The City watchdog has challenged insurers to do more to protect British households, warning that millions remain financially exposed if illness or death strikes.

The Financial Conduct Authority has launched a consultation after finding that while the market for so-called “pure protection” insurance broadly works for those who buy it, most adults still go without cover.

Some 58% of UK adults do not hold products such as life insurance, critical illness or income protection despite many being likely to benefit.

In interim findings from its competition review,the FCA said consumers who do take out protection insurance generally receive fair outcomes. There is a wide range of products available, claims are usually paid when needed and the cost of cover has remained broadly stable in recent years.

SIGNIFICANT FAILURE

However, the regulator said the scale of under-insurance represents a significant failure of engagement rather than supply.

Research suggests many consumers are unaware of their protection needs or are never prompted to consider them. Others are deterred by affordability concerns, misunderstandings about what policies do and do not cover, or weaknesses in the sales and advice process.

CLOSE THE GAP

The FCA is now seeking views from insurers, advisers and other stakeholders on how to close the gap and bring protection products into the financial mainstream.

It said better consumer prompts, clearer explanations and improvements in how products are sold and reviewed could all play a role.

“These insurance products play a vital role.”

Graeme Reynolds (main picture, inset), director of competition and interim director of insurance at the FCA, said: “These insurance products play a vital role in helping families manage some of the most difficult experiences in life.

“While competition in the market is mostly working well for consumers, many more people could benefit from protection. We will work with industry to reduce this gap, to help consumers navigate their financial lives.”

GOOD VALUE

The regulator said it has already seen examples of firms delivering good value but will examine the market again using updated 2025 data before publishing its final report.

It will also consider reforms to product switching, amid concerns that consumers may be encouraged to move policies without clear benefit.

Any switch, the FCA said, must demonstrably meet the customer’s needs and improve their position.

A final report will be published in Q3 2026, setting out final findings and an update on progress.

HUGE UNDERTAKING

Rob Clifford, chief executive of Stonebridge, said: “Overall, the FCA rightly describes a market that is serving consumers extremely well but the regulator is clearly concerned about the protection gap, and so are we. We welcome the FCA’s findings.

“Most consumers don’t have any protection at all and a large proportion of them would benefit from it.

“For a long time now, the industry has been working hard to plug this protection gap, but there’s obviously still a lot more work to do.

“Our firm alone has invested millions of pounds on people and technology to enable more advisers to get quality protection advice to thousands more consumers.

“It’s a huge undertaking for the sector and it’s fantastic that a spotlight is being shone on it here with the regulator planning to provide pragmatic help.

“Levels of adoption won’t change overnight. It’s going to take a concerted effort from  the FCA, insurers, networks and advisers to close the gap but the FCA should be congratulated for endorsing the existing distribution model which is already equipped to take on this challenge without major reforms.”

POSITIVE STEP

Tony Mudd, third party products and services director at St. James’s Place, said: “It is encouraging that the FCA found no major systemic failures, while still identifying practical areas for improvement.

“In particular, we support the focus on helping customers better navigate the claims process and linking protection advice more closely with wider financial planning, including Wills and Powers of Attorney.

“The FCA’s emphasis on collaboration to address the UK’s long-standing “protection gap” is a positive step. Closing this gap will require coordinated action across the industry rather than quick fixes, and we fully support the FCA’s intention to work with firms to develop solutions that improve consumer understanding, access and long-term outcomes.

“Overall, this is a constructive and balanced assessment of the protection market and an opportunity for the industry to build on what is already working well for customers.”

MISSED OPPORTUNITY

But James Daley, managing director of consumer group Fairer Finance, said: “The FCA’s protection market study is another missed opportunity.

“Many of the issues in the market have been side stepped – and once again, the main headline from the interim report is that the FCA is not planning any major action.

“The Government’s pro-growth, deregulation agenda continues to make all the running – with the FCA clearly feeling it cannot take any action which is seen to be unpopular with industry.

“It’s incredibly frustrating that the regulator has invested so much time and energy in both the protection and premium finance market studies – only to conclude that no action is necessary.

“These market studies were launched because of concerns about the way these markets were operating – yet the regulator has felt unable to follow through and take any action to address those problems.”

Read the interim report HERE.