"While the review is ongoing, all who would invest in our market face great uncertainty. Therefore, we urge the FCA to keep this process as short as is fair and practicable."
- Neil McCarthy, on behalf of the Protection Distributors Group
To understand how the market is working, the Financial Conduct Authority (FCA) will explore consumers’ engagement with an understanding of the products they’re buying, the competitive constraints on insurers and intermediaries, and potential conflicts of interest in the structure of commission.
READ MORE: FCA announce intention to launch protection market study following competition concerns
Speaking on behalf of the Protection Distributors Group (PDG) Directors, Neil McCarthy, Chair of the PDG, stressed that this market study is starting “with an open mind as to whether we find evidence of harm,” and isn’t currently defining a start date – only an intention to launch in 2024/25.
“This gives ample opportunity for all relevant parties to comment accordingly. We would however note that while the review is ongoing, all who would invest in our market face great uncertainty. Therefore, we urge the FCA to keep this process as short as is fair and practicable,” he said.
The PDG welcomes the FCA's decision to finally examine protection specifically and not “lumping it in with General Insurance (GI).” Notably, the group believes this is the first time any UK financial regulators have done such a review since 1986.
Several topics included in the Terms of Reference (ToR) issued by the FCA were previously raised in November 2023 by Lisa Sturley, Head of Market Interventions, Insurance Supervision at the FCA - such as loaded premiums being unfair to customers, clarity on the blurred boundaries between advice and non-advised sales, and the treatment of vulnerable customers throughout the lifetime of a protection policy.
“You play an important role in overseeing the distribution of your products. How well do you know your distributors? Are they aligned with your principles? And what are they doing to maintain your reputation and the Consumer Duty that you have worked so hard to implement?” she said during a recent keynote speech.
Within her department at the FCA, Lisa revealed the regulator recently looked at a case where products had been targeted at a particular demographic where English was not their first language. She questioned how these customers were being supported to understand the products they were buying, “Were they always the most suitable products? Did they understand the declaration they were making and the consequences of not making accurate declarations?”
READ MORE: FCA urges insurance manufacturers to ensure fair value
The market study will focus primarily on the sales of four specific types of products: Term Assurance, Critical Illness (CI), Income Protection (IP), and Whole of Life (WOL) Insurance, including policies for over-50s that offer guaranteed acceptance – excluding workplace group policies. “On initial reading, the PDG can see value in understanding the same issues facing micro businesses, business protection sales, and possibly the sale of Private Medical Insurance (PMI),” Neil explained.
The PDG has highlighted three specific concerns raised by the FCA:
- Competitive pressures in the market may be weakening due to the recent exit of several insurers,
- Some pure protection products may not provide fair value to customers,
- The design of commission arrangements may not always support the delivery of fair value.
In terms of recent exits, Canada Life announced its departure from the individual protection market in November 2022 to which Alan Lakey, Director at CIExpert, expressed his disappointment, explaining that a “vibrant” protection sector requires competition to keep prices low and to encourage innovation which has been “lacking over the years.”
In April 2023, Royal London announced its acquisition of Aegon UK’s individual protection business. “The advised nature of Aegon’s individual protection customer base makes it a perfect strategic fit. We’re strong champions of the adviser community and impartial advice, and we look forward to supporting advisers through this transaction, making sure there is no disruption to their business or their customers,” said Barry O’Dwyer, Group CEO of Royal London.
Most recently, the industry saw AIG Life UK exit the protection market, acquired by Aviva. The insurance giant has since confirmed that after reviewing AIG Life’s core individual & group protection products, it will continue with the Aviva-branded core propositions only. Darren Sage, Proposition Development Manager at Guardian Financial Services (Guardian), suspected it wouldn’t have been a case of simply picking plan A or B; “Factor in things like building the products on the Aviva system, integrating to UW rules engines, reinsurance arrangements.”
READ MORE: Aviva plans to retain AIG Life’s High-Net-Worth channel and “strong partnership distribution”
“The PDG will be reinforcing the point that fundamentally the protection market works well, and that indemnity commission supports distribution and allows many sales models to operate across the product areas, whilst supporting access to, and the needs of, diverse customers,” said Neil.
Likewise, the PDG will make clear that it’s “very wrong to suppose all re-broking of policies is done just to generate commission – changes in customer circumstance and new product developments are entirely legitimate reasons to replace & update policies.” In the PDG’s view, clarity of the sales process and its remuneration is part of a healthy market where customers can buy products and services that meet their needs and provide fair value.
Finally, the PDG believes long-term products need lifetime engagement to reinforce the product features, claims opportunities, and added-value services; “We would urge insurers to get on with the long talked of delivery of annual benefit statements to customers.”
