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Richard Finan, Director of Arc Legal Assistance, has been discussing whether add-ons should be separate products.

The reasons why add-ons should not be sold as standalone products are fairly clear-cut and compelling for consumer, provider and broker alike.

At the basic level, providing add-on cover as part of an insurance policy helps the spread of risk and so has a direct impact on the premium – but the standalone approach cannot achieve this.

Secondly, adverse selection is always a factor in the purchase of standalone cover. In my experience, where legal expenses is requested as a mid-term adjustment rather than at inception or renewal there is inevitably a motivation for its inclusion.

The high proportion of claims made – and subsequently rejected because of exclusions or coverage issues – from these mid-term requests is evidence of the issues created by adverse selection with standalone cover.

The cost factor is another element. With the inevitably high acquisition and fulfilment costs associated with standalone products there is a direct impact on product pricing and distributor commission levels. Not so for add-on covers, where the retailer can spread these costs across a portfolio of products.

In 2010, the Shopping Around: What Consumers Want from the New Legal Services Market report by the Byfield Consultancy revealed that when some 2000 consumers were asked if they would pay £75 a year for an insurance policy that covered “all their unforeseen legal needs”, two-thirds said they were not willing to pay that modest premium.

Compare this with Germany, where 46% of the population has a standalone policy, with premiums in the range of €300. There is nothing to suggest the attitudes of UK consumers to paying a modest premium for standalone cover have changed significantly over the past four years so you have to ask – is there really an appetite for this type of policy?

The crucial role of the broker in the sales process of add-ons should not be in doubt. This applies whether it is providing best advice on the right product, comparing covers, wordings or terms and conditions and analysing data on claims and service levels. Will the purchase of a standalone product direct from the provider offer the consumer such a rigorous qualification and quality assurance process?

A move towards a standalone market will not help to increase the penetration of products, such as legal expenses, but will increase the price to consumers, will bypass brokers and will impact on providers’ costs.

This story first appeared in Post Magazine on 15 May 2014.

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