Earlier this year, the Financial Conduct Authority (FCA) announced its intention to launch a market study into how pure protection insurance products are being sold. The study, which will be launched later in 2024/25, follows concerns that competition is not working well in the market.
Designed to help individuals and their families with their finances should the policyholder die or become unable to meet their financial commitments, pure protection products paid out about £4 billion in claims in 2022. In a market briefing in August, the FCA outlined its concerns that the design of commission arrangements for the products – which are mainly sold via intermediaries – may not allow firms to deliver good outcomes to policyholders.
The financial services watchdog also conveyed its concerns that some products may be providing poor value, offering the example of where the total premiums paid over a lifetime might significantly outstrip the maximum conceivable payout.
The remit of the FCA’s upcoming market study will primarily focus on the sale of four specific product types - term assurance, critical illness cover, income protection insurance and whole of life insurance including policies for over 50s that offer guaranteed acceptance.
Offering insight into the investigation, David Allison (pictured), solicitor at RPC, noted that it was prompted by the introduction of the Consumer Duty – which was implemented for open products on July 31, 2023. “The Duty is governed by the Consumer Principle,” he said, “which requires regulated entities to deliver good outcomes for retail customers.
“This is underpinned by a duty to act in good faith and a requirement that products / services provide value at a fair price. At this stage, we know that the FCA intends to launch a market study, but we don’t have the full specifics. What we do know is that - rightly or wrongly - they are concerned that the commission arrangements for pure protection products could mean that they are providing poor value, although this is yet to be demonstrated.”
Identifying some of the competitive constraints currently being placed on insurers and intermediaries, Allison highlighted that one of the concerns being raised is that several providers have exited the market. The FCA has concerns around the strength of competition, he said, but also that these pure protection insurance products may not offer fair value. However, the FCA does acknowledge that, while it has concerns around the commission models, dealing with an intermediary can benefit consumers due to the intermediary’s expertise and access to the market.
“One of the key themes running through communications from the FCA since the advent of the Duty is the requirement to be conscious of the needs of vulnerable customers,” he said. “They have noticed improvements, for example in the form of communications, but seem to be of the view that there is still work to be done.
“The FCA has stated that, at some point, slightly under half of the population will qualify as ‘vulnerable’ under their definition. Pure protection policies are intended to respond when there is some sort of unexpected event, such as premature death or an illness which prevents the policyholder from working. The FCA notes that such products are intended to assist customers in vulnerable circumstances and this seems to be what has prompted the review, at least in part.”
As to the next steps in terms of the upcoming review, Allison noted that the watchdog has published its proposed Terms of Reference for the market study. Meanwhile, the study itself will be launched later in 2024 or early 2025. On the FCA’s website, the regulator highlighted that it is keen to hear any feedback on its Terms of Reference and that, ahead of launching the market study, it will engage with firms, industry groups and others to gather views on the market and the issues it proposes to examine.
