The Financial Conduct Authority has launched its much-awaited pure protection market study on fair value for consumers.
The study, launched today (21 March), will look at how well the distribution of pure protection insurance products is working for consumers.
The regulator said while it 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.
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.”
Last August, the FCA laid out plans to launch a protection market study following concerns about competition and insurance products.
The study 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.
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.
The products are mainly sold through intermediaries such as independent financial advisers or mortgage brokers.
Around £4.85bn was paid out in claims on individual policies in 2023, according to the FCA.
Meanwhile, the regulator said it has introduced changes to the draft terms of reference it published last August.
It said it did so following interventions from stakeholders in the protection sector.
The changes include further clarification on the scope of the market study, including that private medical insurance is out of scope, as well as funeral plans and accident, sickness and unemployment products.
It also includes developing a better understanding of barriers to innovation and investment, the ‘protection gap’, as well as access for those customers that fall outside a typical definition of a ‘healthy life’, such as those with existing medical conditions.
Initial findings of the study and any proposed next steps will be published by the end of 2025.
Stakeholders in the protection sector have welcomed the study, although with some reservations.
Setul Mehta, protection specialist, said: “I’m encouraged by the fact that it recognises the market is complex and [is] incorporating views from portals and reinsurers – it’s right to consider both as part of an end-to-end review.
“The fact that the significant majority of advice is via intermediaries [means] it’s right the focus is on value and structure, and that is what many across the industry have been calling for.
“While [I am] disappointed to see business protection out of scope, if the majority of the review is at a macro level, it could end up being a red herring.
“It’s clear the FCA aren’t going to jump to conclusions. We don’t want unnecessary disruptions as there is much that works incredibly well in our industry across all parts of the value chain.”
Tim Hogg, director at consumer group Fairer Finance, added: “Pure protection markets could be working better for consumers. The design and size of some commission payments appear to be hurting rather [than] 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.”
