The FCA’s pure protection market study: closing the protection gap

Following a market study launched in March 2025, the FCA has concluded that competition in the distribution of pure protection products generally works well for existing policyholders: a wide range of products, high claims acceptance rates, and generally more than 50% of premiums paid out in claims.

The exception is income protection, where claims ratios were markedly lower at around 40%, a fair value concern the FCA flagged explicitly and one that manufacturers should expect to face questions on. The FCA also found a significant protection gap: 58% of people hold no protection product, and 59% of that group have never even considered their needs.

The FCA's answer is not a new rulebook. It is a package of FCA-led, industry-led and stakeholder initiatives working through existing frameworks, with the FCA stating it does not currently see a need for further regulatory intervention, though it will keep outcomes under review and could act if the position does not improve.

That restraint should not be mistaken for indifference. The report reads less like a closing statement and more like a roadmap: a clear signal of where the FCA's supervisory attention on Consumer Duty, product governance, fair value and distribution arrangements will fall next.

A study about distribution, not product failure

The FCA has not concluded that the market is systematically delivering poor outcomes to existing customers. Its concern is that too many consumers never reach the point of engaging with the protection market at all.

This gap reflects a mix of demand-side factors (low awareness, limited understanding, behavioural biases) and supply-side factors (friction in customer journeys, underwriting complexity, limited product availability for complex needs). The FCA found limited evidence that regulation itself drives the gap, though some firms cited perceived regulatory uncertainty as a brake on innovation.

Firms should treat that finding with some caution rather than as licence to relax controls, since "we thought the rules stopped us" is unlikely to be a persuasive answer if a supervisor later asks why a barrier was not addressed.

This creates an interesting question for firms subject to the Consumer Duty, which focuses on outcomes for retail customers but, on the FCA's analysis, effectively extends that lens to people who have not purchased a product at all. If a customer journey is unnecessarily difficult, or a proposition inaccessible to particular groups, that is relevant to whether a firm's arrangements deliver good outcomes.

This does not create an obligation to sell protection to people who do not want it and the FCA accepts that some consumers make an informed choice not to buy.

The practical challenge this creates is evidential. Firms have well developed MI for customers who complete a purchase, but far fewer have systematic visibility over where and why prospective customers drop out, which is precisely the population this study is concerned with. Building that visibility, even at a basic level, is likely to be one of the more concrete actions firms can take in response to the report.

The protection gap and the Consumer Duty

The FCA reminds firms of their obligations under the Duty and PROD 4 and, following its review of fair value assessments, identifies scope for better evidence around target market value and how remuneration and distribution arrangements affect outcomes and fair value.

This fits the broader direction under the Duty, where firms are expected not just to have a governance framework aimed at good outcomes, but to evidence that those outcomes are actually being achieved.

This is a pattern worth recognising from other sectors the FCA has reviewed under the Duty. The regulator rarely mandates a specific fix on first pass, but it does expect the next fair value review to show demonstrably better analysis than the last one. Firms whose assessments look materially unchanged twelve months from now should expect follow-up questions.

For manufacturers, relevant questions include whether they understand how product design and underwriting affect different groups in the target market and whether distribution arrangements support the intended outcomes.

For distributors, the questions turn on whether remuneration is properly reflected in fair value assessments, what is actually being provided for that remuneration and whether the distribution strategy creates outcome affecting incentives.

The FCA describes its fair value findings as limited in scale and not systemic, but firms should still review their own arrangements against them and be able to explain why those arrangements remain appropriate, rather than assuming no change is needed at all. In practice, that means the assessment itself, not just the conclusion, needs to withstand scrutiny: a firm that reaches the right answer through a thin or generic analysis is arguably in a weaker position than one that reaches a similar answer through a rigorous, well evidenced process.

Distribution remuneration and switching

The FCA identifies a small number of distribution issues capable of producing harm, including instances of intermediaries incentivised to switch consumers unnecessarily and continued industry requests for clarity on how premiums can be adjusted for commission.

Switching is a particular focus because replacing a protection policy is not like switching most other financial products. A cheaper or seemingly better replacement may come with fresh underwriting, different exclusions, waiting periods, or the effect of a health change since the original policy was taken out.

The question is not whether switching is inherently problematic, but whether firms can show a recommendation to switch was appropriate and that the disadvantages were properly weighed. Firms identifying a pattern of switching should understand the rationale for it, not just point to a cheaper product as proof of benefit.

Vulnerability and financial inclusion

The FCA highlights groups more likely to be affected by the protection gap, including those with pre-existing or complex medical conditions, renters, lower-income households and the self-employed or gig economy workers. The concern goes beyond cost to harder applications, more underwriting uncertainty and fewer chances to encounter protection through established channels.

For insurers, this reinforces the importance of product governance and target market analysis, since a broad target market should not be assumed to be equally accessible to everyone within it.

This is not a new obligation so much as an illustration of how existing Consumer Duty and PROD requirements are expected to operate. But it does put a sharper edge on a question that is often treated as a tick box exercise: firms that can point to specific analysis of how a named underserved group experiences the product, rather than a generic statement that the target market is broad and inclusive, will be far better placed if asked to justify their approach.

Removing friction

The FCA flags lengthy applications, delays obtaining medical evidence, unclear communications and limited product availability for complex needs as barriers to accessing cover. It intends to support work on medical record delays and is considering a TechSprint focused on underwriting journeys, particularly for consumers with preexisting conditions and on product design for non-standard risk profiles.

This is not a call to strip out underwriting. The FCA draws a distinction between necessary underwriting and unnecessary process complexity - one that will matter most as firms adopt automation and AI. The kinds of technology that speed up gathering information can improve access without compromising underwriting discipline, while technology that removes questions or obscures decisions raises different risks. The FCA is also proposing a myth busting webinar, being aware that perceived regulatory uncertainty can itself discourage innovation.

Evidence based supervision

Rather than imposing one solution, the FCA is asking industry to experiment and to measure whether interventions work. In the case of protection prompts at life events (such as buying a home, becoming a parent, self-employment, or a health or family change), it wants distributors to collect and share data on where consumers were first prompted, so effectiveness can be assessed.

This action is a signal for firms generally that where the regulator backs an initiative, it will increasingly want evidence that it actually works.

What should firms take from this?

Most firms will not need a wholesale change to their frameworks, since the FCA has chosen existing tools over broad new measures. But the report is a useful prompt to revisit governance.

Manufacturers should check whether fair value assessments properly evidence value across the target market and capture data on application drop off. Distributors should look at advice quality and remuneration driven switching incentives.

More broadly, firms should ask whether their Consumer Duty MI only captures successful customers or also sheds light on those who disengage.

The most useful immediate step for many firms is likely to be a straightforward gap analysis against the specific questions the FCA has posed in the report, rather than waiting for a formal supervisory request. Firms that can point to work having already been done will be in a materially stronger position than those responding for the first time under scrutiny.

What happens next

The study now moves into implementation, with industry and stakeholder initiatives expected to begin during 2026 and meaningful progress expected over the following 12 to 18 months. The FCA will monitor implementation and publish an update on delivery and progress by the end of 2027 and has made clear it will keep further intervention under review if outcomes do not improve.

In an area where the regulator has deliberately chosen restraint over rulemaking, the real risk for firms is not a new compliance obligation but complacency. 

For further information on any of the topics raised please contact the authors or your usual Freshfields contact.