The FCA will be looking at the way customers are generated by different distributors and assessing the value of revenues and cost of acquisition from lead generators, and range of intermediaries (advised, non-advised, mortgage brokers, PCW, networks, etc) to understand the different commission models with the aim of understanding whether the distribution arrangements for pure protection products are consistent with the aim of providing fair value.
It is worth noting the success of signposting protection cases from wealth managers, usually under a commercial agreement funded from indemnity commission.
Regarding product fair value, the FCA has focused on guaranteed acceptance over-50s insurance. Specialist manufacturers in this market will be able to provide market analysis, but there will be examples of customers who have paid more premium than their potential payout.
It is good that the FCA wants to understand the drivers for insurers exiting the market, and the concentration risk with the largest two insurers taking such a large market share.
As a market we can present many new product initiatives, for example broadening of cover and support services, and the UK is often quoted as one of the most competitive protection markets in the world.
The downside of this is that margins are squeezed, and while investment in new business submission has been positive, the same investment in claims management has not.
Reducing real profitability for distributors also means lack of investment for future growth, as can be seen by the increased focus in wealth management and lack of specialist protection intermediaries.
Competition and outcomes
In chapter five the FCA states the issues it intends to explore and the crux of this TOR.
They will seek to understand how well competition is working and the outcomes that consumers receive including price, quality and alignment with their needs.
While analysis and conclusions will be driven by the evidence, they are looking at the outcomes using four broad themes:
- Consumer needs, engagement and understanding: this is a huge undertaking tackling the benefits and values of the various products, presentation, customer understanding, how consumers make choices, benefits and values of services provided, understanding of intermediary remuneration, and customer engagement during lifetime of product.
- Competitive constraints on insurers and intermediaries: the importance of intermediaries as a route to market and the value of the services they provide to insurers, the relative bargaining power between intermediaries and insurers and the nature of competition between insurers for distribution channels. Within the broader macroeconomic environment, how insurers and intermediaries compete and the nature of this competition. In the PDGs response we can consider the consumer protection that they have in advised situations with access to the Financial Ombudsman Service, and whether this has a monetary value.
- Commission incentives and potential conflicts of interest: commission structure, size, incentives that commissions create and the features within commission schemes investigating incentives and conflicts of interest.
- Firms behaviour and practices: how firms' incentives impact their conduct in relation to products, the market and their treatment of consumers.
A number of protection specialists among the PDG have been calling out the blurring of lines between advised and non-advised sales, loaded premiums being unfair to consumers and whether there is sufficient investment in the claims process to ensure customers receive consistent assessment and prompt payment of claims.
Would annual benefit statements, delivered in a consistent way across the market help consumers understand their policies better, and engage with some of the added-value services that are included in so many policies? Are all re-broking of policies just done to generate commission?
Change of client circumstances and new product developments are entirely legitimate reasons to replace and update policies. Insurer metrics will show where policies are cancelled consistently early, and they have the ability to cancel agencies to stop that behaviour.
