Advisers have applauded the Financial Conduct Authority (FCA) launching an investigation into the protection market, citing commission levels and indemnity structures as a key scourge of fairness which also affect client outcomes.
The FCA announced today that it will be conducting a review into the operation of the pure protection market including commission structures, loaded commission and the shrinking insurer market.
The regulator raised concerns that intermediaries may be incentivised to unnecessarily churn products or load premiums to earn higher commissions or take other actions not in customers’ best interests.
Overall, advisers appeared to believe the investigation was ‘the right thing to do’.
They largely supported the development acknowledging that commissions can be too high, although there were concerns that previous regulations had not had a positive effect on the industry, and could have unintended consequences.
Common sense needed
Speaking with Health & Protection Alan Lakey, director at Highclere Financial Services and CIExpert, was hopeful that despite past disappointments from regulatory action this would prove beneficial to the market, particularly regarding commission.
“Hopefully there is a common sense thread that will run through and the views of advisers will be considered,” he said.
Lakey noted there was an argument that some fees were not “commensurate with fairness” and that he puts a maximum fee in place as the amount of work on a £200,000 policy is the same as that on a £1m policy.
But he said “that’s an individual factor,” noting that his cost of doing business may be half of what it would cost an adviser based in the city.
Good thing for the market
Moneysworth director Andrew Wilkinson appeared stronger in his approval for the development.
He told Health & Protection: “In short I think it’s good thing for the market and I welcome it.”
Wilkinson said: “I’m against loaded commission models and premiums outweighing benefits,” and added “there are several aspects deserving of further investigation.“
Outlining how the current system encourages bias towards and against different types of consumer based on their health conditions, Wilkinson said: “Commission models currently for most distributors are heavily front-ended, based on indemnity commission, with very little ongoing servicing income.
“Indemnity clawback periods provide a disincentive to servicing clients in the early years.
“Relying so heavily on indemnity commission encourages a focus of finding new business rather than servicing existing clients.
“Current market practice also incentivises a focus on straight through new business where the distributor can be paid quickly and the amount of work per case is minimised.
“This model leads generally to poorer outcomes for those living with health conditions, who suffer on average longer, often much longer and riskier, customer journey times and poorer product choices.“
Wilkinson added that the current indemnity commission model created bias between different groups of consumers.
“In essence overall the current system tends to reward a filtering or triaging approach towards acquiring new clients based on the speed and reliability of getting paid,” he continued.
“Here the prime determinant is the client’s health, though not for Moneysworth as we take the opposite approach.
“I’d suggest as a starting point that the regulator compares the percentage of applications, declines, postpones and on risk business for people living with a wide range of health conditions over the last 12 months, with national incidence levels for those conditions across the nation, to illuminate the biases which are supported by current market practices.”
Right thing to do
And Dr. Sheun Oke, managing partner and CEO at Emergenzz Financial Services also welcomed the announcment.
She told Health & Protection: “I believe the FCA move is the right thing to do, especially with loaded premiums.
“Since the advent of Consumer Duty, the onus lies on the FCA to check product pricing for fairness to consumers.
“I personally believe loaded premiums are not fair to our clients, hence ensuring we do not participate in that. “
But Oke believed that her company’s policy on commissions was fair.
She said: “We want to help our clients take on the right protections for themselves and their businesses at affordable prices.
“Our pure motivation is helping. So we can go home and sleep well, knowing our commissions have been earned.”
‘Fair value is very pertinent’
The danger of the drive for ever increasing commissions was pointed out by Kesh Thukaram co-founder of managing general agent and intermediary Best Insurance.
Thukaram said: “I think the question of fair value is very pertinent to protection.
“The inevitability of seeking better commissions certainly has the potential to skew the distribution model, especially given the high cost of acquisition and the prohibitive costs of a call-centre adviser model.
“The other extreme is the fee model, wherein the customer pays a fee to the adviser based on the advice quality.
“Somewhere in between all these is the annually indemnified model which we follow and that gives a balance between quality of advice, income potential and value for customer.”
A firm message
Cara Spinks, head of life and health at Broadstone said: “The FCA is delivering a firm message to the financial services industry with yet another probe into whether a segment of the market is delivering good outcomes to members.
“This investigation into the distribution of protection products is focused on commission arrangements, fair value for consumers and competition in the market.
“These products provide vital cover for policyholders in the case of death and serious illness or injury, delivering protection at a vulnerable or stressful period in people’s lives.
“Ensuring the market is providing a fair and competitive service to policyholders is central to the regulator’s Consumer Duty objectives.”
Long overdue
Protection Guru founder and CEO Ian McKenna also welcomed the development noting it was long overdue as there had not been such an in-depth examination since the introduction of the 1986 Financial Services Act.
McKenna argued that while there was room for improvement, the UK protection market was on a positive trajectory, particularly with the recent boom in income protection sales.
“It is crucial that the FCA’s review supports this momentum without causing unintended setbacks,” he said.
However, he recognised there were issues present which the FCA had highlighted, including a shortage of insurers operating in the market.
“The UK protection market currently faces a lack of supply, with several consolidations in recent years significantly impacting consumer choice,“ he said.
“We are now left with only a handful of insurers operating in certain sectors. It is vital that the FCA avoids any actions that could lead to further contraction in the number of providers, as this would severely damage competition.
“It would be great to see the regulator focus on making the UK market more attractive for new insurers to enter, thereby enhancing competition and consumer choice.”
He noted that changes to capital requirements have made it difficult for insurers to profitably offer plans to consumers requiring any level of rating.
McKenna continued: “If the FCA does not tread carefully, millions could become uninsurable. The UK must remain an attractive place for insurers to write pure protection business to maintain the high standard of products available.“
And he highlighted that Consumer Duty work had largely focused on wealth advisers, leaving protection advisers with less clarity on expectations, with this presenting an opportunity for the FCA to provide more guidance on what is required.
Harm for customers and under-insurance
Meanwhile, Tim Hogg, director at consumer group Fairer Finance was also a strong supporter of the move.
He said: “There are important issues for this market study to investigate – this is long overdue.
“Market failures in pure protection are leading to harm for existing customers, while under-insurance means that far too many people are not protected at all.
“Some over-50s products offer notoriously low value to customers, who can end up paying significantly more in premiums than their family will ever receive in payouts.
“The nature of competition in this market has led to intermediaries sometimes receiving what appear to be high commissions, resulting in lower value products for consumers.
“There are also concerns about competition weakening due to firms exiting the market, and lower competition is likely to lead to worse outcomes for consumers in the long run.“