Pure protection interim report – a positive outlook

Announced in summer 2024, the FCA’s market study aims to assess how pure protection products are sold, and whether the market works well for consumers. Despite significant market apprehension, the FCA’s interim report finds that the market is functioning well in many aspects, with targeted work needed to close the protection gap and some practices that could be improved.

As such, the FCA doesn’t envisage significant interventions, but firms may expect further regulatory scrutiny over income protection claims ratios, incentives to switch products and supporting good claims experiences.

Positive findings from the FCA

The interim report generally portrays a positive picture of the pure protection sector, including some aspects that were considered to be under greater scrutiny given the market study’s terms of reference.  

An effective market

The FCA notes a wide range of products available from providers who keenly compete against one another, with stable or even falling premiums, tight margins and no evidence of excessive profitability. Claims acceptance rates and ratios are typically high, while complaints to the Financial Ombudsman Service are relatively low. The report notes recent market consolidation, but the FCA does not appear concerned that this has materially compromised competition. 

The role of intermediaries is generally positive

Around 80% of sales in 2024 used an intermediary, with a wide variety of distribution business models. The FCA accepts that intermediaries are central to the distribution of pure protection, and notes the positive role they play in matching customers with suitable products at important life stages.  

Crucially, the FCA reports that while intermediary commission has increased slightly, it is stable. Providers typically exercise good control over commission arrangements, including the risk of product bias and early lapse rates. 

Pure protection premiums vary significantly 

The interim findings note a high degree of price dispersion, with customers paying a wide range of prices for similar products. However, the FCA does not seem overly concerned, attributing this to market norms, including differences in insurers’ risk assessments, appetites, cost of claims and cost to serve. 

No action on ‘loaded’ premiums 

At the start of the market study, there were concerns over ‘loaded premiums’, where customer premiums are raised to increase commissions to intermediaries or restricted panels. Despite affecting around 26% of intermediated new sales in 2024, the FCA says it has not found evidence that this practice creates worse pricing outcomes for consumers. 

No action on over-50s guaranteed cover 

As anticipated, the FCA found that underwritten ‘whole of life' policies generally offer better value to customers than guaranteed over-50s products. This is largely because they’re subject to medical underwriting – which over-50’s products aren’t – so, they have a higher claims ratio. 

However, the FCA acknowledges that over-50s premiums tend to be lower and meet market needs through a guaranteed payout on death without underwriting requirements. As such, they provide cover for lower income and more vulnerable customers who may not be able to get underwritten insurance. The industry has evidently demonstrated that it is aware of the risk of poor outcomes associated with guaranteed over-50s products and is monitoring their value. 

Evidence of innovation 

The FCA is generally pleased with technological advancements, including the use of online portals, more sophisticated pricing models and increases in hybrid digital-advised customer journeys. 

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Areas of FCA concern 

While the FCA pure protection interim report findings are more positive than many commentators anticipated, it doesn’t represent a clean bill of health. Key areas of further focus are outlined below. 

Intermediary poor practice 

The FCA saw evidence of poor practices from some intermediaries, including: unsuitable sales; encouraging switches to generate commission; and written-off clawback. To address this, the FCA could pursue firm-specific supervisory activity, and providers should consider how their own distribution strategies, oversight mechanisms and controls relate to these findings.  

Pricing practices and distribution 

In principle, the FCA is comfortable with ‘customisable’ or non-uniform pricing. This suits both price-sensitive customers and those who place a higher value on pure protection products, or the supporting customer service.  

However, the regulator notes the risk of intermediaries tailoring their advice towards customers who are willing to pay more. It also warns about price discrimination targeting vulnerable customers, which would be a regulatory concern. 

Commission for over-50s guaranteed cover 

While the FCA hasn’t proposed any significant restrictions on the provision, pricing or commission of over-50s guaranteed cover products, it notes that they typically generate the highest commission rates, as a percentage of premium. 

Income protection claims ratios 

The claims ratio for income protection is lower (about 40%) than for protection products generally. This is most likely due to product features – such as, a greater risk profile and higher costs, combined with premiums falling at a higher rate. The FCA will explore this point further over the remainder of the market study. 

Removing barriers to entry 

Consumers favour established brands, making it hard for new and smaller participants to compete – especially considering that insurers make low margins, and can only operate effectively at scale. This exacerbates the protection gap, and the FCA notes scope for market growth. Improving consumer claims experiences could be a key differentiator for firms. 

Strengthening the pure protection market 

The FCA proposes potential remedies across a range of areas, to strengthen the pure protection market, improve fair value, and narrow the protection gap.  

Individual reference numbers for intermediaries  

Individual Reference Numbers (IRNs) for those selling protection, similar to wealth or mortgage advisers, could help the FCA identify and address poor practice by individuals. The FCA could also require intermediaries to report the lead generators used, to help providers identify potential future ‘churning’.  

Improving income protection claims ratios  

The FCA will refresh its assessment of pure protection claims ratios ahead of its final report. This could potentially be used to improve income protection claims ratios. 

Claims experience 

The FCA will consider ways to encourage more intermediaries to embrace positive practices, such as: engaging with customers on how to claim, placing policies in trust, and suggesting that they set up wills and powers of attorney. 

Closing the protection gap 

To close the protection gap, the FCA is focusing on improving market access and boosting consumer understanding of pure protection products. This includes greater prompts around key life events (such as buying a house) and making use of initiatives such as targeted support (which can offer commercial benefits to firms as well as improved customer outcomes. The FCA also intends to make use of the Government’s National Financial Inclusion Strategy. 

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Next steps 

While the interim report is relatively benign, it demonstrates the FCA’s ongoing commitment to good customer outcomes under Consumer Duty, recognising that well-intentioned frameworks and processes aren’t enough.  
The pure protection market study is ongoing, and the FCA has laid out the groundwork for more interventionist supervision, particularly on intermediary behaviour. Firms should therefore consider themselves ‘on notice’ and proactively address areas of FCA concern.  

Providers and intermediaries should also revisit their pricing, commission and distribution arrangements, including for over-50s guaranteed cover, and be able to demonstrate how they support good customer outcomes.  

Acknowledging the FCA’s concerns around ‘churning’, intermediaries could revisit their controls over quality of advice, switching and re-broking. It’s also important to consider the operational impacts of the potential new IRN requirement for protection advisers, or reporting lead generators. 

Firms underwriting income protection could also explore whether their claims ratios for pure protection products are lower than other products – and if so, why. This can be factored into their fair value assessments, with supporting actions to remedy any shortcomings. 

The pure protection market study interim report is open to feedback until 31 March 2026, and the final report is due in Q3 2026. For further information contact Peter Lovegrove, Jon Sperrin or Emma Wilson.