Claims ratios from pure protection insurance products are generally above 50% and typically higher than most general insurance (GI) products, according to analysis from the Financial Conduct Authority (FCA).
Ratios for income protection (IP) were significantly lower than the rest of the market but insurers highlighted the problem of mis-representation and non-disclosure.
The regulator noted insurers were taking action to improve IP claims acceptance and reduce premiums, but highlighted potential questions about consumer understanding of the product.
Released as part of its pure protection market study interim report, the FCA said it will be reconducting its value for money examination including claims ratios using 2025 data before publishing its final market paper later in the year.
Claims ratios, acceptance and mis-representation
Using projected claims costs as a proportion of the present value of projected premiums, five protection products were above or near 50% claims ratio.
Whole of life (66%) and term assurance (60%) offered the highest claims ratios, followed by accelerated critical illness (59%), guaranteed acceptance over 50s insurance (52%) and standalone critical illness (49%).
Income protection, at 40%, was the lowest of the six products reviewed, although this was still on par with dental insurance and above several other GI lines.
IP also had the lowest rate of accepted claims among insurers with 86% accepted, compared to term assurance (96%), critical illness (91%) and whole of life (100%).
The FCA said insurers had noted that rates of declined claims had prompted reviews and further action to address the risk that customers did not have an adequate understanding of their policy, and that distributor behaviour was contributing to instances of misrepresentation at the point of sale.
Firms reported that declined claims were due to claims not meeting the policy criteria, such as attempts to claim based on symptoms, without being able to evidence a condition.
“One firm stated that 80% of their declined claims were in respect of not meeting policy criteria and that lower customer understanding of income protection was a contributing factor,” the FCA said.
“Firms also commonly identified misrepresentation and non-disclosure as the reason for claims being declined for income protection products – some firms indicated that misrepresentation and non-disclosure accounted for around 20-85% of claim declines in 2024.”
The FCA added that while complaints to Financial Ombudsman Service were relatively low compared to the total income protection policies in force, complaints relating to declined claims were the most common issue (60%), the highest across all pure protection policies in scope.
Concentrated insurer market and pricing reductions
The interim report found provision of income protection was highly concentrated, with two insurers accounting for the majority of new income protection sales in 2024.
However, the FCA said it understood some insurers had repriced their income protection products in 2025 as part of efforts to ensure products remain competitively priced.
“If the value of benefits have remained stable, then the price reductions noted by insurers can be expected to increase value for consumers,” it said.
While acknowledging this was not a perfect approach, the FCA said benchmarking pure protection claims ratios against general insurance value measurements was valuable for the market.
“It provides context that the claims ratio for income protection products does not appear to be an outlier when compared to many general insurance products with regards to claims ratios,” it said.
The FCA continued: “While claims ratios are a commonly used metric across insurance products and provide an indicator of value to customers, they are not an all-encompassing measure; the value of a product may also reflect non-monetary and intangible benefits to customers.”
Consumer understanding lacking
In this regard, the regulator’s consumer research found 86% of consumers felt positive about their decision to purchase income protection – in line with whole of life insurance (86%) and critical illness (83%).
However there was evidence that some customers did not fully understand their income protection products.
For example, research submitted by one firm found that consumers’ claimed understanding of income protection was high but was in fact fraught with misconceptions, particularly around the circumstances in which income protection could be claimed.
Many wrongly believed they could use income protection for unemployment, redundancy and short-term leave, while its uptake remains lower than other products, accounting for only 10% of all new protection policy sales in 2024.