The £1 billion insurance 'add-on' market – which includes extras such as winter sports cover for travel policies – needs cleaning up, according to the Financial Conduct Authority (FCA).
After studying travel, gadget, guaranteed asset protection (GAP), home emergency and personal accident insurance, and finding that consumers may be being overcharged £200 million a year for add-on products, the regulator has proposed a series of changes to make sure customers get a fair deal.
One change the FCA has called for is a ban on pre-ticked boxes, which effectively get customers to agree to purchase an add-on product unless they opt-out.
Another is for firms to be forced to reveal how often the products come in useful by publishing claims ratios.
A third is to stop car sellers flogging GAP insurance - intended to cover the gap between an insurance pay-out and what the owner pays for a car should it be written off or stolen – at the same time as the car.
The Financial Ombudsman Service (FOS) received almost 3,000 complaints about add-on insurance in the first nine months of the current financial year (April to December 2013), up 5% from the same period last year.
It said most of the complaints it receives about add-on insurance products are to do with the sale of the policy, "with consumers often telling us they either didn't want the insurance, or were unaware they had purchased it," it added in a statement.
Other problems it sees include people trying to make a claim on their policy only to find that they aren't covered for what they reasonably thought they were.
No value for money
Christopher Woolard, director of policy, risk and research at the FCA, said: "There's a clear case for us to intervene. Competition in this market is not working well and many consumers are simply not getting value for money. Firms must start putting consumers first and stop seeing them as pound signs.
"We believe our proposals will address these issues and prevent consumers paying for poor-value insurance products that they may not need or use."
A spokesperson for the FOS added the following advice for anyone buying insurance add-ons: "We all want to make sure that we are covered should the worst happen, but it pays to shop around. Add-on insurance policies aren't necessarily a bad thing – but like any bargain, you get what you pay for.
"Make sure you check out the small print in your policy before you need to make a claim. And if you think you've been misled, then the ombudsman can help where the business can't."
The FCA is asking for comments on its report and proposals by 8 April 2014.