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The UK financial watchdog will probe whether customers are being ripped off by insurance policies designed to financially protect them and their families if they die or fall ill, as it steps up pressure on the industry over consumer outcomes.
The Financial Conduct Authority said it would launch a market study into pure protection insurance products, such as income protection and critical illness cover, due to concerns over how such policies are being sold. About £4bn was paid out in claims in 2022.
The probe will look at the commission paid to the intermediaries who sell the products, including independent financial advisers and mortgage brokers, and whether the incentives built into those arrangements create worse outcomes for customers.
“We have seen examples of intermediaries encouraging customers to switch unnecessarily . . . to a product that does not meet their needs as well or that provides poorer value . . . to earn repeat commission,” the regulator said.
It also expressed concern over the lack of competition in this segment of the market and said some policies might not provide good value for customers because of high premiums and low average payouts.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Pure protection can offer peace of mind and financial security, often when people are at their most vulnerable. Consumers should be able to buy products which meet their needs and provide fair value.”
He added: “We have seen indications that this may not be the case across the pure protection market and we will act if we find that the market is not working well.”
Tim Hogg, director at consumer group Fairer Finance, said: “Market failures in pure protection are leading to harm for existing customers, while underinsurance means that far too many people are not protected at all.”
He said: “Some over-50s products offer notoriously low value to customers, who can end up paying significantly more in premiums than their family will ever receive in payouts.”
The inquiry into this section of the insurance market — which includes forms of life insurance, as well as critical illness cover and income protection — comes as the FCA pushes forward with a new “consumer duty”, requiring banks, asset managers and other providers of regulated financial services to prove they are acting in customers’ best interests.
The FCA last week warned the insurance industry that too many companies and brokers “still cannot show how they are providing fair value to customers or that they were receiving good outcomes”.
It has also this year clamped down on providers of add-on car insurance over concerns that they were not giving customers value for money.
The watchdog said the protection market study could lead to rule changes or enforcement action if it found evidence of harm to consumers. It was now seeking feedback on its terms of reference and intended to launch the market study “later in 2024-25”.
The Association of British Insurers said: “Protection insurance products provide vital financial support to individuals and families in their time of need.” It added that its members understood the “importance of providing products that deliver fair value to customers” and were committed to working with the FCA on its probe.