Why the FCA consultation paper is an opportunity, not something to fear.

At the time of writing, an FCA review of the Protection market will be underway, with larger firms already visited and analysis – or at least data requested and collection underway. From an advisory firm perspective, you will have your own view if it’s an opportunity or threat.

In case you aren’t aware, I’m referring to MS24: Market Study into the Distribution of Pure Protection Products to Retail Consumers, published back in August 2024. This specific study seeks to understand whether the market is functioning well and whether consumers are receiving good outcomes.

What is MS24?

Adviser firms will have come to terms within their own Consumer Duty approach in how they understand and evidence that the desired outcomes relating to:

• Products and services
• Price and value
• Consumer understanding
• Consumer support

…are being met and embedded within every stage of the customer journey.

With these specific points required under the far: wider-reaching Consumer Duty, advisers (and the broader distribution partners and manufacturers) may have been a little surprised about the specific market study in pure protection products.

The FCA is reviewing whether the market is functioning well and delivering good outcomes for consumers.

Key focus areas of the FCA Study

This “deep dive” into the Protection market is the first time to the PDGs knowledge that any regulator has attempted this, separating it from General Insurance. Whilst the FCA have said they are starting the market study with “an open mind as to whether we find evidence of harm,” they also point out:

We have seen indications that this may not be the case across the pure protection market and we will act if we find the market is not working well enough.

The FCA have identified areas where the market may not be functioning well and competition not working effectively in the interests of consumers.

Broadly they have identified:

• The design of commission arrangements may not always support delivery of fair value.
• Some pure protection products may not provide fair value to customers.
• Competitive pressure may be weakening due to the recent exit of several insurers.

Are the FCA concerned about indemnity commission in principle as a way of manufacturers paying distributors? I personally don’t think so. Does evidence from Australia and the Netherlands suggest that significantly amending commission structures has a massive negative impact on consumers’ protection levels? – Yes.

Often the disparity between commission rates impacts the insurer margin, not the customers monthly premium. Commission terms are often a factor of distributor business quality and volume. Where the underlying premium rate for the customer is increased using “loaded premiums”, demonstrating fair value becomes a challenge.

Delivering good outcomes for consumers

With respect to the FCAs comment of routinely switching products to earn additional commission, distributors have a great opportunity to state their processes. Re-broking to improve the level of cover, reflect clients’ changing circumstances, or take advantage of improved market rates should be encouraged to deliver good consumer outcomes, with the improvements clearly recorded. Insurer and distributor data will identify behaviours that don’t add any consumer value and could be controlled by insurers via agency management.

The Guaranteed Over 50s plan will come under scrutiny, particularly where the benefit paid is less than the premiums that have been paid over the policy term.

There is an additional challenge to ensure the product structure and pricing delivers value, whilst positioning the advantages that not requiring medical evidence brings. Advisers who recommend these products to clients who would not get cover if underwritten should position the value they provide.

There have been insurer exits to the market recently, and certainly the PDG would like to see more insurers competing for business and delivering innovative new solutions, but in the core markets of Life, CI and IP how many insurers are needed? Data collected from distributors will identify how many insurers are used from both whole of market and limited panels across these product areas.

Hopefully advisers reading this will agree that the UK protection market is broadly functioning well for UK consumers and delivering good outcomes.

According to the ABI the total payout was £7.34bn in 2023, significantly contributing to personal wellbeing, financial resilience and the general economy.

Clarity for All

This is a study those involved with the protection market should embrace.

A consequence of the study may be improved transparency in the sales process in terms of consumer understanding of the difference between buying with advice versus through a non-advised sales process.

Feedback from distributors would help to understand whether insurers, upon whose underwriting we depend, do enough to help vulnerable customers and customers with pre-existing complex medical needs.

Good advisers have always embraced the principle of delivering good outcomes for their customers. A deep dive into the protection market may unearth a few areas that need to be improved or stopped – but will also reinforce the good that is done in helping consumers purchase more protection and building financial resilience. We don’t want over regulation, but this level of scrutiny may identify where controls can be better utilised.

The Protection Distributors Group is formed of UK based protection advisers, specialising in the provision of protection advice to, and arranging of protection policies for consumers, both personal and corporate. We are not a conventional trade body, in that our clearly stated purpose is specifically to improve what our market does for its customers.

More information and the current membership can be found here: Home – Protection Distributors Group.

If you want information about joining the PDG contact us via our email: [email protected]