The Financial Conduct Authority (FCA) has raised serious concerns about the distribution of pure protection products to retail consumers ahead of its market review.
The regulator highlighted that there are indications the pure protection market may not be functioning well and that competition may not be working effectively in the interests of consumers.
As part of its Terms of Reference for the study, the FCA included key data outlining the market operation.
According to the FCA’s latest data, in 2022 more than 19 million individual pure protection policies were held by consumers in the UK, covering term life insurance, critical illness (CI), income protection (IP) and whole of life plans.
It added that around 2.5 million new individual pure protection policies were sold in the UK generating around £928m in new premiums during 2022.
Around £4.2bn was paid out in pure protection claims in 2022 to support people suffering bereavement, illness, and injury.
The average payout per claim was around £8,000 for income protection, £53,000 for term assurance, and £66,000 for critical illness cover.
And the regulator highlighted that provision of pure protection insurance was concentrated, with the top five insurers accounting for 70% to 80% of the market in critical illness cover, term assurance and income protection sales, and around 90% in guaranteed acceptance over-50s plans.
The main distribution channel for pure protection products is via intermediaries: in 2023, around 92% of income protection and 82% of critical illness premiums from new sales were generated through intermediaries.
However, the FCA does not have a complete view of the market.
Following a freedom of information request from Health & Protection, the FCA confirmed it does not know how many protection policies are in-force in the UK.
Health & Protection’s latest Individual and Business Protection Report found there were more than six million lives covered by term life assurance, in excess of 2.5 million CI policyholders and at least 624,000 IP members in 2022.
Four issues to explore
As part of its review, the FCA highlighted four main subjects that it intended to explore. It said these are:
Consumer needs, engagement and understanding
The benefits and the value of pure protection products to consumers, the nature and complexity of products and whether they are presented in a way that is understandable to consumers, how consumers make choices, the benefits and the value of services provided by intermediaries, how well consumers understand how intermediaries are remunerated, how engaged consumers are with pure protection products they have, and how cross-selling occurs.
Competitive constraints on insurers and intermediaries
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 how insurers and intermediaries compete, and the nature of competition between insurers and between intermediaries.
Commission incentives and potential conflicts of interest
The size and structure of commissions in the pure protection market, the incentives that commissions create, and the effectiveness of FCA rules and features of commissions schemes (such as clawback) in mitigating incentives and conflicts of interest.
Firms’ behaviour and practices
How firms’ incentives impact their conduct in relation to products, the market and their treatment of consumers.