Besides providing information about current news in financial regulation, we have chosen to carry out a more detailed analysis of the report on consumers’ need for gadget insurance issued by the Swedish Financial Supervisory Authority at the beginning of the year.
THE FINANCIAL SUPERVISORY AUTHORITY’S REPORT ON CONSUMERS’ NEED FOR GADGET INSURANCE
At the beginning of the year, the Financial Supervisory Authority published a report on consumers’ need for add-on cover and gadget insurance. The report is based on a detailed analysis of the value that consumers in different age groups derive from add-on cover such as supplements to home, villa and vehicle insurance, as well as the value of gadget insurance.
Contents of the report
In order to investigate consumers’ needs for gadget insurance and add-on cover, the Financial Supervisory Authority looked at what consumers, as an insurance collective, pay in premiums compared to the insurance compensation received, the so-called loss ratio. In its analysis, the Financial Supervisory Authority compared the loss ratio for add-on cover and gadget insurance policies with the loss ratio for home, villa and vehicle insurance (car insurance for consumers), which the Financial Supervisory Authority used as a reference point.
The report concludes that consumers’ generally have little need for gadget insurance, though many consumers add this insurance on unnecessarily when they purchase a product. According to the report, the loss ratio for add-on cover, in other words the compensation that the insurance collective gets back in relation to the premiums paid, is in line with the reference point, whereas the loss ratio for gadget insurance is significantly lower than the reference point. The Financial Supervisory Authority considers that this indicates that consumers have little need for gadget insurance. The report clearly shows that gadget insurance for mobile phones accounts for just over 75 per cent of the total market for gadget insurance. Other products for which gadget insurance is usually taken out include televisions, refrigerators and freezers, computers (including tablets and similar), watches and jewellery and bicycles. The report concludes that for consumers who wish to extend their insurance cover, it is usually better to take out supplementary insurance in the form of all-risk insurance for movable property, which provides more extensive insurance cover, instead of gadget insurance that only covers a specific product.
Impact of the report
The fact that the insurance market is analysed in terms of consumer needs and interests is important and is to be welcomed. However, the conclusions and impact of the Financial Supervisory Authority's report are not entirely clear. According to current regulations in the area of insurance, insurance companies need to clarify the customer’s insurance needs before the customer is offered insurance. Based on this, the insurance company also needs to present objective information about the insurance offered. In the report, the Financial Supervisory Authority emphasises that gadget insurance is often sold at the moment when the consumer purchases the actual product to which the insurance relates. The Authority therefore considers that the stores that sell the product then also distribute the insurance and act as the insurance company’s representatives. The insurance company is therefore responsible for ensuring that the stores distributing the insurance policies comply with applicable regulations and survey the consumer’s insurance needs before the insurance is sold and advise consumers against taking out any insurance they do not need. The Financial Supervisory Authority suggests in its report that defective compliance with these regulations may be the reason why consumers purchase more gadget insurance they do not need than add-on cover.
The report’s conclusions are interesting and highlight the importance of providing consumers with clear, accurate information regarding their insurance cover. This is necessary in order to enable consumers to make an informed choice about which insurance cover is most suited to their needs. However, the advantages and disadvantages of gadget insurance is a complex question and any attempt to simplify it risks giving a view of consumers’ actual need for gadget insurance that is at best without nuance and at worst downright misleading. Most consumers will probably not read the report itself, but in the press release sent out by the Financial Supervisory Authority upon publication of the report, the Authority wrote:
“Many consumers have add-on cover and gadget insurance. The premiums for these policies amount to several billion (SEK) every year. Our review shows that this insurance is often not needed.”
“The insurance companies are responsible for ensuring that anyone who acts as an agent for or sells their insurance, such as electronics chains, only does so to customers who need it.”
