The Financial Conduct Authority (FCA) is right to look into the issue of whether insurers loading premiums in order to pay selected networks and distributors higher commissions needs ensures fair value.
This is according to the Protection Distributors Group (PDG) which also argued that, in order to avoid abuse, insurers needed to undertake effective checking of the marketing and sales behaviour of the intermediaries they pay commission to.
Loaded premiums
The body was responding to the FCA’s publication of its final terms of reference for its now-launched market study which extended the scope to include restricted panels operated by networks and cover for those with pre-existing conditions.
“We do feel that commission itself, including indemnity commission, is an appropriate way to remunerate intermediaries, and sustain intermediation and specifically advice in protection,” the PDG said.
“We agree that insurers loading premiums in order to pay selected networks and distributors higher commissions needs to be investigated to ensure fair value.
“And we feel that, in order to avoid abuse, insurers need to undertake effective checking of the marketing and sales behaviour of the intermediaries they pay commission to.
“We believe the review should clarify this point to insurers, who in dealings with us have made clear that they see that as ‘the regulator’s job.’
“We’d expect such quality checking to help address the ‘unnecessary re-broking’ identified.”
Initial response
In October the PDG responded positively to the initial Terms of Reference, when it highlighted the lack of clarity when results were to be published, pointing out that this could have an impact on those that may be looking to invest in this market in the future.
It welcomed the FCA’s confirmation that initial findings will be published around the end of 2025 as well as its plan to maintain proactive and regular engagement with stakeholders and its plans to publish several pieces of analysis to share latest thinking throughout the year.
And in August, PDG chairperson Neil McCarthy (pictured) said: “The PDG welcomes the fact that at long last the FCA is looking at protection specifically and not lumping it in with general insurance.”
Expansion of scope to broader protection
The PDG also welcomed the regulator’s expansion of the scope to include broader protection environment activities involving reinsurers, portals and product comparison platforms in the way they influence the market, accepting they are not the direct focus of the market study.
The additional sections include:
- the “protection gap and access to necessary cover” which will give greater clarity on whether customer outcomes are well served for those falling outside the “healthy lives” definition, and how well vulnerable customers are served
- and “barriers to innovation and investment”, where feedback has indicated ongoing initiatives that may help market expansion, as well as several areas of potential innovation such as improved customer journeys, simplifying the policy wording and product innovation
- A greater understanding of the drivers behind the recent insurer exits may help understand the competitiveness of the UK market and current barriers to entry, and also whether consumers are receiving appropriate product choice and fair value when purchasing protection products
The PDG also noted that business and key person insurance remains outside the scope of the study, adding while not being volume business, and almost 100% intermediary distributed, they are “fundamentally” the same term and CI products.
Transparency of advised and non-advised sales processes
It added that broadly the rationale and focus of the study has not changed significantly, with the assessment looking at the following key areas:
But the PDG also said it believed one of the most important areas the review should address was the transparency of the sales process in terms of consumer understanding of the difference between buying with advice versus through a non-advised sales process.
In summing up, the PDG said it was pleased to see the final terms of reference and expected reporting timescales.
“The high claims paid ratios in term life products and the relatively low number of complaints received by the Financial Ombudsman are positive indicators that the products do deliver to policy holders or their dependents in the event of death, incapacity or injury, providing financial resilience when consumers are at their most vulnerable,” it added.
“We welcome the market study and will continue to assist during the remainder of 2025,” it concluded.
Major issue for years
Commission has been a major issue for years since the FCA launched its product value rules and announced the introduction of the Consumer Duty.
The regulator has repeatedly warned firms about the potential for commission levels to skew industry practice and hurt consumers.
In August 2021 the FCA flagged commission as a key target within assessing product value.
And in May 2022 it pressured insurers to again consider adviser commission levels as part of their Consumer Duty implementation.
Three months later it told insurers that it expected them to tell advisers and distributors how their commission affects the value of the product for consumers.
Advisers and other industry leaders have also raised concerns, particularly around loaded premiums which provide a higher commission to the intermediary.
As far back as December 2021 Cura Financial Services managing director Alan Knowles and industry veteran Johnny Timpson said they believed loaded premiums were incompatible with the new rules.
In July 2022 this was also echoed by St James’ Place divisional director Tony Müdd who said the issue was “bordering on a stain on the industry”.
And in December that year Assured Futures commercial director Ian Sawyer said commission models in the protection industry were “ridiculous” and incentivised poor behaviour.
In March 2023 Aviva managing director of protection Fran Bruce told Health & Protection it was bringing firms with loaded premiums “back into line”.
That month Legal & General Retail managing director for distribution Ali Crossley added the insurer had not told any firms they must reduce, or end loaded premiums, but said it had declined deals where it thought the commission level was too high.
And in the August 2023, Guardian CEO Katya MacLean told Health & Protection the insurer had not chosen to end any relationships with its distribution network for this reason.
