The Financial Conduct Authority (FCA) intends to launch a market study into how pure protection insurance products are sold following concerns that competition is not working well in the market. The study will be launched later in 2024/25.
Pure protection products are designed to help individuals and their families with their finances should the policyholder die or become unable to meet their financial commitments. Around £4 billion was paid out in claims in 2022. The products are mainly sold through intermediaries like independent financial advisers or mortgage brokers.
The FCA has concerns that the design of commission arrangements may not allow firms to deliver good outcomes to policyholders. The regulator is also concerned that some products may be providing poor value, for example if the total premiums paid over a lifetime far exceed the maximum conceivable payout.
In order to understand how the market is working the FCA will explore consumers’ engagement with and understanding of the products they are buying, the competitive constraints on insurers and intermediaries, and potential conflicts of interest in the structure of commission.
The FCA will focus primarily on the sale of four specific types of products – term assurance, critical illness cover, income protection insurance and whole of life insurance including policies for over 50s that offer guaranteed acceptance.
Sheldon Mills, Executive Director of Consumers and Competition at the FCA, said:
“Pure protection can offer peace of mind and financial security, often when people are at their most vulnerable. Consumers should be able to buy products which meet their needs and provide fair value. We have seen indications that this may not be the case across the pure protection market and we will act if we find that the market is not working well.”
The FCA is keen to hear any feedback on its Terms of Reference and, ahead of launching the market study, will engage with firms, industry groups and others to gather views on the market and the issues they propose to examine.
Ian McKenna, Protection Guru founder and CEO comments on today’s announcement into pure protections market saying:
“The detailed review into the UK protection market initiated by the FCA is unprecedented and highly welcomed. This review is long overdue, as there has not been such an in-depth examination since the introduction of the 1986 Financial Services Act. The protection market has evolved significantly, and while it operates more efficiently in many areas than it has in the past 38 years, there are still crucial areas that need regulatory attention.
“Several key issues require the FCA’s careful consideration. The inconsistencies around terminal illness benefits and the challenges in accessing information, equally post-COVID a scarcity of qualified claims adjusters has led to delays in claim payments, an issue highlighted by the Protection Distributors Group through their work on the claims charter. The FCA should certainly look at why there is such a large disparity between the level of claims paid on individual protection plans and group risk where in the case of Group Income Protection and Group Critical Illness far fewer claims get paid. It is noticeable that when information on the group risk market is published annually invariably it focuses on premiums received with barely any reference to claims paid. Group risk cover has seen major growth in recent years have claims kept pace?
“The UK protection market currently faces a lack of supply, with several consolidations in recent years significantly impacting consumer choice. We are now left with only a handful of insurers operating in certain sectors. It is vital that the FCA avoids any actions that could lead to further contraction in the number of providers, as this would severely damage competition. It would be great to see the regulator focus on making the UK market more attractive for new insurers to enter, thereby enhancing competition and consumer choice.
“Based on my work internationally, the UK protection market offers excellent superior products at highly competitive prices compared to other major economies. It is also far more efficient than other jurisdictions such as the United Stated where it still takes months to get most policies in force which leads to significant consumer detriment. Recent changes to regulation in Australia have led to poor consumer outcomes and a major reduction in the number of people protected. The FCA need to be very careful not to make the same mistakes. However, recent changes to capital requirements have made it difficult for insurers to profitably offer plans to consumers requiring any level of rating. If the FCA does not tread carefully, millions could become uninsurable. The UK must remain an attractive place for insurers to write pure protection business to maintain the high standard of products available.
“The FCA’s work on Consumer Duty has largely focused on wealth advisers, leaving protection advisers with less clarity on expectations. The recent thematic review emphasised that advisers basing recommendations solely on price are not meeting the new standards. This review presents an opportunity for the FCA to provide more guidance on what is required from protection advisers. Many advice firms are already working towards significant changes, and it is hoped that the FCA will recognise these efforts and target actions at those who are not yet adapting.
“While there is room for improvement, the UK protection market is on a positive trajectory, particularly with the recent boom in income protection sales. It is crucial that the FCA’s review supports this momentum without causing unintended setbacks. The industry now has the chance to build an even better protection market for the future, and we look forward to working with the regulator to achieve this goal.”
Cara Spinks, Head of Life and Health at leading independent financial services consultancy Broadstone said: “The FCA is delivering a firm message to the financial services industry with yet another probe into whether a segment of the market is delivering good outcomes to members.
“This investigation into the distribution of protection products is focused on commission arrangements, fair value for consumers and competition in the market. These products provide vital cover for policyholders in the case of death and serious illness or injury, delivering protection at a vulnerable or stressful period in people’s lives.
“Ensuring the market is providing a fair and competitive service to policyholders is central to the regulator’s Consumer Duty objectives.”
