The Financial Conduct Authority (FCA) does not expect to be making significant interventions including the banning of loaded premiums in the protection market.
The regulator highlighted that loaded premiums and restricted panels were not creating worse pricing outcomes for consumers.
This was despite a quarter of new protection sales being conducted with loaded premiums and average commissions being 25% higher in loaded premiums.
The regulator said it will be working with the industry to create better and more detailed metrics and was considering measures to better identify intermediaries using poor practice.
Its interim report on its pure protection market study the regulator said the market was “working well” and that the issues identified are not “sufficiently significant or widespread” to warrant substantial market intervention.
Loaded premiums
Following previous statements from the regulator and industry sentiment the market had been expecting the FCA to take some action on the role of commisison, particularly loaded commission.
However, the FCA was generally not concerned by this approach in the market and highlighted there were many complexities in its oepration and calculation.
“Firms know that commission can create poor outcomes and take preventative action,” it said.
“On average, loaded premiums or restricted panels aren’t currently creating worse pricing outcomes for consumers.”
It found insurers self-reported that about a quarter (26%) of intermediated new sales in 2024 involved loaded premiums.
The regulator noted it would be concerned if it found evidence of this practice resulting in higher premiums for customers which could not be justified by improved quality or service as this would be inconsistent with firms’ fair value obligations under Prod 4.
It added that premium pricing and commission rates were complex and varied substantially.
The regulator highlighted there was no universal ‘standard’ premium adopted by individual insurers on to which additional commission could be loaded and said insurers’ pricing models were also complex and had multiple pricing points, resulting in premiums varying significantly.
Commissions are also usually negotiated bilaterally which contributes to this.
Commission 25% higher on loaded premiums
In a bid to further understand the impact of loaded premiums, the regulator compared individual policies sold with loaded premiums to those sold without to determine whether products with loaded premiums were more expensive for consumers overall.
The regulator then analysed outcomes for groups of consumers with more directly comparable characteristics.
As it expected, the distribution of commission rates for all products showed that, on average, policies with loaded premiums had approximately 25% higher commission rates.
But from the customer’s perspective, the regulator found loaded premiums appeared to be within a similar range on average as non-loaded premiums.
It added that if loaded premiums were generally higher than non-loaded premiums, it would expect to see loaded premiums more concentrated in the top part of the chart compared to non-loaded premiums.
However, the distribution of annual premiums was seen to be similar between the loaded and non-loaded policies.
Likewise, when comparing loaded and non-loaded premiums for specific products sold to groups of consumers with more directly comparable characteristics, the FCA found that the distribution of loaded and non-loaded premiums was similar.
Overall, at current levels, it found little evidence indicating that loaded premiums equated to higher prices for customers compared to non-loaded products.
“While our analysis of loaded premiums doesn’t indicate higher premiums, we can’t rule out cases where specific premiums and commissions – including loaded premiums – may not align with firms’ obligations under Prod 4,” the FCA said.
“We’ll continue to monitor these risks and invite views on whether additional evidence points to inconsistencies with fair value.”
Switching commission structures
Touching on the issue of switching commission structures, the regulator noted this may incentivise intermediaries to encourage customers to switch to a new policy shortly after the end of the clawback period.
Around 80% of protection sales are to new customers that do not already hold any protection policies, but some intermediaries may be encouraging customers to switch to a new policy to generate repeat commission, the regulator noted.
“The harm this causes consumers is unlikely to be substantial: fewer than 19,000 customers per year, around 0.1% of policyholders, are likely to be affected and they will still have cover,” it said.
“But intermediaries’ focus on switching customers unnecessarily does not help reduce the protection gap.
“We want the sector to collect, monitor and report better information on customers switching to make sure it’s aligned with their needs. Ahead of the final report, we propose to work with industry to develop the reporting metrics to ensure they’re proportionate and effective in deterring churn.”
While the regulator called on the sector to collect, monitor and report better information around customer switching to ensure it is targeted to consumer need, it warned it could use existing rules and clarify expectations with examples of good practice and areas for improvement or it could consider new rules and/or guidance.
Furthermore, it noted it could also explore introducing Individual Reference Numbers (IRNs) for those selling protection – similar to mortgage or wealth advisers.
This would mean poor practice can be more readily identified and addressed as well as introducing a requirement on intermediaries to report the lead generators they used, to help insurers identify potential future customer churn.
Not pursuing interventionist remedies
However, the regulator pointed out that it will not propose to pursue more interventionist remedies.
The FCA noted that when assessing its proposed interventions and remedies, it considered whether they were proportionate to the harms concerned, whether they would be effective at mitigating them, and any potential unintended consequences.
“Although we’ve identified some areas of concern, the evidence we have at this stage suggests that, in many respects, the market is working well and that the issues identified are not sufficiently significant or widespread to warrant widespread market intervention,” the FCA said.
“This is why we’ve not considered banning products or commissions, or pricing interventions such as capping commissions.
“These remedies are unlikely to be proportionate to the harms and also carry a high risk of significant unintended consequences, including worsening the protection gap.
“If further evidence and analysis provides strong evidence that such options could lead to better outcomes that we can deliver through the steps outlined above, without strongly distorting supply-side incentives, we may reconsider.”
The FCA now plans to engage with stakeholders to identify a targeted programme of work to address the protection gap and hear feedback on potential remedies to the issues it has identified.
It will also organise workshops with stakeholders in Spring 2026 and will aim to publish its final report in Q3 2026, in which it will set out its final findings, a summary of feedback it has received, and any intended next steps.
