In its highly anticipated market study of the pure protection market, the regulator said “the distribution of pure protection to consumers works well and delivers good outcomes to those that purchase it”, but that “some aspects of the market could work better”.
The FCA said it was “not anticipating any significant market wide intervention” and instead would “explore a small number of areas” before it published its final report later this year.
Protection gap key area to address
One area it is examining is addressing the protection gap, with potential options including improving awareness through the increased use of prompts or trigger points and targeted support for pure protection products.
“Life events, such as buying a house or having a child, are triggers for people to consider their protection needs. We could encourage use of our innovation sandboxes and open finance work to explore ways to improve digital engagement, with people at different trigger points to raise awareness of pure protection products.
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“We could further encourage firms to highlight useful metrics, such as claims acceptance rates, acting as a nudge that may change firm and consumer behaviour,” the report said.
Targeted support, which at the moment is being explored for pensions and investments, would allow companies to “provide suggestions designed for groups of consumers with common characteristics to help them make important decision[s]”.
Feedback suggested that this could be applied for pure protection, and “help to close the protection gaps for consumers who are not well-served by standard market offerings”.
“This would need to be considered carefully, however, as it would involve widening the current scope of targeted support beyond investments and pensions, and is likely to involve significant regulatory change,” it said.
Claims ratios in protection will be examined
The FCA said it would also look at claims ratios, the value of claims paid as a percentage of premiums paid for different pure protection products, as there is “noticeable variation”.
Typically, the higher the claims ratio, everything else being equal, the “better value for money the product provides”, the regulator said.
The claims ratios are generally estimated at 50% or higher for most protection products, but income protection is lower at around 40%.
Whole of life stands at around 66%, term assurance comes to 60%, followed by accelerated critical illness at 59%, guaranteed acceptance over-50s insurance at 52% and standalone critical illness at 49%.
The regulator said it would “refresh its assessment” of the claims ratio, using 2025 premium and cost data from its sample of insurers for its final report.
Commission structures could incentivise ‘churn’
The FCA said the commission structure in pure protection may “incentivise intermediaries to encourage customers to switch to a new policy shortly after the end of the clawback period”.
The report said around 80% of protection sales are to new customers, but some intermediaries may be “encouraging customers to switch to a new policy to generate report commission”.
The FCA said fewer than 19,000 customers per year – around 0.1% of policyholders – are likely to be affected but they would still have cover in place so the “harm” to consumers is “unlikely to be substantial”.
However, it said there “there is a risk that churn could grow if unchecked”.
It is calling on the sector to “collect, monitor and report better information around customer switching to ensure it is targeted to consumer need”.
“We want to work with industry to develop the reporting metrics to ensure they’re proportionate and effective in reducing and deterring churn. This could further help insurers reduce their exposure to commission clawback debt,” it said.
The regulator added that it would also explore introducing Individual Reference Numbers for those selling protection, so “poor practice can be more readily identified and addressed” and adding a requirement on intermediaries to report the lead generators they use so insurers can identify potential future customer churn.
Another area is to make certain practices more widespread to support the claims experience. This includes placing policies in trust, and setting up wills and powers of attorney.
“We want to encourage this as it aligns with our expectation under our existing rules and is a clear example of good practice. We could use existing or new rules and/or guidance to achieve this,” it said.
FCA calls on industry for feedback on initial findings
The FCA said it would begin engagement with stakeholders to “identify a targeted programme of work to address the protection gap” and to get feedback on the value of protection products, switching and claims experience.
Workshops will be organised for spring 2026, and the deadline for feedback on interim findings has been set for 31 March 2026.
The FCA said it aims to publish its final report in Q3 2026.
Graeme Reynolds, director of competition and interim director of insurance at the FCA, commented: “These insurance products play a vital role in helping families manage some of the most difficult experiences in life. While competition in the market is mostly working well for consumers, many more people could benefit from protection. We will work with industry to reduce this gap, to help consumers navigate their financial lives.’”
