The Financial Conduct Authority has called on the insurance industry to help close the ‘protection gap’, after finding that the majority of adults lack cover.
While the interim findings of its Pure Protection Market Study suggest that the distribution of pure protection to consumers works well, it found there are many consumers who would likely benefit from pure protection but don’t have it.
Nearly three fifths (58%) of adults do not hold a pure protection product, of which 59% have never considered their protection needs.
Pure protection products include life insurance, critical illness insurance and income protection insurance.
Graeme Reynolds, director of competition and interim director of insurance at the FCA, said: “These insurance products play a vital role in helping families manage some of the most difficult experiences in life.
“While competition in the market is mostly working well for consumers, many more people could benefit from protection. We will work with industry to reduce this gap, to help consumers navigate their financial lives.”
Research suggests that the gap exists because consumers aren’t aware of their needs and aren’t prompted to consider them. Affordability concerns, misunderstandings about the products and improvements needed in the sales process were also cited.
The FCA has pledged to work with industry and other stakeholders to explore what more can be done to better support consumers.
Alongside this, the regulator plans to focus on three issues it believes will improve consumer outcomes. These include lower claim ratios for some protection products than others; intermediary incentives to switch consumers unnecessarily; and actions intermediaries can take to improve consumers’ claims experience.
It aims to publish its final report with next steps in the third quarter of this year.
Commenting on the report, Erika Parker, actuarial director at Broadstone, said: “Better product promotion to help build consumer awareness and understanding of the value of protection products will be critical, particularly at key life events such as buying a house or having a child. A smoother sales process and innovation in payment offerings could also build product ownership.
“A growing protection market will be critical to supporting the many people who rely on these insurance products to support them when they are at their most vulnerable, whether they are suffering from long-term ill health or going through a bereavement.”
Tony Mudd, third party products and services director at St. James’s Place, said: “It is encouraging that the FCA found no major systemic failures, while still identifying practical areas for improvement.
“The FCA’s emphasis on collaboration to address the UK’s long-standing “protection gap” is a positive step. Closing this gap will require coordinated action across the industry rather than quick fixes, and we fully support the FCA’s intention to work with firms to develop solutions that improve consumer understanding, access and long-term outcomes.
“Overall, this is a constructive and balanced assessment of the protection market and an opportunity for the industry to build on what is already working well for customers.”
