The Cobra Effect – Implications of the CMA’s No Claims Bonus Proposals

Published: December 23, 2014

In this world nothing can be said to be certain – except death and taxes, said Benjamin Franklin.

Luckily for Mr Franklin he didn’t live to see the days of complex regulatory compliance changes that we can be certain will cause confusion and havoc to businesses and consumers alike.

I am referring, in particular, to the CMA’s proposed remedy requiring disclosure of the implied price of no claims bonus (NCB) protection and step back procedures, among other recent proposals (Most Favoured Nation clauses, which deserves another article all to itself).

After two years of research the CMA has concluded that the Protected No Claims Bonus (PNCB) is an add-on product.  First and foremost, it isn’t.

Leaving that aside, however, because the CMA is convinced that it is an add-on product they are saying that many of my customers – motorcycle enthusiasts as it happens – don’t understand it and therefore insurers, aggregators and brokers need to articulate in much more detail what it covers and  also how it’s priced.

Having worked in the insurance business as a broker for more years than I care to remember, I am certain that regulators are well meaning in their intent. They are clearly under intense pressure from all sides – consumers, voters, businesses – to create a level playing field for policyholders. What is supposed to be in the interests of the customer, however, often proves to be to the detriment of the customer if for no other reason than the law of unintended consequences.

This law has been dubbed the ‘cobra effect’, after an anecdote about how a bounty for killing cobras in British India caused people to breed cobras. In 2014, however, it’s not so much a cobra effect as a ‘paperwork effect’ and these consequences create huge problems for us insurance brokers and companies working at the coalface in terms of what we have to do to comply, often restricting our ability to advise customers and provide the most competitive deals.

If customers ask for protected no claims bonus we can no longer just tell them what the price is -including the PNCB they have just asked for – we also have to tell them what the price is without the PNCB. But some insurers use the fact that customers asked for the protected no claims bonus as a rating factor – effectively saying they’re a different risk because they’ve asked for it – and that creates a different type of rating mechanism.

Insurers have kept that very close to their chest in terms of how that rating is calculated. As an insurance broker we deal with a panel of insurers and all of a sudden – well, within six months – we’re going to have to explain to each and every customer what the price is for and after and what the NCB scale is and what the step back scale is.

Of course in 2014 we have to be open with the customers. There is only so much information, however, that a contact centre employee, say, can provide when already motorbike insurance customers are saying: “Hurry up, what is the price, I’m just about to scoot off to meet my mates for a bacon sarnie at Box Hill!”

Then you need to go through these other hurdles. Some insurance companies are already making noises to the effect that they won’t offer PNCBs as it’s too complicated and costly to change their systems.

The other approach is to include protected no claims bonus with maximum bonus, for example. This is all pre-purchase information you’ve got to give as well so explain to me how this is in the end customer bikers’ interests?

To quote the Association of British Insurers (ABI): “In broad terms we are supportive of the use of statements to assist consumer understanding in terms of what is and is not protected by an NCB protection product, although we suggest this should be shortened and made more compatible with emerging sales technologies.”

What we are getting though are mixed, often conflicting messages. I would be interested to learn if any of our regulators have worked in a contact centre environment at the point of sale? Closing a sale, renewing a biker’s insurance or re-engaging with a motorcyclist that has SORNed his bike during winter months is a skill as much as a service and these proposals will be a huge test of my dedicated team’s abilities, which I am sure they will pass with flying colours.

But it should not have to be this way. As the ABI notes again: “Since its creation the FCA has moved away from a prescriptive approach to regulation and their own work in areas such as behavioural economics shows that consumers look for smarter and streamlined information disclosure. The recently announced Project Innovate confirms the FCA is encouraging firms to engage with consumers in innovative ways and to create different models of customer service.”

I heartily agree with the sentiment that what is required is a flexible and simple approach that allows an insurance broker like myself to provide information in a format that works best, making it easier for consumers to understand rather than burdening them with too much information. Customers need to be provided with clear information to help them make informed decisions and the provision of this information to the consumer will best be undertaken by the Price Comparison Website or insurance broker.

It is also to be welcomed that the ABI echoes the concerns of insurance brokers that the CMA has not fully considered the impact of this requirement to telephone sales and emerging technologies (i.e. sales via mobile phones). We are all working on ways to shorten and simplify rather than increase policy wordings.

To quote the ABI once more the proposals put forward by CMA would: “result in already lengthy phone calls becoming even longer. Additionally, the two statements as proposed could limit sales via mobile phones (which are becoming increasingly common). It is not just the two mandatory statements that could pose difficulties with emerging technologies. For example, including the step back tables on the sales journey for smartphones / tablets will not provide a good user experience.”

It seems more than likely that the proposed six month lead-time significantly underestimates the hours required by insurers, software houses and brokers to update our systems. In addition, more work-hours will be required so that the required information is provided to customers on all distributor sites (including my own company’s direct sales channels).

Regulation is necessary in a world where consumers are acutely aware of their rights and the responsibilities of service providers such as insurance brokers. I am a complete advocate of providing customers with clear, fair and non-misleading information to help them make an informed decision about their product.

As has been noted by many insurance stakeholders, having to separately report to the CMA seems likely to create an extra, unnecessary layer of regulatory scrutiny that would add time and operating costs. Insurance brokers need to lend their voices to a debate that ensures a sensible approach is indeed taken to achieve proportionate and reasonable reporting.

William Hughes, Managing Director at Devitt

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