Its final report of its Market study into the distribution of pure protection products to retail customers found that protection distribution and competition generally worked well for consumers, but 58% of people were still unprotected.
However, the FCA said it would not introduce any market-wide measures but would take supervisory or enforcement action where needed. It rejected stakeholder suggestions to mandate protection discussions or auto-enrol consumers, saying this would be “disproportionate and could encourage a tick‑box approach”.
Instead, it will work with stakeholders to improve penetration. The programme will begin by the end of the year, and the regulator expects “meaningful progress” over the next 12-18 months.
The FCA’s findings suggested that the lack of protection was mainly due to low consumer awareness and limited product understanding, as well as people’s biases. It also found that friction in the customer journey, complex underwriting and limited availability of products for people with complex needs were also impacting take-up.
It found limited evidence to suggest that regulation was contributing to the protection gap, but noted that some providers felt regulatory barriers discouraged innovation.
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On the distribution side, the FCA will work with organisations such as the Association of Mortgage Intermediaries (AMI), the Digital Property Market Steering Group (DPMSG) and the Money and Pensions Service (MaPS) to ensure more people have protection.
It will also run a TechSprint to encourage providers to innovate product design and complex underwriting.
FCA ‘encouraged’ by mortgage advisers
The FCA said it was “encouraged” by mortgage advisers prompting clients to consider protection when purchasing related products, such as a mortgage.
It commended practices such as making consumers aware of the risks of failing to keep up with mortgage payments or unexpected circumstances such as illness, death or income loss.
The regulator also praised advisers for informing clients that relying on current earnings to pay their mortgage could make them less financially resilient, and identifying how a change in circumstances could require reviewing their policy.
The FCA encouraged distributors to collect and share data on where consumers were first prompted to consider protection so it can monitor the effectiveness of this strategy.
Policy switching not causing significant harm
It did note that commission structures could incentivise advisers to encourage clients to switch to a new policy at the end of the clawback or indemnity period, and said this could create risk if consumers were left with the same coverage at a higher price or insufficient coverage.
However, it said it already worked with the industry to monitor lapses and switching rates to identify and address potential risks.
It considered the costs of tying clawback periods to commission agreements and introducing individual reference numbers to track advisers engaging in unnecessary switching, but said the cost of this would “not be proportionate given the relatively small number of policies affected by unnecessary switching”.
It reiterated that not all switching was harmful and said there was not enough evidence showing this caused enough harm to warrant market-wide intervention.
The regulator will continue to monitor switching and asked the sector to continue sharing information on “bad actors”, so it could take action.
The FCA said the policy premiums were complex and although commissions had an impact, loaded premiums – where the customer premium is increased to fund intermediary commission – were not leading to poor pricing outcomes for consumers.
It reminded firms to demonstrate how products provided fair value, as required by Consumer Duty.
Overall, it found that premiums were affected by underwriting risks, claims costs, reinsurance, expenses, commission, distribution strategy and other commercial factors.
Regarding restricted panels, the regulator concluded this did not negatively impact pricing for consumers but said there might be risks to competition and access for smaller insurers.
Provider innovation
The FCA said there was “limited evidence” that its rules directly prevented innovation. Still, firms may have adopted a cautious approach, which could create uncertainty when discussing protection with other products or comparing options.
To resolve this, the regulator will hold a myth-busting webinar in Q1 2027 to clarify its expectations and give firms confidence to innovate.
Its TechSprint will allow insurers to test technology and data-led solutions to resolve friction in the consumer journey. This will also focus on consumer awareness and understanding, application and underwriting journeys and product design and access.
Its decision to proceed with the TechSprint will depend on sufficient stakeholder interest. If demand is sufficient, it will launch the TechSprint in Q3 2027. If not, the FCA will focus on industry-led measures and monitor the impact on consumer outcomes.
It acknowledged that the Association of British Insurers (ABI) was among a number of firms looking at the delays in obtaining medical information, which sometimes led to friction in the underwriting and claims process.
The regulator said there may be a need for “renewed momentum and active regulatory engagement” and will hold a roundtable with stakeholders to discuss the impact of delayed access to medical information and potential solutions.
The FCA will publish an update on the market’s progress by the end of 2027.
It said: “We expect these initiatives to increase consumer engagement with and access to protection products, and ultimately reduce the protection gap, helping more consumers build financial resilience against illness, incapacity and bereavement.
“While we do not currently consider further regulatory intervention necessary, we will keep this under review and consider if additional measures are needed if evidence indicates that outcomes are not improving.”