The Financial Supervisory Authority’s message to consumers is therefore that they should usually avoid taking out gadget insurance and add-on cover because they rarely need them and the message to insurance companies is that they need to ensure that they only sell gadget insurance and add-on cover to consumers who really need them. What is worrying is that the Financial Supervisory Authority’s statement makes it appear that both gadget insurance and add-on cover are often unnecessary whereas, on the contrary, the report shows that the loss ratio for add-on cover is in line with the reference point. It is true that it will be clear to anyone who reads the Financial Supervisory Authority’s press release in its entirety that the Authority is only referring to gadget insurance when it states that most people can do without it. As far as add-on cover is concerned, they state that “Younger people have a greater need for this insurance compared to older people, who often have little need for it.” Unfortunately, this description is downright misleading. What clearly emerges from the report is that for the 50 and under age group, the loss ratio for add-on cover is as high as it is for home, villa and vehicle insurance. That age group can therefore be said to have just as great a need for the supplements to their home, villa and vehicle insurance policies as they have for the policies themselves. The fact that older people often have little need for add-on cover is certainly consistent with the report’s conclusion that people in the 70 and over age group have little need for it, but the Financial Supervisory Authority’s statement that add-on cover is often not needed in general is simply incorrect. Even if we take into consideration the fact that the Authority subsequently attempts to nuance the view by describing the need for add-on cover as being greater among “younger people”, that description is misleading when the report actually shows that the only group that has little need for it is people aged 70 and over. You do not have to be guilty of ageism to realise that the average person will not interpret the term “younger people” to mean everyone up to the age of 69. One also cannot help but wonder how the Financial Supervisory Authority itself would view the matter if, for example, a pension adviser always advised 50 year-olds to take the highest possible risk in their pension investments because they belong to the customer group of “younger people”. Nor is it difficult to imagine how the Consumer Ombudsman would react if a company marketed a product as “excellent for younger people” when the product was actually only aimed at people in their 40s and 50s.
On a more serious note, we should at least question how one of Sweden’s most important authorities, with responsibility for almost the entire Swedish financial sector, can be permitted to be so unclear and misleading in its communication. It is true that, in the report, the Financial Supervisory Authority observed that gadget insurance often provides more extensive cover than all-risk insurance with regard to movable property because, unlike all-risk insurance, gadget insurance often also applies in the event of mechanical or electrical breakdown without any external influence. All-risk insurance, on the other hand, generally only covers damage resulting from sudden and unforeseen external events. It is also common for gadget insurance to either have no excess or to have at least a lower excess than all-risk insurance covering equivalent damage, which the Financial Supervisory Authority also noted in its report. In addition, gadget insurance often applies without any deduction due to age. We cannot therefore rule out the possibility that a consumer who is covered by all-risk insurance may also benefit from gadget insurance. The Financial Supervisory Authority mentions these aspects only in passing and any analysis and conclusions based on them are conspicuous by their absence. Further analysis of this would have been welcome from both a regulatory and a consumer-protection point of view.
As the report states, 75% of the gadget insurance market consists of insurance for mobile phones, which is a product group that is characterised by the fact that the value of the product falls rapidly. When comparing the insurance companies’ terms and conditions for home insurance, it appears that full compensation is only payable if the phone is damaged during the first 6 months of use. Substantial deductions due to age are subsequently made as a result of wear and tear and the rapid fall in the value of phones, which means that compensation can fall to 50% of the purchase price by the time the phone is only one year old. If we also include the excess, which is often between SEK 1000 and SEK 2000 on home insurance, the final compensation in the event of damage is extremely low. This can be particularly noticeable if, for example, the injured party has purchased the phone in instalments over two or three years and the insurance compensation is significantly less than the remaining debt. Mobile phones are also normally classified as theft-prone property, which means that loss of the phone is often not covered by home insurance if you have taken it outside the home. It is true that an all-risk supplement to the home insurance can compensate for this to some extent, but since the property is seen as theft-prone, there are a number of required precautions and safety regulations applicable that also limit the right to compensation. It is therefore understandable that gadget insurance is popular for mobile phones and can often provide better cover than home insurance with an all-risk supplement.
In its communication regarding the report, the Financial Supervisory Authority has unfortunately failed to mention any of the advantages of gadget insurance. At the same time, most consumers will probably have insufficient interest or time to read the entire report by the Financial Supervisory Authority and will therefore also not read the information about the advantages of gadget insurance that the Financial Supervisory Authority cautiously highlights in it. The Financial Supervisory Authority’s one-sided communication therefore risks leading to consumers actually being underinsured.
To sum up, it may be said that the Financial Supervisory Authority’s report on consumers’ need for gadget insurance leads to uncertainty for both insurers and consumers. At a time when the all Swedish public authorities are fighting against misinformation and lobbying campaigns, it is undeniably depressing that the supervisory authority of the financial sector chooses to spread partly deceptive and misleading information regarding products over which it is meant to be exercising supervision.