Select Committee on Treasury Fourth Report

Conclusions and recommendations

The regulatory context

1.  In advance of the completion of the FSA's review of its general insurance regulation, there are welcome signs that the overall approach to the regulation of that industry is changing. Insurance regulation should benefit from the FSA's move towards a more principles-based approach to regulation. There also appears to be broad support emerging for greater differentiation in the treatment of different kinds of insurance products through a more risk-based approach to regulation. We expect the FSA to clarify its overall approach in the first quarter of 2007, and in particular to clarify the extent to which it will be applying risk-based regulation to the insurance sector and the implications of adopting a risk-based approach. Developments in the overall approach to regulation form part of the context in which to consider the future treatment of bundled travel insurance. (Paragraph 15)

The extent of cover and consumer information

2.  Consumers are at risk of being sold travel insurance policies which do not meet their needs. We are especially concerned that there is insufficient awareness of exclusions in areas such as terrorist acts and pre-existing medical conditions including pregnancy, and in particular by evidence that around ten million United Kingdom holidaymakers in 2006 would not have been covered for medical expenses in the event of terrorist incidents. Such exclusions reduce the actual level of protection provided to holidaymakers when they are abroad or travelling. This has potentially serious consequences for holidaymakers, who are risking damage to their health or considerable financial loss if they require treatment while abroad or repatriation to the United Kingdom. (Paragraph 39)

3.  Overcoming this consumer detriment is a challenge for the insurance industry, for all those who sell travel insurance and for those who regulate them. In responding to the challenge, the insurance industry, those who sell travel insurance, the Government and the FSA must work together to develop insurance policies that are summarised in plain English, that provide clear and prominent information on exclusions and that are promoted in such a way as to maximise the number of holidaymakers with proper coverage through travel insurance. Such discussions should include consideration of the benefits of the introduction of a comprehensible standard contract so that consumers can make reasonable assumptions about what will normally be excluded or included in their cover. (Paragraph 40)

The regulation of bundled travel insurance

4.  Given the evidence of the weakness of the sales process within the bundled travel insurance market, we do not believe that there is a convincing case for the maintenance of self-regulation in that market. The fact that the ABTA Code of Conduct is not part of an OFT-approved scheme, albeit for reasons unconnected with the sale of travel insurance, does not inspire us with confidence about the prospects of progress through voluntary self-regulation. We see merit in the introduction of a coherent and unified system of statutory regulation for the travel insurance market and we believe that the FSA is best-placed to deliver such a system. The FSA has relevant expertise in the regulation of the sale of financial products. Although we are sensitive to the FSA's understandable concerns about the extension of its remit, we believe that the costs of regulation would be greater if carried out by a new body. (Paragraph 41)

5.  If the FSA were to assume these additional responsibilities, it would need to ensure that regulation across the travel insurance market was consistent, principles-based and risk-based. We recommend that, if the Government is satisfied that the FSA can deliver regulation that meets these requirements, it extend the scope of FSA insurance regulation to cover the bundled travel insurance market. (Paragraph 42)

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Prepared 25 February 2007