Yavi Ganeshamohan, Adam Hughes, and Joshua Lea of the IFoA’s Consumer Duty Working Party provide insights into the FCA’s protection market study, highlighting key dynamics shaping the retail protection landscape.
The FCA recently published the first of two papers expected this year from its pure protection market study (MS24/1.1), setting out the structure of the retail protection market and the roles of market participants, with an interim report expected by the end of 2025.
The market study was launched to address concerns about the distribution and value of pure protection products, specifically focusing on term assurance, critical illness cover, income protection insurance, and whole of life insurance (including guaranteed acceptance over 50s plans).
The market overview recognises that the pure protection market is complex and involves multiple participants, including insurers, reinsurers and intermediaries. The primary distribution channel for retail protection products is via intermediaries, with the market overview highlighting that approximately 88% of individual new business in 2023 was intermediated.
Many IFA firms join larger networks, who may be able to negotiate uniform, often higher than average, commission rates with insurance providers for their member firms. In recent years there has been a ‘commission creep’, with networks generally requesting higher commission rates from insurers every few years. Insurers who refuse to increase commission rates will be at a sales disadvantage over those who do, and it is not uncommon for insurers to receive feedback that certain firms will not choose their products over a competitor because the commission is too low.
Some of these networks write significant volumes of business on ‘restricted panels’. With these panels, the member IFA firms are only allowed to quote with a limited number (often four to six) of insurers and provide customers with options from only those insurers.
These panels are controversial as the commission rates requested by the networks are often much higher than standard, to the point where insurers have historically had to load customer premiums in order to afford the commission. If an insurer refuses to meet the requested commission rates, they will likely be excluded from the restricted panel, with the network thus closing off the insurer’s access to a large customer base.
Although these networks provide justifications for the higher commission rates and potential premium loadings in terms of the higher service levels provided to customers, they remain controversial due to their anti-competitive nature and the loadings to premiums beyond what the client would have paid through a different channel.
The market study recognises that commissions are a critical component of intermediary remuneration in the insurance industry. LAUTRO (Life Assurance and Unit Trust Regulatory Organisation) indemnity commission is a commonly used structure in the UK insurance market.
This involves insurers paying intermediaries upfront commission based on a sold policy’s annual premium, term and a number of pre-agreed factors. Should a policy lapse within the initial commission period (ICP, usually either two or four years), the intermediary will be required to return a percentage of the commission. The commission paid will be considered fully earned if policies remain in force beyond the ICP.
COBS 7.2 specifies rules and guidelines to prevent churning and ensure that consumers' interests are prioritised. Regardless, the design of indemnity commission can still be seen to create a conflict of interests for intermediaries given that there is greater financial incentive to find the consumer a better deal after the ICP has ended.
Other types of commission are used in the protection market, for example non-indemnity commission, where intermediaries receive regular commission payments for the duration of the ICP, or hybrid commission structures that blend indemnity and non-indemnity structures. Pure non-indemnity structures are not necessarily as well aligned to the costs incurred by intermediaries, where early administration expenses occur at the inception of the policy.
As commission amounts can be large (typically well in excess of a policy’s annual premium), there is a potential conflict of interest where unethical advisers may choose the policy that earns the most commission rather than the policy that provides the best value or most appropriate cover for their customer.
There is also ‘churning’, which refers to the unethical practice where an insurance agent or broker encourages a policyholder to replace their existing insurance policy with a new one, often from the same insurer, without any significant benefit. Whether indemnity commission structures incentivise churning is likely to be considered in the FCA’s future updates.
The market study terms of reference set out a number of areas of focus which may be included in the interim report:
In recent years, there has been a lot of M&A activity in the protection market, most notably with Aegon, Canada Life, AIG Life and HSBC Life all selling protection books to existing providers. The market overview highlights that the provision of protection insurance is concentrated among five firms, who account for more than 80% of the total market for individual protection.
While economies of scale may result in lower premiums and hence better outcomes for customers, this may also result in a reduction in consumer choice, less product variety and potentially less market innovation. The terms of reference for the market study include a focus on the barriers to entry and drivers for insurers exiting the market.
The FCA has highlighted that payouts on GAO50s are low relative to the premiums paid, and there is concern that this could be disproportionately affecting vulnerable customers. There are a number of drivers for the relatively low payouts, for example:
These issues can be partially mitigated by encouraging healthier lives to consider an underwritten whole of life policy, by ensuring that consumers are fully informed about the extent to which premiums paid may out-strip benefits and are aware of products offering premium cessation dates.
