The Financial Conduct Authority (FCA) will be conducting a review into the operation of the pure protection market including commission structures including loaded commission and the shrinking insurer market.
It is also examining whether products provide fair value for customers after it cited instances of premiums exceeding the potential benefits that maybe received by a customer.
Practices from intermediaries and insurers operating in the market will be examined including advised and non-advised sales.
In particular, the FCA raised concerns that intermediaries may be incentivised to unnecessarily churn products or load premiums to earn higher commissions or take other actions not in the customers best interests.
The FCA has raised several issues with the protection market over the last two years, including a scathing letter to life insurer CEOs from FCA director of insurance Matt Brewis a year ago.
Loaded premiums have been a particularly high profile subject with many leading advisers calling for them to be banned while at Health & Protection’s Protection Forum in April, insurer leaders said they would be “delighted” if the regulator took action on the practice.
The regulator said it will launch its market study into how pure protection insurance products are sold “following concerns that competition is not working well in the market”.
It added that there are indications that “the pure protection market may not be functioning well and that competition may not be working effectively in the interests of consumers”.
Four products will be the focus of the review: term assurance, critical illness cover, income protection insurance, and whole of life insurance including guaranteed acceptance over-50s plans.
The FCA highlighted three key items in its reasoning for the review: the design of commission arrangements, fair value of products and insurer market competition.
Commission concerns
The regulator highlighted that the design of commission arrangements may not always support the delivery of fair value.
It explained that when designed well, commission can be an effective tool for renumerating intermediaries for providing valuable services, but when not designed well, firms maybe incentivised to push products that are not consistent with a consumer’s needs or do not meet them as well as another product would do.
The regulator said: “We want to understand the impact that commission has on intermediaries’ incentives, both for advised and non-advised sales.
“We have seen examples of intermediaries encouraging customers to switch unnecessarily (eg to a product that does not meet their needs as well or that provides poorer value) to earn repeat commission,” it said.
“We also want to understand the use of loaded premiums – a mark-up to the standard premium paid by a consumer that enables additional commission to be paid to an intermediary.
“We will consider the extent of any impact that their use could have on intermediaries’ incentives.
“Commission arrangements, such as loaded premiums, may also impact price and therefore fair value outcomes for consumers.”
It added that it wanted to understand whether the distribution arrangements for pure protection products are consistent with the aim of providing fair value.
Product fair value
The FCA noted that some pure protection products may not provide fair value to customers, and highlighted guaranteed acceptance over-50s insurance as a key example.
It found that some guaranteed acceptance over-50s life insurance products appear to have low average payouts in comparison to overall premiums paid and to other products.
“We have seen examples where the total premium paid over an average lifetime far exceeds the payout, typically at least 50% greater,” it said.
“And, while the total premium could be higher if the customer lives longer than average, the payout amount is fixed, widening the gap between premiums paid and payout amount.
“We are particularly concerned that this may not be consistent with providing fair value and in particular, this may be impacting customers in vulnerable circumstances.”
Insurer market competition
The FCA warned that competitive pressures in the market may be weakening due to the recent exit of several insurers providing pure protection products.
It said it was aware that the impact of the recent exits of some insurers on concentration in the pure protection market increased the likelihood of competition issues and the urgency of understanding and addressing these.
“We would like to understand the impact of this, and whether this reduces consumer product choice and potentially weakens the incentives on the remaining insurers to meet consumers’ needs,” it said.
“We want to understand the drivers for insurers exiting the market, and the extent of barriers to entry and expansion faced by potential entrants who may be able to strengthen competitive pressures in the market.
“If the market is not functioning well and competition is not working effectively in the interests of consumers, the potential harm to policy holders and their dependants may be significant.”
Over the last three years Canada Life has withdrawn from the individual protection market as did Aegon before being bought by Royal London, while Aviva completed a deal to buy AIG Life UK earlier this year.
LV= was also the subject of failed takeovers, first from Bain Capital which collapsed when members rejected the move and then following an approach by Royal London.
The FCA said for insurers, its focus will comprise the design and distribution, both direct and intermediated sales, of products, including pricing products, benefits consumers receive, and the commissions that insurers pay to intermediaries.
“We will also consider the impact, including unintended consequences, of mitigants in place to address conflicts of interest created by commission such as clawback arrangements,” it said.
Intermediaries
For intermediaries, the focus will comprise distribution of products, including where they influence product design, total price paid by the customer, and commission.
“We will also look at fees and adviser charging and in-house remuneration if it helps us to understand how the market operates, and to better design remedies, if they are required,” it said.
The regulator added that it recognised insurers and intermediaries also carried out other activities which could be of interest in its work, such as cross-selling products.
“These are not directly in the proposed scope of the market study, but may be of interest if they materially impact the nature of competition in pure protection,” it continued.
“For example, we may be interested in cross-selling of pure protection products as a secondary sale to a loan.”
The investigation will begin later in the 2024-25 financial year but the FCA has not given a solid date as it is considering other pending priorities.
It is not formally consulting on the terms of reference for the investigation, but said it would welcome any views or feedback which must reach it by 11 October.
It will also engage with firms, industry groups and others to gather views on the market
FCA executive director of consumers and competition Sheldon Mills 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.”