Addressing the market failure of Add-on Insurance Products

The FCA identified that the ‘add-on mechanism’ weakens consumers’ ability to discipline firms by shopping around and comparing products effectively. This in turn has implications for possible remedies. Baker et al have identified four ways regulators can reduce this market failure:

1. enhanced disclosure (which they explain doesn't work), 
2. a ban on the point of sale offer of add-on insurance, 
3. price regulation (commissions often capped at 20% but not insurance profits), and 
4. the creation of a new, on-line market (forcing sellers to show stand-alone competitor quotes)

If you don't want to wait for regulators and you dont fancy scouering Reddit for possible insurance solutions and providers (e.g. domestic travel insurance providers to cover collision damage waivers) you may want to consider PeerCover. PeerCover is a fair and transparent way get add-on cover without the exorbitant rates.

Citation
Baker, Tom and Siegelman, Peter, "“You Want Insurance with That?” Using Behavioral Economics to Protect Consumers from Add-on Insurance Products" (2013). Faculty Scholarship. Paper 441.
http://scholarship.law.upenn.edu/faculty_scholarship/441

Add-on Insurance Products 'protect' consumers against small losses. Consumers tend not to shop and hence Add-on Insurance Products are highly profitable for sellers:

• claims normally are 20% to 30% of premiums 
  
• commission are normally at least 20% and often more than 40% of premiums
• insurance company profits are consistently greater than 10% of premiums

Examples include the extended warranties sold with electronics and home appliances, mobile phone damage insurance, gap insurance on car loans, the credit life insurance and identity theft protection sold with mortgages, car loans, and credit cards, and the collision damage waivers and short term liability insurance sold with car rentals

Surprisingly a significant proportion of people buy this type of insurance, reasons given are often:

• Peace of mind, 
• Convenience,
  
• I already committed to purchasing the primary product,
• I was pressured by the sales person,
• I didn't know I had bought it

The UK's Financial Conduct Authority (FCA) has produced an infographic which shows how consumer behaviour is affected when general insurance is sold as an add-on product as opposed to a primary purchase: