The Implications of the FCA’s Pure Protection Market Study on the Insurance Sector

Assessing Regulatory Shifts and Industry Evolution

Introduction

The insurance sector is no stranger to regulatory scrutiny, especially in the context of consumer protection and fair market practices. The Financial Conduct Authority (FCA) has launched a series of market studies aimed at ensuring that insurance products deliver fair value and good outcomes for consumers. The most recent development in this regard is the FCA’s pure protection market study (MS24/1.2). The scope of this ongoing study, which is delving into products such as term insurance, critical illness cover, income protection, and guaranteed acceptance over 50s insurance, does not only highlight prevalent market dynamics but may also set the stage for future changes in the industry’s operating landscape. In this article, we comprehensively examine the potential implications of the FCA’s pure protection market study on the insurance sector, considering regulatory, commercial, consumer, and technological perspectives.

Background and Objectives of the FCA Market Study

The FCA’s pure protection market study was launched in March 2025 to address mounting concerns regarding the functioning of the pure protection insurance market. Unlike investment-linked insurance products, pure protection policies are designed solely to offer financial security against specific adverse events, such as death, serious illness, or loss of income due to incapacity.

The principal objectives of the FCA’s market study include:

Assessment of product value and pricing practices – concerns have been raised about certain products delivering poor value – e.g. guaranteed acceptance whole-of-life plans where total premiums may exceed payouts by 50% or more. This includes whether products align with fair value expectations under Consumer Duty and the PROD rules
Scrutinising sales practices and the role of intermediaries – in particular, whether commission incentives encourage unnecessary policy switching or ‘premium loading’ potentially harming consumer value. Given over 90% of the pure protection policies are sold through intermediaries, this highlights the importance of commission-driven incentive structures
Identifying potential barriers to competition and innovation – whether current practices support innovation and new entrants, or whether existing distribution and commission models are stifling market growth
Ensuring that vulnerable consumers are adequately protected against distribution barriers – in particular the impact of market exits by insurers and whether consumers with certain medical conditions are being underserved or facing a protection gap

The study’s methodology is encompassing data collection from insurers, brokers, and consumers, as well as a review of marketing materials, policy documentation, and claims data.

Key Emerging Themes

While the FCA’s market study is ongoing, with initial findings and an interim report expected by the end of 2025, our engagement with the market is highlighting a number of key emerging risks and themes that have direct implications for the future conduct of the insurance sector:

Product Complexity: Some pure protection products may be overly complex, making it difficult for consumers, especially those who are vulnerable or financially less literate, to compare offerings and make informed decisions.
Sales and Distribution Practices: There is a dominance of intermediaries in the market with potential inconsistencies in the quality of advice, with commission-driven sales leading to the risk of mis-selling or suboptimal recommendations and customer outcomes.
Value for Money: The value delivered to customers can vary significantly across providers. In certain instances, consumers are paying higher premiums for similar levels of cover, with little clear justification for the discrepancy. We are also seeing guaranteed acceptance over 50s insurance often resulting in low payouts compared to premiums paid, raising fair value concerns.
Claims Outcomes: While the majority of claims across the insurance sector were paid out (totalling a value of around £4.85bn in 2023*), we are seeing instances of delays, poor communication, and ambiguous policy wording leading to poor or suboptimal outcomes for some customers.
Access and Inclusion: Certain consumer segments, particularly those with pre-existing health conditions or from lower-income backgrounds, may be facing barriers to accessing appropriate cover, raising questions about inclusivity and fairness.

Implications for the Insurance Sector

These emerging themes have far-reaching consequences on multiple fronts.

Regulatory Compliance and Governance – Foremost among these themes is a heightened focus on transparency, suitability, and fair value. This means insurers and intermediaries should consider:

Enhancing governance and oversight across the entire distribution chain, with a particular focus on the proactive identification and mitigation of customer harm and the delivery of good customer outcomes. This is likely to include:
- Greater use of AI and data analytics to monitor outcomes and identify areas for improvement
- Automation of compliance processes, such as product value assessments and outcomes testing
Disclosing commission structures and managing conflicts of interest effectively and transparently
Reporting more granular data on claims outcomes, complaints, and customer outcomes

While this will require significant work and collaboration between firms across the distribution chain, proactive engagement with the FCA’s agenda also offers an opportunity to differentiate as a consumer-centric provider.

