The Financial Conduct Authority (FCA) has expanded the areas under consideration for its pure protection market study to include restricted panels of insurers used by distributors’ cover for customers who have pre-existing medical conditions and barriers to innovation and investment.
These areas were not originally considered in the regulator’s initial terms of reference published in August.
It will continue to focus on the elements of distribution arrangements and commission, fair value of some pure protection products and the impact of recent insurer exits.
The regulator confirmed the terms of reference for its market study into the distribution of pure protection products to retail customers and formally launched the investigation, which it expects to give an interim report with initial findings and proposed next steps around the end of the year.
Restricted panels
The FCA highlighted concerns with restricted panels used by distributors that had been raised with it.
These included:
Higher commission payments: Stakeholders told the FCA that insurers must pay higher commissions to access restricted panels. This may increase the premiums paid by customers, it said.
- Barriers for smaller insurers: Smaller insurers may struggle to join restricted panels due to high commission rates for access. This may prevent them from gaining the necessary customer volumes to expand effectively, the FCA added.
- Limited customer choice: Customers may not be aware of the restricted nature of a panel, limiting their choices or affecting the value they receive.
The FCA did note that some distribution arrangements such as restricted panels and exclusive or single tie arrangements can offer more simplicity for advisers and customers and may be an effective way of distributing pure protection products.
Complex cases and pre-existing conditions
The FCA widened the consideration of its study to include vulnerable customers and individuals who fall outside the healthy lives definition, highlighting that insurers have increased policy exclusions.
While 70-80% of customers are eligible for straight through underwriting it meant those not would face difficulties.
It noted respondents to its initial terms highlighted that those with medical conditions, may struggle to access affordable insurance.
“This may be due to the cost of the underwriting process, uncertainty of the outcome, and/or the intermediary commission structure not fully compensating the intermediary for their time spent on a more complex case,” it said.
“We have also been told that insurers have increased the number of policy exclusions over time.
“This has reduced the pool of people eligible for headline premiums and increased the pool of people who find it more difficult to access appropriate cover at an affordable price.
“We will examine how well vulnerable consumers are currently served and, if not, examine the reasons why,” it added.
The FCA also recognised the protection gap and said it will undertake some work to develop a better understanding of the magnitude of the protection gap and its underlying causes.
Barriers to investment and innovation
The existence of a protection gap may indicate opportunities for market expansion and growth, the FCA acknowledged.
It noted stakeholders told it of ongoing initiatives to educate consumers, reach under-insured groups, design new products, and improve underwriting and claim settlement processes, while feedback also highlighted areas with potential for more investment and innovation.
For example, stakeholders have told it that the approach to distribution and remuneration of intermediaries has been uniform across insurers and has not changed significantly over a long period of time.
Other areas identified by stakeholders for potential innovation and improvement included:
- Improving the consumer journey: Making the insurance process less time-consuming both when taking out the insurance and at the time of pay out (for example, shortening pay out times)
- Simplifying policy wording: Making it easier for consumers to understand the cover they are receiving
- Product innovation: Improving the availability of affordable cover for customers who do not fit within the current healthy lives definition
“We will explore potential opportunities for market growth, identify barriers to investment and innovation, and the extent to which these barriers could be overcome,” it said.
Importance of intermediaries and commission
The regulator also reiterated elements of its initial terms and highlighted it would be looking into the role of intermediaries and commissions.
“We will examine the size and structure of commissions, the incentives they create, and the effectiveness of FCA rules and commissions scheme features (for example clawback or equalising commission across advisers) in mitigating incentives and conflicts of interest,” it said.
“We will consider the effects for different types of intermediaries (advised and non-advised). In addition, we are seeking to understand the impact that commission arrangements may have on fair value outcomes for consumers.”
The regulator will also be examining:
the importance of intermediaries as a route to market and the value of services they provide to insurers,
- the relative bargaining power between intermediaries and insurers
- the nature of competition between insurers for distribution channels
- the broader macroeconomic environment and its impact on insurer and intermediary competition
- the nature of competition between insurers and between intermediaries, and how distribution arrangements can affect this.
The FCA added that it will “maintain proactive and regular engagement with stakeholders throughout the duration of the market study”.
During 2025, it plans to publish several pieces of analysis, on specific subjects, to share its latest thinking.
“If the distribution of pure protection products is not working well against our operational objectives, including our competition objective, we will consider whether any improvements are needed on a forward-looking basis, in particular to support competition that delivers innovation and investment and to make sure the market works well for consumers,” it said.
“Market studies are forward-looking and do not examine past conduct of individual firms, nor do they set out to establish the basis for redress,” it added.
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.”
