Pure protection supports consumers’ financial resilience during life's most difficult moments. Given their importance, the FCA’s market study aims to ensure these products are designed and distributed in a way that presents fair value. This includes maintaining appropriate competition across the market, by assessing the impact of recent insurer exits and the extent of the protection gap.
The FCA is primarily looking at four products, namely: life insurance, critical illness cover, term insurance and income protection insurance. Out of scope products are those with a saving or investment element; private medical insurance; funeral plans; business and key person protection; and bolt-on products such as accident, sickness and unemployment insurance.
The pure protection market study will look at the wider distribution chain and how that affects consumer outcomes. For insurers, the regulator will review product design and distribution through direct sales or via an intermediary. Here the onus is on pricing, customer benefits and commissions paid. However, the FCA will also review any negative impact from clawback arrangements, which initially intended to reduce conflicts of interest.
Regarding intermediaries, the FCA will look at the final cost to consumers and the related commission structures, fees or charges, as well as in-house remuneration.
The study aims to establish whether these products align with the Consumer Duty principles and offer fair value for money, across the key areas below.
The FCA will analyse the effects of different distribution arrangements (such as panels, whole of market or tied) on customer outcomes. It will also assess the size and structure of commissions. This includes the effectiveness of FCA rules and commission scheme features aimed at mitigating negative incentivisation and conflicts of interest – for example, clawback arrangements or equalising commission across advisers. It will also look at the impact of distribution arrangements across various intermediary types.
The FCA is concerned about the value of guaranteed acceptance of over-50s insurance. It will assess the relationship between the quality of the products and services, and the overall price consumers pay. This includes the benefits and value of services provided by intermediaries.
With some insurers exiting the pure protection market, the FCA is exploring why and examining the impact on competition. This includes assessing barriers to entry and potential expansion from new entrants, which could strengthen competitive pressures in the market.
Building on the above, the FCA will explore the protection gap across the insurance market. It will primarily focus on vulnerable customers to identify if, and subsequently why, they are underserved.
The FCA will assess whether current market structures support innovation. This is crucial given both the Government’s tough growth agenda and the protection gap within the insurance sector.
Findings are due by the end of 2025, and at this stage the FCA is simply conducting a market study. However, there are similarities with other regulatory work across the financial sector and it’s reasonable to expect comparable outcomes. For example, the FCA’s thematic review of Multi-Occupancy Buildings Insurance (MOBI) and the related broker remuneration review. These led to changes to improve fair value and transparency, with an impact on product design, distribution arrangements and pricing. There’s also the ongoing premium finance market study, which assesses comparable themes, and will likely prompt changes to current practices.
Following the pure protection market study, it's reasonable to expect further work through thematic reviews, firm-specific attestations and skilled persons reviews. Looking further ahead, there could also be more significant guidance or rule changes.
Until the market study findings come through, firms can ensure they operate good practice and continue to align with regulatory expectations in the following areas:
With the FCA’s end-goals in mind, it’s essential to review product governance processes and distribution design. These processes need to support fair value to consumers, regardless of the distribution channel, with mechanisms in place to re-evaluate that over time. Key actions include checking the timeliness, detail and quality of product manufacturer assessments, product distribution arrangements and annual product review assessments.
Good documentation is a must, with a clear audit trail to demonstrate an effective control framework and appropriate escalation processes. This needs to reflect work across the second- and third-lines of defence, with appropriate management information and reporting, and adequate input from the product oversight group or committee.
With increased scrutiny over pricing and commissions, it’s more important than ever for insurance firms to show their workings. This includes transparency over the cost-to-serve model, evidencing why profit margins are appropriate and assessing remuneration structures beyond standard commission payments.
The pure protection market study could prompt significant changes across the sector. As such, it would be sensible to carry out scenario modelling for improved financial planning in the short- to mid-term. Looking further ahead, firms can benefit from model viability testing to assess potential broader strategic changes to their distribution structure. Where current practices are no longer viable, firms can benefit from independent advice on operational, financial, strategic and organisational restructuring.
Regardless of the market study outcome, additional training can establish what good looks like and support individuals in their role. Product governance workshops can instil the core principles of Consumer Duty, keeping them front and centre when creating or reviewing pricing and distribution models.
Board training can also support meaningful challenge at a senior level, and drive investment to support any improvements required by the FCA.
Good use of technology and effective data sharing across the distribution chain is vital to understand the consumer journey and promote good customer outcomes around pricing. This includes digital platforms to enhance data management and data governance. These platforms can support effective governance, risk and compliance processes, help document product inventories and streamline workflows.
The FCA will share insights throughout the pure protection market study, giving firms more opportunities to align with good practice. It’s important to stay up to date with this output, as early action can prevent foreseeable harm to consumers.
Re-evaluating product design, distribution, pricing and commission arrangements will take time, but will ultimately strengthen market integrity and enhance consumer protection across the sector.
For more insight and guidance on the pure protection market study, contact Jon Sperrin, Peter Lovegrove or Emma Wilson.
