Government response
Introduction
The EU's Insurance Mediation Directive (IMD) requires,
broadly, the regulation of the selling of insurance by intermediaries.
However, regulation is not required of travel insurance sold along
with a holiday or related travel, with the decision whether or
not to regulate such products at the discretion of individual
member states. Following a public consultation on implementation
of the IMD in 2002/3 the Government decided that there was insufficient
evidence to regulate travel insurance sold along with a holiday
at that time. However, it recognised that there were concerns
with this market and undertook to review its decision in early
2007.
In August 2006 the Economic Secretary announced that
HM Treasury would be conducting its review into whether travel
insurance sold alongside a holiday should be subject to FSA regulation.
The Treasury issued a call for evidence in November 2006 consulting
on possible options for regulation including FSA regulation, strengthened
industry self-regulation and maintaining the status quo. In announcing
the call for evidence, HM Treasury highlighted the importance
of consumers' understanding of what is and is not covered by their
travel insurance, particularly highlighting consumers' understanding
of terrorism exclusions in travel insurance as a key area of concern.
The publication of the call for evidence coincided
with the Treasury Committee's own hearing into the scope of FSA
regulation. The Government is grateful for the work of the Committee
in this area.
Information provided with travel insurance
1. 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 Government agrees that there is a challenge for
the industry in ensuring travel insurance policies are explained
to consumers in the most effective and informative way and that
best presents the cover the policy provides.
The Treasury is taking forward work with the Financial
Services Authority and the Association of British Insurers to
develop a better understanding of what the issues are around consumers'
understanding of travel insurance policies, in particular whether
people are aware of what they are and are not covered for. This
work will also look at whether industry guidance could help improve
the quality of disclosure to consumers and better signpost customers
through what is a complex insurance policy.
The regulation of bundled travel insurance
2. 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)
3. 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)
The Government has decided to give
the FSA responsibility for regulating the selling of travel insurance
along with a holiday. This is because there is a weight of evidence
pointing to a gap in consumers' understanding of travel insurance
as a product and the cover that it provides. In particular:
- although the travel insurance market is highly
competitive, polices tend to be more complicated than a simple
household or motor policy;
- as a secondary purchase, consumers are less likely
to be focussed on the details of their insurance policy than through
a direct sale;
- the majority of consumers only really seem to
consider price, not the details of the policy, in deciding which
policy to purchase.
There is also no principled case for the distribution
of travel insurance through this channel to sit outside the regulatory
framework when stand-alone sales through insurers or brokers are
within it. And whilst all firms selling travel insurance could
do more to explain to customers what the policy does and does
not cover, the evidence suggests that FSA regulated firms do a
better job in terms of product disclosure and navigating the consumer
through the sales procedure. Furthermore, customers of FSA firms
have access to statutory redress and compensation mechanisms if
things go wrong.
The Government has full confidence
that the FSA is well placed to deliver a principles based and
proportionate regime suitable for regulating the selling of this
type of insurance. The Government will work with the FSA to ensure
the regime is implemented in a sensitive way and that both the
FSA and the travel industry have adequate time to adapt to regulation.
The Government's intention is for regulation to be in place by
January 2009.
Full details are included in the
summary of response document, which contains a partial Regulatory
Impact Assessment (RIA) and draft legislation. The Government
will now undertake a further period of consultation on its preferred
approach in order to inform a final RIA.
HM Treasury
26 June 2007
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