The Financial Conduct Authority (FCA) is to investigate how pure protection insurance products are sold following concerns that competition is not working well in the market.
Around £4bn was paid out in pure protection claims in 2022, with the products mainly sold through independent financial advisers or mortgage brokers.
The FCA has concerns that the design of commission arrangements may not allow firms to deliver good outcomes to policyholders.
The regulator is also worried that some products may be providing poor value, for example if the total premiums paid over a lifetime far exceed the maximum conceivable payout.
The FCA study will explore consumers’ engagement with and understanding of the products they are buying, the competitive constraints on insurers and intermediaries, and potential conflicts of interest in the structure of commission.
The authority will focus primarily on the sale of four specific types of products – term assurance, critical illness cover, income protection insurance and whole of life insurance including policies for over 50s that offer guaranteed acceptance.
Commenting on the study, FCA executive director of consumers and competition Sheldon Mills said: “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 added: “’We have seen indications that this may not be the case across the pure protection market and we will act if we find that the market is not working well.”
The study will be launched later in 2024/25.
Protection Guru founder and CEO Ian McKenna said: “The detailed review into the UK protection market initiated by the FCA is unprecedented and highly welcomed. This review is long overdue, as there has not been such an in-depth examination since the introduction of the 1986 Financial Services Act. The protection market has evolved significantly, and while it operates more efficiently in many areas than it has in the past 38 years, there are still crucial areas that need regulatory attention.”
He added: “The UK protection market currently faces a lack of supply, with several consolidations in recent years significantly impacting consumer choice. 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.”
