The Financial Conduct Authority (FCA) is undertaking a market study to look into how well the distribution of pure protection insurance products is working from a consumer perspective.
The review will explore how effectively this important market is working. While the FCA has seen indications of good outcomes for consumers and relatively few complaints, it says there are concerns that commissions used to sell these products may affect the outcomes consumers receive and the products’ value or design.
The FCA committed to looking into the sector in further detail in August last year, but prior to launching, took feedback from the market on the terms of reference.
In 2023, around £4.85bn was paid out in claims on individual policies to support people suffering from bereavement, illness, and injury.
The study will examine whether:
- the structure of commission encourages advisers to suggest switching that may not be beneficial for consumers
- premiums are being raised by insurers to pay a higher commission to an intermediary
the products provide fair value - the market supports innovation and growth
The market study will focus primarily on the sale of four products – term assurance, critical illness cover, income protection insurance and whole of life insurance. It will allow the FCA to carry out a more detailed analysis in these areas using its competition powers and the launch does not presuppose any particular outcome.
Initial findings and any proposed next steps will be published by the end of 2025.
Sarah Pritchard, executive director of supervision, policy, competition and international at the FCA, said: “Consumers rely on pure protection to provide an important safety net, often when they are at their most vulnerable be it through bereavement, illness, or injury. We are determined to ensure the market is working well and delivers good outcomes for consumers by testing it or suggesting improvements.
“In launching the study today, we will be able to take a closer look before considering next steps. We will keep stakeholders regularly updated and welcome the feedback to date that will help us plan the scope of this review.”
COMMISSION CONCERNS
Tim Hogg, director at consumer group Fairer Finance, welcomed the news. He said: “Pure protection markets could be working better for consumers. The design and size of some commission payments appear to be hurting – rather helping consumers.
“The FCA has started to do its homework in understanding commission payments, and is signalling that it will get under the skin of whether commissions should be restricted or reformed.
“Ultimately, many people aren’t buying life insurance when they would benefit from it. Communications about life insurance remain complex and off-putting. Purchase journeys can be lengthy and contain high levels of friction triggering negative emotional responses with the medical questions. It’s great that the FCA will look at how to facilitate more innovation in this market – from the design of communications and journeys, to the way that products work.”
OPPORTUNITIES FOR CHANGE
Ian McKenna founder and CEO of Protection Guru, said: “It’s good to see the FCA identify the specific areas they will be exploring under this review and clarify the areas to be excluded.
“By concentrating on the mainstream Term, Critical Illness, Income Protection and Whole of Life products the FCA are recognising where there are significant opportunities for change and innovation.
“We are particularly pleased to see that the Review will not look at the assessment of fair value in isolation but examine this alongside cross cutting obligations under consumer Duty. We also applaud the decision of the FCA to examine fair value in the context of the quality of services and the overall price consumers pay.
“Day in, day out, we see situations where consumers can be offered products that are significantly higher quality for just a small additional outlay over the cheapest product, we see this shows where fair value assessment can deliver far better consumer outcome than the pre-Consumer Duty approach which favoured the lowest cost.
“In the context of today’s announcement, we believe our work released earlier this week to highlight how identify how selecting best value for consumers can bring additional revenue to advisers to offset the extra work Consumer Duty necessities shows why advises need research tools capable of analysing Term and Income Protection as well as Critical illness, rather than just having data tables that they need to review and analyse manually.
“It is also encouraging that the regulator has acknowledged that advice firms have mechanisms in place to avoid bias that could be attributed to commission. While the regulator has said they will investigate these mechanisms in more detail, it’s good to see the regulator listening and learning from processes adviser already have in place.”
ROBUST DATA IS CRITICAL
Andrew Gething, managing director of MorganAsh, added: “The FCA’s market review looks set to address many of the known harms the sector has been aware of for a long time.
“As expected, commission remains a hot topic – as we have seen in the car finance sector. Consumer groups have long cited commission bias as a cause of consumer harm. While the industry argument that the protection gap would widen without commission does have merit – particularly for less exciting products like life insurance – it’s up to firms to evidence in their outcome reporting that any detrimental impact of commission bias is minimal and/or reducing, especially for vulnerable cohorts.
“The sector is responsible for many good outcomes and the FCA recognises this in its updated terms of reference. However, these products are most needed when clients are at their most vulnerable. With the FCA’s recent vulnerability review identifying that many firms are still unable to monitor or take action on outcomes for this cohort, the sector needs to demonstrate that is looking beyond just those who claim and is alive to the challenge for all customers.
“Across all areas – particularly customer vulnerability management – robust data is absolutely critical and the best defence in meeting the regulator’s requirements – particularly Consumer Duty. With quality management information, firms will hopefully be able to demonstrate that any poor outcomes that are identified in the review are at least low or shrinking.”
