I cannot be alone in being a little surprised by the FCAs publication of MS24: Market Study into the Distribution of Pure Protection Products to Retail Consumers, following on so closely, from Consumer Duty given both cover similar grounds.
That being said, perhaps I shouldn’t be.
The principles-based approach taken in Consumer Duty leaves scope for both manufacturers and distributors to interpret the guidance in ways, dare I say it, that the regulator may not have expected.
If I am right perhaps this study is a pre-emptive strike across the industry rather than addressing their concerns piecemeal with insurers and advisers with the obvious potential for confusion and fracture.
In my view there is much to like about this intervention.
And I am not saying this because I need to: in case the regulator takes a dim view of any criticism I may offer.
They are after all entering into this with an “open mind” and undoubtedly coming at this with the best of intentions.
Equally I am sure any and all who respond to this study and any subsequent consultation will do so with the best interests of consumers and the industry we hold dear.
An industry the FCA acknowledges consumers rely on to provide financial resilience and an important sector paying out £4.2bn in claims in 2022.
It is worth noting the payout in 2022, according to the ABI, was actually £6.85bn and totalled £7.34bn in 2023.
I make this observation not as a criticism just a fact that may make the FCA acknowledge an even greater contribution than it had initially appreciated.
Loaded premiums and over-50s concerns
So back to ‘much to like’.
This is the first time, certainly that I can remember, and I have been around longer than most, that a regulator has done a deep dive into protection separating it from general insurance (GI).
An acknowledgment, in my book, well overdue, that pure protection advisers are specialists in their own right.
I also very much like, and this will not come as any surprise to any of you who have read my previous contributions, the specific reference to ‘loaded premiums’.
This practice has long been a stain on our industry and certainly, in my view, unsustainable under Consumer Duty.
I also welcome the inclusion of guaranteed over-50s plans in the study.
These policies are purchased in huge volumes and are done so predominately on a single feature: the absence of the need for a medical.
A significant number of clients purchasing such contracts wouldn’t be required to go for a medical anyway.
Those that would be required would, in the main, get a better value contract if they accepted going for a medical is no big deal.
Arguably the only place for these policies is part of an advised sale to individuals who would not otherwise get cover.
The result is a market that only exists by virtue of a large number of ill-advised or misguided and potentially vulnerable consumers having policies that affectively subsidises advised policies for an informed minority. This cannot be right.
I also have some concerns. There are references to indications that the market may not be functioning well: with examples for guarantee over-50s – agreed, but also the design of commission arrangements with impact on fair value and weakening market pressure due to the exit of insurers.
Better due diligence by insurers
On commission, I would be surprised if the FCA has a problem in principle, after all the UK is the third largest protection market in the world with only the US and China ahead of us.
So it can only be concerns around whether the design of commission arrangements themselves lead to inappropriate sales and poor client outcomes.
I am not sure, loaded premiums apart, what evidence there is for this.
I accept indemnity commission, which can be essential for new distribution entrants to the market, is also one of the primary drivers for businesses whose only intention is to take advantage of lax controls by providers.
However better due diligence by the insurers would largely solve this problem.
The FCA only has to look at the impact of regulators messing with indemnity commissions in Australia and the Netherlands to realise the dangers.
Yes, there are differences in commission terms between distributors agreed with insurers but these are largely based on the quality and quantity of the distributor’s business.
Indeed most insurers evidencing poor sales practice are likely to give poor commission terms rather than the reverse.
Furthermore, the disparity between commission rates from one distributor to another ultimately comes from the insurer’s margin rather than the price the consumer pays.
Competition concerns unconvincing
On the issue of a weakening market due to the exit of insurers, I am not convinced.
First it should be noted that the Competition and Markets Authority (CMA) cannot have had an issue with Aviva’s purchase of AIG.
Competition would have been high on the agenda prior to giving its approval.
Second, and I am sure many insurers will bristle at this, but with a few exceptions that I cannot mention, lest I be accused of favouritism, the majority simply act as packagers for reinsurers. Admittedly with a variety of knobs, whistles and value-added benefits even though the majority of these are not used by clients and are not contractual either.
Finally, and much to my amusement, while you can argue that the loss of insurers could in theory impact the competitiveness of the market, those making this point the loudest were the same individuals who construct or work for networks who operate limited panels: oh the irony.
Is churning products routine?
The final point I want to make, which again is something I have written on, is my objection to the inference made that advisers routinely encourage their clients to switch products unnecessarily to earn repeat commission.
I am not naïve, this does happen, but “routinely”?
In my view re-broking; as products improve, client circumstances change, and rates reduce is not just an essential part of being a proactive adviser but is a practice encouraged by Consumer Duty to deliver good consumer outcomes.
All in all, while there are dangers in over regulation we should welcome the scrutiny of the regulator.
There are some aspects of the protection market that can only be changed with their intervention and the vast majority of us that do the job right, should welcome this with open arms.