Following a superb Protection Forum I walked away questioning the fragile balance that exists between regulation and innovation and the potential impact of the Financial Conduct Authority’s market study.
There are of course factors beyond the role of remuneration and partnerships but these two feature high on the impact list.
At the Protection Forum, PwC outlined key considerations for the FCA in the UK protection market.
One major focus will be the “cost to serve” and how remuneration structures shape adviser and distributor behaviours.
While these are critical issues for ensuring good customer outcomes, there is a deeper challenge on the horizon – one that could inadvertently stifle product innovation and the “creative spark”, that Toni Smith (pictured right), Zoe Priselac (pictured centre) and I (pictured left) discussed that the life insurance industry so urgently needs.
The role of commission in driving sales
For years, commission structures have been a key leaver in enabling networks to support advisers and drive sales across the protection market.
The word commission often has a negative context but very few would dispute that its acceptable for an adviser to be remunerated for supporting a client – which also cross-subsidises the many clients seen that may not take up the recommendation but have been through the advice process.
The question is always more focused on, is it fair, what’s the right amount, is it enough and so on.
Then there is increased commissions, often funded by insurers through loaded premiums; whether linked to distribution quality risk, the additional cost of supporting advisers through training, marketing or oversight, or panel structures.
And while loaded premiums are not prohibited by the regulator even as part of Consumer Duty, it was clear following the Protection Forum that this will be a key review point.
The question here is, if some of the largest contributors to reducing the protection gap are utilising loaded premiums as part of their operations, is there a risk that removing it could increase the protection gap?
Some would vehemently argue not and others will be able to demonstrate to the regulator where and why it works.
The FCA’s intention to ensure value for money and protect consumers is, of course, critical.
Yet, it is important to recognise that commission structures are not simply a cost – they are also an important tool that supports market participation and consumer access to protection products.
Product innovation and exclusive arrangements
When it comes to product innovation, the relationship between insurers and networks, nationals and larger advisory distribution groups, plays a pivotal role for consumers and our industry.
Insurers often work closely with these groups to develop innovative products, tailoring them to needs identified, as these organisations are close to customer groups and categories.
Beyond this, in many cases, exclusive products or panel arrangements create a virtuous circle: insurers are supported to create distinctive propositions which means networks, nationals and distributors have a competitive edge, and advisers are driven to present fresh, customer-focused solutions.
The biggest impact actually, is when these are created and they do not drive the intended outcomes.
However, if the regulatory review discourages or limits the use of exclusives or network-specific panel arrangements, this ecosystem could be disrupted.
Without the promise of volume through such partnerships, insurers may become more cautious in their product development efforts.
The commercial rationale for creating truly innovative products could weaken, particularly in a market where distribution remains concentrated.
An important caveat to note is, most panel arrangements still offer options to refer out for client scenarios where an immediate option is not available, there is an increased usage of these referral routes and insurers create products that will ultimately be available to all and do not always solely rely on distribution partners.
Get the balance right
The FCA’s protection market study will no doubt shine a light on important areas such as commission practices, pricing transparency, and customer value.
However, as the industry looks into this regulatory review, it is critical to ensure that well-intentioned reforms do not inadvertently dampen the innovation and creativity that the protection sector needs to thrive.
Ultimately, a balanced approach is essential – one that safeguards consumer interests without dismantling the commercial and strategic frameworks that underpin adviser engagement and product development.
We need to continue to have the environment where manufacturer, distribution, advisers and the various members of the value chain can continue to collaborate and innovate, the market will be better positioned to close the protection gap and deliver the tailored solutions customers deserve.
In fact, as PwC mentioned, it is important that all parts of the value chain have their voice heard and utilise the outlets available in the right way.
So for those that were unable to attend the event, please do engage in the next steps, whether its directly with the regulator or through trade bodies and forums.
