Identifying the key harms in protection ahead of FCA market study

The FCA has set out its plans to conduct a pure protection market study. The aim is to understand if the market is functioning well and whether consumers are receiving good outcomes. In particular, the regulator wants to ensure that outcomes align with Consumer Duty – including whether they represent fair value.

What does the FCA mean by fair value? It wants to see products and services designed to meet the needs of its target market; products that are transparently sold and ones where customers have the ability to switch or exit – and access support.

Given that protection products are sold primarily through intermediaries and often come into their own when consumers are faced with vulnerable circumstances, this is hugely important.

The question is though, for issues or harms already known, should the industry get on the front foot and provide outcome measures so these can be presented to the FCA as quantifiable issues with plans to address?

Products and services

There are certainly examples of where products are not set up to deliver benefits or pay out to the intended beneficiaries. A key example is where unmarried partners may not automatically be entitled to a life insurance payout. Cohabiting couples are the fastest growing family type in England and Wales, and account for 18% of all families. Separately, there are also joint policies that are not flexible enough to accommodate divorce or separation, or where trust or nominee policies are not set up effectively.

Alternatively, a policy might not match the consumers’ needs, whether because there is no protection in place to protect a mortgage or loan, or because an incorrect product or coverage amount hasn’t changed in line with the customer's circumstances. A good example here is income protection not reflecting a change in job or career progression.  Does sending a letter each year to remind consumers of their coverage resolving this issue and reducing harms?

Before all this is the risk of inadequate health assessments at the application stage. Not only does this increase the chance of reduced or even declined pay outs, it can also increase premiums for all consumers – which is clearly at odds with fair value.  Should we be putting more effort into reducing non-disclosure up front?

Price and value

In terms of price and fair value, there is the potential for consumers to be paying for a policy that is no longer appropriate, whether that is due to changing circumstances – such as divorce – or through adopting group cover.

Commissions is undoubtedly a hot topic too, just as we have seen recently in the car finance sector. Clearly the onus is on firms to provide evidence in outcome reporting that the detrimental impact of commission bias is small or being managed.

Consumer understanding

For consumers, there is the possibility that they do not understand their options or what products actually cover, leading to disappointment or even outrage at the claims stage. The underwriting process can also present challenges too, with a lack of understanding potentially leading to non-standard decisions or higher prices than originally quoted.

Furthermore, a lack of understanding can lead to consumers being unaware that they could claim, or forgotten that they have a policy in the first place. Similarly, trustees may also be unaware of their role and responsibilities.

Consumer support

A slow or poor service, particularly with a lack of empathy at the claims stage is certainly a cause of stress and potential harm. The same is true for a lack of support when life insurance is used for economic abuse and exercising coercive and controlling behaviour.  Consumer feedback is really positive on nurse and GP support services, how do these impact outcomes, especially for the vulnerable cohorts?

Data is our best defence

Consumer Duty requires firms to not just measure outcomes, but report on how outcomes and fair value compare between vulnerable cohorts and the resilient. This is not easy, indeed the recent CII report lists vulnerability as the hardest part of Consumer Duty.

At first glance, protection has a lot of data on health and finances, but in practice there are major challenges in accessing this data. Most vulnerability assessments are undertaken by the intermediary, but the health data is submitted into pricing portals and not retained by the intermediary. In addition, most underwriting focuses on health issues affecting mortality or morbidity, and don’t cover the lifestyle issues that are so important in assessing vulnerability.

While specialist protection providers may use provider portals, more general holistic advisers and mortgage brokers use multiple systems. Consumers have multiple products - mortgages, General insurance as well as protection. Therefore, when considering systems to identify, assess and support vulnerable customers, the need is to be product and provider agnostic.

With very few intermediaries and providers sharing data on vulnerability, there is a lot of work to be done. Some providers may look to lock in intermediaries by providing vulnerability assessments as part of protection application portals. However, with the requirement on outcome reporting for intermediaries as well as providers, it is likely that intermediaries will have to hold their own data - independent of providers - and hence select their own systems.

Some may look to build these vulnerability systems in-house, but given the size and scale of the task at hand, this is not an efficient use of time, energy or resources – especially when systems already exist in the market to meet these requirements.

With the right management information, the hope is that we can demonstrate that the kind of poor outcomes described are low or shrinking. 

If we can really get a handle on these potential harms, the reward for firms is far greater than just meeting regulatory requirements. It means we can achieve our ultimate goal of supporting customers properly in their darkest hours, delivering unrivalled service and support that converts customers to powerful advocates for both protection, their provider and their adviser too.