Ensuring Compliance: Are Home Emergency Add-Ons Meeting Consumer Duty Standards?

It’s 10 years since the FCA carried out its market study into insurance add-ons. Its initial investigation of the market uncovered problems with problematic pricing, unsuitable products, and misleading presentation. In response to these findings, the FCA implemented new rules to protect customers which included the ban on “opt-out selling”.

A decade on, while things are certainly better than they were, challenges remain. The FCA’s new consumer duty raises the bar in terms of expectations on how insurance is sold but there’s been little movement over the past 12 months in respect to how home emergency cover add-ons are sold. So, what can firms do to ensure their sales of home emergency add-ons remain compliant and avoid drawing unwanted attention from the FCA spotlight?

Addressing Add-on Specific Challenges

Home emergency is an umbrella term that covers a range of individual products designed to protect homeowners from unforeseen events that damage their property. These can be purchased directly with providers or as an add-on to home insurance.

While both add-on and standalone policies can be comprehensive in terms of their cover, many stand-alone providers offer specialist covers as distinct products. For example, it is possible to buy products that just cover plumbing & drainage, without having to pay for the rest of the home emergency offering. 

Where a customer sets out to buy a standalone policy there's a greater chance for customers to consider all their options and customise their policy. But for insurers who are selling the product as an add-on, it’s easy for customers to gloss over the details and sleepwalk into buying a product that doesn't meet their needs.

To mitigate this risk, firms must help consumers make more informed choices. This can be achieved by creating clearer and more understandable content, ensuring customers know what they are buying. Such positive friction benefits both consumers and firms, as will be discussed later.

So how can we begin to address add-on specific challenges? In the following sections, I present a series of solutions to what I believe are the three greatest challenges and risks to consumers purchasing home emergency cover as an add-on to home insurance.

Product suitability: Screening & Streamlining

A noticeable difference when comparing the selling of home insurance with home emergency add-ons is the lengths firms go to understand the needs of their customers. For home insurance, customers are subject to a series of underwriter questions to screen out unsuitable customers whose needs may exceed or fall short of the products being offered. However, this thorough screening is much less common when selling home emergency add-ons.

Instead, home emergency coverage is often included in the home insurance purchasing process without much consideration for whether the product is suitable for the buyer. This is less of an issue for more bespoke home insurance providers with a more refined target demographic, but for insurers with wide target markets it will become increasingly difficult to justify the selling of home emergency cover to customers without first understanding their needs under the Duty.

To address this, insurers should implement effective choice architecture-how choices are presented to consumers. A practical approach could involve pre-screening customers to evaluate the appropriateness of home emergency products before they are offered. This process aims to discern the customers likely needs, allowing the firm to determine if their products are appropriate for that customer.

For example, firms could ask straightforward questions like:

Do you have any home emergency coverage with another provider?

Would you like to learn more about our home emergency insurance and also consider whether it might be a good option for your needs?

Out of these home emergency options, what do you want to cover? (e.g, plumbing, electric boiler…)

If the screening process reveals that the home emergency product(s) are unlikely to meet the customers needs, the sales process for the add-on can be skipped. This might happen if the customer already has similar coverage or seeks coverage not offered by the insurer. This selective omission streamlines the purchase journey, allowing unsuitable customers to focus on the primary product and reduces any unnecessary cognitive load.

By minimising the information overload, through omission, these customers are less likely to miss crucial details about the primary product - home insurance. This clarity reduces the risk of suboptimal decision-making and potential consumer harm. 

Firms could also explore beyond traditional questionnaire-based screening methods by exploring more innovative screening solutions and guidance. Scenario-based questionnaires could offer more dynamic and engaging ways to assess the appropriateness of selling home emergency cover as an add-on. Ultimately, this guidance could take the sector closer to a form of robo-advice.

I suspect when firms start to better understand customer needs it will expose a number of weaknesses in their rigid approach to the current packaging of their home emergency offering. This shift could lead to a more diverse and customisable offering, allowing add-on sellers to better compete with direct providers who currently hold the advantage over customisation and with it the greater share of the market.

Forming customer expectations

Almost all insurance suffers from an expectation gap - a gap between what the consumer thinks that they are buying and are actually buying. The most recent financial lives survey noted a 4% drop in customers who say they understood their home insurance policy very or fairly well, now at 88%. Although it isn't the worst in the GI sector, there's a need for better consumer understanding.

The issue in home emergency add-on cover is made all the harder by the fact that products which run under the same name can be very different. Yet often insurers are worried about slowing the application journey down and taking time to educate their customers - as it could increase the likelihood of them dropping out of the application altogether. 

Fairer Finance’s 2024 Spring customer experience ratings showed that only 8% of purchase journeys for home emergency cover clearly indicated whether key covers like pest control, plumbing & drainage, primary heating systems, power supply, and security were included. Most of the market fails to declare these key exclusions, leaving consumers in the dark about critical aspects of their coverage.

Establishing a consensus on what is included in a comprehensive home emergency policy is crucial for forming a baseline for consumer expectations. If brands presented home emergency coverage consistently, it would simplify product comparison with direct offerings allowing customers to make more informed choices. Such a model would require providers to be more upfront about what is covered, fostering transparency and trust. 

Critics might argue that standardising home emergency cover by agreeing on key components could limit innovation. However, establishing a baseline does not stop insurers from adding extra features or enhancements. It simply guarantees that the basic elements of home emergency cover are presented clearly and consistently as either covers or exclusions, both in the purchase process and in the supporting documentation. 

Market Awareness and Competition

Brands often neglect to inform customers about other products in the market, limiting their choices. As we know, greater shopping around is pro-competitive and supports better customer outcomes. Uninformed consumers might not fully understand the product or know they can buy similar products directly from providers. While convenient, purchasing a home emergency add-on should be done with an understanding of the broader market. 

To better serve customers, firms could inform customers that there is a wider market to choose from rather than maintaining a captive audience. Implementing targeted disclosures might be a good way to enhance market competition and penetration. A well designed screening process can not only prevent unsuitable purchases but also include disclosures that make customers aware of other home emergency products on the market. 

This approach ensures consumers, especially those who might not benefit from the home emergency add-on being sold, receive information about other products. Increased transparency empowers consumers to make informed decisions and fosters a competitive market. This aligns with the FCA’s consumer duty, enhancing customer experience and ensuring financial solutions meet diverse needs. 

Conclusion

In order for home emergency add-on cover to stay out of the spotlight in a consumer duty world, there is more work to be done to help customers make informed choices and receive fair value. 

By implementing thoughtful pre-screening, ensuring clear and consistent communication, and fostering better market awareness, insurers can help customers make more informed choices.

It’s time for the industry to actively work towards delivering meaningful consumer-centric solutions to age-old problems.