Navigating the FCA's pure protection market study: what insurance firms need to know

While in this article we delve into the pure protection market study, many of our insights will apply to both the pure protection and the newly announced premium finance market study.  

The FCA plans to kick off its market study into the distribution of pure protection products to retail consumers later this financial year. Spearheaded by the FCA’s competition function, the study will take a comprehensive look at the pure protection market, to understand whether the market is functioning well and whether customers are receiving good outcomes. The FCA proposes to focus on four products: term assurance, critical illness cover, income protection insurance, and whole of life insurance. 

In this article, we explore the FCA’s motivations for launching this market study and offer our insights on the immediate implications for insurance manufacturers and distributors in scope of the study.

What’s causing the FCA concern?

The FCA discusses its wide-ranging concerns about this market in its proposed Terms of Reference. In summary, these are:

• Commission arrangements and loaded premiums: the FCA is concerned that these may not support fair value, leading intermediaries to push unsuitable products onto consumers.

• Poor payouts for certain products: specifically, the FCA is concerned about products such as guaranteed acceptance over 50s insurance, which may offer poor payouts relative to the premiums paid, disproportionately affecting vulnerable customers.

• Reduced consumer choice: the exit of several insurers from the pure protection market could limit consumer options and weaken competitive pressures, potentially harming consumer interests.

In light of these concerns, some of the areas that the FCA plans to explore include:  

• Consumer needs and engagement: how well consumers understand and engage with pure protection products.

• Competitive constraints: the competitive pressures on insurers and intermediaries.

• Commission incentives and conflicts of interest: whether commission structures create conflicts of interest that could lead to poor consumer outcomes.

• Firm behaviours and practices: how firms' behaviours and practices around incentives impact consumer interests.

These four broad areas are all familiar territory for the FCA’s competition function. Over the past decade, the FCA’s market studies across various sectors have consistently revealed issues related to transparency, competition, and conflicts of interest. These findings have prompted the FCA to propose and implement a range of remedies aimed at enhancing market conditions and improving consumer outcomes. For example, following its investment platforms market study, the FCA introduced rules to make it easier for consumers to switch platforms without having to sell their investments. These rules aimed to enhance competition in the sector, boost efficiency, and improve the consumer experience. Another example is the high-cost credit market study, where the FCA implemented measures such as price caps on high-cost short-term credit products and enhanced disclosure requirements, aimed at protecting consumers from excessive charges and ensuring they fully understand their credit options.

How will the FCA approach this market study?

Market studies are a distinct tool in the FCA’s armoury. They are generally 12-18 month processes run by the FCA’s competition team, who tend to be economists with broad industry experience. The team will be focussed on the collection and analysis of data and evidence from a wide range of sources. 

The FCA will be keen to engage with market participants across the industry, including larger and smaller players in both underwriting and distribution markets, as well as prospective entrants. It will also want to understand the consumer viewpoint, considering issues such as how consumers make choices and how well they understand products. As a result, the process can be resource intensive for firms, with a number of data and information requests to respond to in the early stages of the study. The FCA will employ a mix of quantitative and qualitative research methods, utilising surveys, and economic analysis to build a robust evidence base. 

The FCA places a strong emphasis on stakeholder engagement before and throughout the study. Regular workshops and feedback sessions are likely to be held to ensure the scope and findings are built on real-world insights and experiences. In practice, this means it is likely that firms will get the opportunity to review and respond to working papers and interim findings as the study progresses. A collaborative approach with the regulator can help to ensure that the FCA fully understands the market dynamics and ensures that the final recommendations do not come as a surprise.

What can insurance firms do to prepare?

Firms will need to plan strategically for a lengthy process and focus on the key risks and areas of contention. This includes spending time analysing and interpreting data to form a view of how the FCA might use and draw conclusions from it. Areas of focus should include trends in pricing, commission structures, profitability, pricing strategies, and consumer outcomes - such as claims acceptance and payout rates - and complaints. Firms will need to consider outcomes for different customer groups, including vulnerable customers. This early planning will allow firms to provide robust economic evidence and analysis to set out their own position on how the market works. 

Setting out a powerful, evidence-based narrative on how the market functions will be key to assisting the FCA to draw sensible conclusions during the investigation. Part of this might involve firms analysing their performance through the lens of economic profitability. This is an approach that the FCA often uses in market studies as part of its analysis of whether the level of prices in the market is consistent with effective competition. If it finds excessive levels of profitability at any level of the supply chain, it will use that as evidence of competition not functioning effectively to drive prices down to competitive levels.  

Firms should consider establishing a dedicated team to manage the data requests and interactions with the FCA, consisting of individuals who have a deep understanding of the firm’s operations and who can provide accurate and comprehensive responses to the FCA’s queries. 

Being transparent and forthcoming with information can help build a positive relationship with the FCA, and demonstrate a firm’s commitment to fair competition and acting in consumers’ best interests. By taking the above steps, firms can mitigate the risks associated with the study. Further, firms can leverage the process as an opportunity to enhance their business practices and strengthen their market position. Proactive preparation, strategic planning, and effective communication will be key to navigating the FCA’s market study successfully.