The Financial Conduct Authority (FCA) has announced its intention to launch a comprehensive market study into the £4bn life insurance sector, focusing on pure protection products. This move comes amidst growing concerns that insurance companies may be exploiting vulnerable customers who purchase policies designed to provide financial security for themselves and their families in the event of serious illness or death.
Pure protection products, which include term assurance, critical illness cover, income protection insurance, and whole of life insurance, are intended to assist policyholders and their loved ones financially should the policyholder pass away or become unable to meet their financial obligations. In 2022 alone, approximately £4bn was paid out in claims, according to the FCA.
The regulator has expressed apprehension regarding the commission structures for the sale of these products, which are primarily sold through intermediaries such as mortgage brokers or independent financial advisers. The FCA is concerned that these arrangements may not be structured equitably, potentially leading to conflicts of interest.
Additionally, the watchdog has raised concerns about poor value for consumers, citing instances where the total premiums paid over the lifetime of a policy significantly exceed the maximum possible payout. Sheldon Mills, the executive director of consumers and competition at the FCA, emphasised the importance of pure protection products in offering peace of mind and financial security, particularly when people are at their most vulnerable. He stated that the FCA will take action if it finds that the market is not functioning effectively.
The market study, which is the first step in assessing the state of competitive practices in the pure protection sector, will examine the consumer experience and their understanding of the products they are purchasing. The FCA will also investigate the competitive constraints on insurers and intermediaries, paying close attention to potential conflicts of interest within the commission structure.
The financial watchdog’s primary focus will be on the sale of four types of pure protection products: term assurance, critical illness cover, income protection insurance, and whole of life insurance, including guaranteed acceptance policies for the over-50s demographic. As Mills stated, “Consumers should be able to buy products which meet their needs and provide fair value.”
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