The FCA has launched a market study into how well the distribution of pure protection insurance products – which support families with financial commitments if someone becomes critically ill or dies – is working for consumers.
In 2023, around £4.85 billion was paid out in claims on individual policies to support people suffering from bereavement, illness, and injury.
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, 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.
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.”
Andrew Gething, managing director of MorganAsh, said:
“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.”
