Home emergency add-on: fair value and distribution under the Consumer Duty
Penhurst Insurance Brokers arranges home policies for 60,000 customers and adds its own 'Home Emergency' cover to every household policy unless the customer ticks a box to remove it. For £96 a year the customer gets a 24-hour helpline and up to £500 per claim for plumbing, heating and electrical emergencies. The insurer's claims cost and expenses are £21 per policy; Penhurst takes 40% commission and the insurer's acquisition cost is 12%. Claims frequency is 6% with an average claims cost of £180. Complaints show that many customers believed the cover was included in their home policy; 9% of claims are declined because the customer could not get through to the helpline (average wait 27 minutes), and one customer with a burst pipe waited 11 hours for a contractor. Penhurst's fair value assessment records only that 'the product is competitively priced and commission is in line with the market'. The FCA has asked for the assessment and the management information behind it.
1. Apply the four Consumer Duty outcomes to this product and reach a view on whether it represents fair value.
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The Consumer Duty requires firms to act in good faith, avoid foreseeable harm and enable customers to pursue their financial objectives, through four outcomes: products and services, price and value, consumer understanding and consumer support. Test each against the numbers.
Price and value: of £96, £21 goes on claims and expenses, £38.40 on Penhurst's commission and £11.52 on acquisition, leaving about £25 (26%) as margin. Expected claims are 6% × £180 = £10.80 per policy. Commission is not banned and a margin is not in itself a breach, but the assessment must show what the customer receives for the money: comparisons with alternative emergency cover, the claims ratio, decline rates, cancellation rates and complaint themes. A single line saying the product is competitively priced is not an assessment.
Consumer understanding: customers believing the cover was already included is a clear warning sign. Adding it by default, at renewal, without a separate explanation of price and scope, is likely to fail this outcome.
Consumer support: a 27-minute average wait on an emergency helpline and an 11-hour response to a burst pipe mean the product cannot deliver its core promise. That is foreseeable harm and it feeds back into value, because a benefit people cannot access is worth little.
Conclusion: value is unlikely to be fair. The insurer should be prepared to redesign or withdraw the product, remediate affected customers and redo the assessment with evidence rather than assertion.
2. What distribution obligations apply, and what remediation should follow if the review confirms the concerns?
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Distribution duties sit alongside the Duty. Penhurst must carry out a demands-and-needs assessment and present the add-on as an optional product with its price separately identified, not blended into the home policy premium. Under the Insurance Distribution Directive it must provide the Insurance Product Information Document, disclose the nature and basis of its remuneration in good time before the contract is concluded, and give the amount on request. Above all it must avoid creating the impression that the cover is compulsory or already included.
If the review confirms the concerns, remediation should include: stopping the default sale and requiring an active choice; writing to affected customers explaining what they bought, what it costs and how to cancel, with refunds where the product was mis-described or could not be accessed; reviewing every claim declined because the customer could not reach the helpline and reopening those that would otherwise have been paid; correcting the value assessment; and setting monitoring information - claims ratio, decline reasons, call waiting times, complaints and cancellation rates.
The board, through its Consumer Duty champion, should approve the assessment, record the challenge and include the product in the annual attestation. The regulator's real question is not whether £96 is too much, but what evidence the firm used and what it did when that evidence showed a problem.