In December 2012 the FSA launched a market study designed to test how well the insurance add-on market is functioning.
This market study has been picked up by the FCA which has recently published an “Occasional Paper” exploring how behavioural economics might inform an assessment of customer behaviour regarding the purchase of add-ons.
This Occasional Paper is the third in a series of such papers published by the FCA exploring the use of behavioural experiments in creating regulatory policy. The paper explains:
“Behavioural economics tells us that consumers do not always make decisions in the ways that regulators have traditionally assumed. And consumers’ reactions to well-intentioned regulations are not always what the regulator expected. These messages need to be taken into account to design regulatory interventions that effectively identify and address the root causes of poor consumer outcomes.”
The paper describes the results of an experiment examining how consumer behaviour is affected when general insurance is sold as an add-on product to a primary purchase.
The paper concludes that the research shows that the add-on mechanism weakens consumers’ ability to discipline firms by shopping around and comparing products effectively. The FCA has suggested this will have implications for possible remedies.
Full findings of the market study are scheduled to be published later this year.