The UK’s Financial Conduct Authority has concluded there is no current need for market-wide intervention in life insurance commission structures after examining whether adviser and intermediary remuneration is contributing to poor consumer outcomes.
This finding forms part of the industry regulator’s recently-released final report into the UK pure protection market.
The FCA market study examined competition and consumer outcomes across term life insurance, critical illness cover, income protection and whole-of-life products, including whether commission arrangements were affecting product value or encouraging inappropriate policy replacement.
While identifying areas requiring continued scrutiny, the regulator ultimately determined the evidence did not support broad intervention in existing commission arrangements.
Focus on outcomes rather than commission structure
The FCA says commission arrangements can deliver fair value regardless of their structure, provided firms can demonstrate consumers are receiving appropriate value.
This conclusion followed analysis of commission levels that, expressed as a proportion of first-year premiums, can appear comparatively high. For intermediated business written in the UK during 2024, median commission rates included around:
- 220% of annual premium for term assurance
- 221% for standalone critical illness
- 229% for income protection
The FCA noted protection policies are generally intended to remain in force for many years. When commissions were considered against projected premiums over the expected policy lifetime, the proportion was significantly lower.
Replacement business remains a concern
One area in which the FCA identified potential commission-related consumer harm was policy switching.
It found commission structures can potentially provide an incentive for an intermediary to replace an existing policy once the original commission clawback or indemnity period has expired, creating an opportunity to receive another upfront commission.
…the FCA distinguished between inappropriate replacement and legitimate switching
However, the FCA distinguished between inappropriate replacement and legitimate switching that produces a better outcome for the customer.
Its analysis estimated potentially unnecessary switching affects around 19,000 customers annually, representing approximately 0.1% of policyholders.
The FCA considered this insufficient to justify market-wide intervention and instead intends to use supervisory activity to address firms or intermediaries where problematic replacement practices are identified.
Industry partnership to address protection gap
The FCA also has placed greater emphasis on addressing the UK’s protection gap, finding 58% of adults have no life insurance, critical illness cover or income protection, while 59% of this group has never considered protection.
Rather than responding through further market-wide regulation, the FCA is seeking to work with industry, government and consumer groups to increase awareness and encourage more people to consider whether protection insurance is appropriate for them.
The UK regulator is also encouraging greater innovation, including addressing potential misunderstandings about its regulatory expectations that may be acting as barriers, and will work with the Association of British Insurers on reducing delays in obtaining medical records.
The regulator says competition in protection insurance generally works well for existing customers and it is not proposing new market-wide measures, although it will take action where individual firms fall short of Consumer Duty and product governance requirements.
For the Australian advice and life insurance sectors, the FCA findings offer a contrasting regulatory approach: retaining commission-based distribution subject to fair-value and consumer-outcome requirements, while looking to greater adviser engagement, industry collaboration and consumer awareness as part of its response to underinsurance.
