Star Ratings for Add-Ons Presentation for: Protect Group 1

Agenda Defaqto Star Ratings Why look at the ‘Add-on’ market Ratings for add-ons Some of the issues we found FCA scrutiny Motor product development in future Questions 2

Philosophy Help people make better financial decisions Simplify decision making Rate products not providers Rate all products in any given market Open and transparent methodology Match our rating to the ‘promise’ of the policy Keep our ratings relevant 3

Methodology Define ‘core’ criteria for 5 and 4 Star products Select other important product features Use product DNA scores to identify total score Assign minimum scores for 1, 2, 3, 4 & 5 Stars Establish the Star Rating for each product Transparent, stringent and consistent process 4

General insurance environment Increasing regulatory pressure Aggregators continue to dominate distribution Direct insurers experiencing lower retention rates Tough competition between direct insurers Differentiation remains a key success feature Consumers presented with choices based on price, not quality of product Ongoing criticism of insurers

Rating the Add-On market Changing nature of distribution  Heavily aggregated  Customers more inquiring FCA investigation  Need to show customers that product has value  Need to show regulator your product is customer centric Customer requests  Star Rated products with non-rated optional extras  Aggregators  Insurers 6

The journey Decide what constitutes an add-on (Sep 2014) Market review - Identify all products and features and create a straw-man rating (Dec 2014) Discussed with add-on insurers (Mar 2015) Launched our final ratings (Jun 2015) Discussion of our ratings with FCA (Jun 2015) Presented at our Roundtable event (Sep 2015) 7

Add-on or policy option? Add-ons: - Simply rated – usually flat pricing - No underwriting or further questioning needed - Available to all customers Policy options: - Usually underwritten - Individual pricing - May not be available to all customers 8

Categorisation of ‘Add-On’ products MotorHome Product Options  Personal Belongings  Windscreen  NCD Protection  Foreign Use  Courtesy Car  Accidental Damage  Personal Belongings  Money  Freezer Add-Ons?  Motor Breakdown  Motor Legal Expenses  Total Loss Courtesy Car  Key Cover  Misfuelling  Personal Injury  Excess Protection  Annual Travel  Home Emergency  Home Legal Expenses  Key Cover Associated Covers  Motor GAP  Scratch & Dent Protection  Tyre/Wheel Protection  Premium Protection  Extended Warranty  Boiler Breakdown 9

Defaqto ratings at 1 Feb 2015 MotorHome Product Options  Personal Belongings  Windscreen  NCD Protection  Foreign Use  Courtesy Car  Accidental Damage  Personal Belongings  Money  Freezer Add-Ons?  Motor Breakdown  Motor Legal Expenses  Total Loss Courtesy Car  Key Cover  Misfuelling  Personal Injury  Excess Protection  Annual Travel  Home Emergency  Home Legal Expenses  Key Cover Associated Covers  Motor GAP  Scratch & Dent Protection  Tyre/Wheel Protection  Premium Protection  Extended Warranty  Boiler Breakdown 10

Defaqto ratings launched in 2015 MotorHome Product Options  Personal Belongings  Windscreen  NCD Protection  Foreign Use  Courtesy Car  Accidental Damage  Personal Belongings  Money  Freezer Add-Ons?  Motor Breakdown  Motor Legal Expenses  Total Loss Courtesy Car  Key Cover  Misfuelling  Personal Injury  Excess Protection  Annual Travel  Home Emergency  Home Legal Expenses  Key Cover Associated Covers  Motor GAP  Scratch & Dent Protection  Tyre/Wheel Protection  Premium Protection  Extended Warranty  Boiler Breakdown 11

Defaqto ratings as at today MotorHome Product Options  Personal Belongings  Windscreen  NCD Protection  Foreign Use  Courtesy Car  Accidental Damage  Personal Belongings  Money  Freezer Add-Ons?  Motor Breakdown  Motor Legal Expenses  Total Loss Courtesy Car  Key Cover  Misfuelling  Personal Injury  Excess Protection  Annual Travel  Home Emergency  Home Legal Expenses  Key Cover Associated Covers  Motor GAP  Scratch & Dent Protection  Tyre/Wheel Protection  Premium Protection  Extended Warranty  Boiler Breakdown 12

Add-On ratings at launch 13 Rating Area 5 Star4 Star3 Star2 Star1 Star Excess Protection17%53%15%12%3% Key Cover2%4%54%21%19% Misfuelling9%22%54%11%4% Motor Personal Accident8%13%46%18%15% Total Loss Courtesy Car15%22%49%8%6% Home Legal Expenses9%14%52%16%10% Total11%23%44%13%9%

Add-On ratings today 14 Rating Area 5 Star4 Star3 Star2 Star1 Star Excess Protection 19%44%16%19%3% Key Cover 2%25%51%5%18% Misfuelling 17%24%48%2%9% Motor Personal Accident 24%0%49%12%15% Total Loss Courtesy Car 15%21%27%15%23% Home Legal Expenses 13%16%47%9%16% Total 15%22%35%12%16%

Issues we found at launch Some poor quality products Benefits lacking compared to most providers Low cover limits (e.g. Personal Injury) Wide disparity of covers between providers Badly worded policy documents Missing definitions, esp. who is actually covered Non-committal terminology e.g. in Key Cover Unclear terminology e.g. alcohol exclusions in PA 15

Issues we found at launch Unfair exclusions Claims waiting times Claims reporting requirements Possible TCF issues Products designed to rarely pay out Identical products at widely different prices Difficult to identify any real benefit Lack of refunds on early cancellation 16

The FCA investigation Focus is on consumer protection Even if the individual add-ons don’t cost much Ban on opt-out selling Fair enough Deferred opt-in for GAP Aimed squarely at driving down car dealer prices Value measures WILL expose some apparently very poor value Ongoing debate about perceived value versus price 17

Where next for add-ons FCA value measures will be poorly received For packaged bank accounts the FCA decided bundling made value too difficult to calculate Obvious conclusion is to return to bundled products: Bronze / Silver / Gold approach “hide” the cost of individual add-ons Dealer market will focus more on warranty and minor repair products 18

Where next for Defaqto ratings Car insurers could now have up to 8 separate Star Ratings We are considering how to rate the overall proposition using the range of multiple ratings Prepare for move back to multi-product ranges Considering the warranty and repairs products 19

Questions Brian Brown, Head of Insight & Consulting, Defaqto Ltd