FCA to Investigate Pure Protection Insurance Market

The Financial Conduct Authority (FCA) has announced plans to launch a market study into the pure protection insurance sector, responding to concerns about potential deficiencies in competition and market outcomes. Scheduled to commence later in 2024 or early 2025, the study aims to scrutinize how pure protection products are marketed and sold, particularly through intermediaries such as independent financial advisers and mortgage brokers.

Pure protection insurance products are designed to provide financial support to individuals and their families in the event of death or inability to meet financial commitments. These products include term assurance, critical illness cover, income protection insurance, and whole-of-life insurance, including policies offering guaranteed acceptance for individuals over 50. In 2022 alone, the sector paid out approximately £4 billion in claims, highlighting its significant role in providing financial security.

The FCA's concerns center on the potential misalignment between commission structures and the delivery of good outcomes for policyholders. Specifically, there is apprehension that current commission arrangements might incentivize practices that do not prioritize the best interests of consumers. Additionally, the FCA is worried that some products may offer poor value if the total premiums paid over a policyholder's lifetime greatly exceed the potential benefits.

To address these issues, the FCA will investigate several key areas:

Consumer Engagement and Understanding: How well consumers comprehend the products they purchase and their engagement with these products.

Competitive Constraints: The competitive dynamics between insurers and intermediaries, and how they impact market outcomes.

Conflicts of Interest: The influence of commission structures on product recommendations and overall market fairness.

Sheldon Mills, Executive Director of Consumers and Competition at the FCA emphasized the importance of ensuring that pure protection insurance delivers value and meets consumer needs. “Pure protection can offer peace of mind and financial security, often when people are at their most vulnerable. Consumers should be able to buy products which meet their needs and provide fair value,” Mills stated. He further noted that indications of market shortcomings would prompt regulatory action to address any identified issues.

In preparation for the market study, the FCA is seeking feedback on its Terms of Reference. The authority plans to engage with firms, industry groups, and other stakeholders to gather insights and refine its approach to examining the market.

This investigation underscores the FCA's commitment to enhancing market integrity and ensuring that insurance products deliver genuine value to consumers.