The Financial Conduct Authority (FCA) has launched a market study into the pure protection market to assess the distribution of products and whether they deliver fair value for consumers.
The regulator will look at how effectively the pure protection market is working.
It said while it had seen signs of good outcomes and few complaints, there were “concerns that commissions used to sell these products may affect the outcomes consumers receive and the products’ value or design”.
In August last year, the FCA said it would examine the sector but took feedback from the market before it officially started.
Its probe will look at whether the structure of commission encourages advisers to suggest clients switch policies even if it is not beneficial, and if premiums are being raised by insurers so a higher commission can be paid to advisers.
It will also look at whether products provide fair value and if the market supports innovation and growth.
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The study will focus on term assurance, critical illness cover, income protection insurance and whole of life insurance. This will allow the regulator to conduct a detailed analysis using its competition powers.
Its initial findings and any proposed steps will be published at the end of this year.
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.”
‘Pure protection markets could be working better’
Reacting to the news, Tim Hogg, director at consumer group Fairer Finance, said: “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.
“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.”
David Gray, senior consultant actuary at Broadstone, added: “It is really important that the protection sector is working well for consumers and that the selling of products like income protection and whole of life insurance is delivering fair value and comprehensive cover over a suitable term. While the FCA points to many current positive indicators and outcomes for consumers, it evidently has concerns around aspects such as commission arrangements and barriers to investment and innovation.
“We note the changes to the terms of reference after listening to stakeholders including ‘work to develop a better understanding of the magnitude of the protection gap and its underlying causes’. We believe that a wider take-up of affordable protection policies can greatly increase societies’ financial resilience.”