Product Design and Innovation – The study’s emphasis on value for money and product simplicity means firms need to re-examine their product suites. This may mean that product manufacturers need to shift towards more modular, customisable policies, with clearer articulation of benefits and exclusions. This will make it easier for consumers to select cover that genuinely meets their needs, reducing the risk of underinsurance or mis-selling.

Moreover, digital innovation will be key. The ongoing adoption of tools such as online comparison engines, interactive product guides, and automated advice platforms. These technologies promise to make the market more accessible and navigable for all consumers, especially those who are currently underserved.

Product Value and Pricing – The FCA is likely to intensify its focus on the value for money offered by pure protection products. This will have several knock-on effects:

Insurers may need to review pricing models to ensure premiums are fair and commensurate with the cover provided.
Excessive commissions or opaque pricing structures will come under regulatory scrutiny, potentially leading to caps or mandated reductions.
Product features and exclusions will need to be justified, with clear evidence that they meet genuine consumer needs.

This could result in the rationalisation of product ranges, standardisation of features, or even the withdrawal of certain products from the market.

Distribution and Intermediary Relationships – The FCA’s scrutiny of sales practices will reverberate through the distribution chain. Insurers are likely to need to reassess their relationships with intermediaries, setting higher standards for advice quality and compliance. Commission structures may need to be reformed to eliminate incentives for inappropriate product recommendations.

Brokers and independent financial advisers will also need to demonstrate robust customer-centric processes and transparent disclosures, or potentially risk regulatory sanction. Some may invest in technology-driven advice solutions or seek to specialise in segments where personalised guidance is most valued.

Customer Communications and Transparency – A key objective of the FCA’s market study and any subsequent interventions that may follow is to rebuild consumer confidence in the pure protection market. By addressing sources of confusion and dissatisfaction—such as unclear policy wording (including key features, benefits and exclusions) and inconsistent claims handling—the sector can foster greater trust among consumers.

Insurers that communicate proactively, through simplification of policy documents and customer communications, including proactive customer engagement at key stages of the customer journey will be well placed to capitalise on this renewed trust. Over time, higher confidence should increase uptake of pure protection products, improving resilience to life’s uncertainties.

Market Competition and Inclusion – By lowering barriers to entry and promoting transparent competition, this should stimulate innovation and price competition. New entrants, including ‘insurtechs’ and niche providers, may find opportunities to carve out market share with digital-first, customer-friendly propositions.

Importantly, the FCA’s ongoing focus on vulnerable consumers is likely to inspire the development of products and distribution channels that are accessible to those with non-standard needs—such as people with chronic health conditions, gig economy workers, or low-income families. This could usher in a more inclusive insurance landscape.

Opportunities for Forward-Thinking Insurers

The FCA’s pure protection market study opens doors for insurers willing to embrace change. Firms that invest in clear communication, digital transformation, and inclusive product design can capture emerging demand and build lasting customer relationships.

Engaging with regulators, participating in industry consultations, and sharing best practices will enable insurers to shape the future regulatory landscape rather than simply react to it. Those who go beyond mere compliance to champion customer value will emerge as leaders in what may become a new insurance ecosystem.

What should firms do now?

While the FCA’s market study is still ongoing, the objectives of this study set a clear agenda for potential future reform. With that in mind, firms should act now to:

Review product governance frameworks to ensure fair value assessments in line with PROD 4
Assess commission models and incentive structures for potential conflicts
Gather and analyse customer outcome evidence, such as claims ratios, complaints, and vulnerable customer data and how this may influence product design and innovation
Review governance and oversight arrangements across the entire distribution chain and whether they evidence the mitigation of harm and the delivery of good customer outcomes
Plan for engagement with the FCA, including pre-emptive data submission and responding to interim insights

The future of pure protection insurance will be shaped by those who act decisively today in response to scope of the FCA’s market study. If you would like to discuss any aspect of the FCA’s pure protection market study or any other conduct related matter, please get in touch at hello@sqaure4.com

Darren Fisher – dfisher@square4.com

Senior Advisory Director (Insurance)