Protection Market Awaits FCA Findings on the Cover Gap

FCA Pure Protection Review: What Could the Final Report Mean for Life Insurance Customers?

The protection industry is awaiting the Financial Conduct Authority's final report into how life insurance, critical illness cover and income protection are sold to UK consumers.

The study is significant because the FCA's interim findings did not conclude that the protection market is fundamentally failing customers.

In fact, the regulator found that in many respects the market works well for people who actually buy protection.

The bigger question is why so many people never reach that point.

According to the FCA's interim research, 58% of adults do not hold a pure protection product, and among those without cover, 59% have never considered their protection needs.

That creates what the regulator describes as a protection gap: people who could potentially benefit from financial protection but have never bought it.

The final report, expected during the third quarter of 2026, is due to set out the FCA's conclusions, feedback from the industry and the next steps it believes should follow.

For customers, the important issue is not whether everyone should suddenly buy more insurance.

It is whether people can understand the financial risks they face, compare suitable products and make informed decisions without being pushed towards unnecessary or inappropriate cover.

What is the FCA reviewing?

The study focuses on the distribution of pure protection insurance.

These are insurance products designed to provide financial support if a specified event occurs, without an investment or savings element attached.

They include term life insurance, critical illness cover, income protection and some whole-of-life products.

Life insurance, critical illness cover and income protection can sometimes be discussed together, but they solve very different financial problems.

Life insurance is principally designed to protect the people left behind if the insured person dies.

Critical illness cover can pay a lump sum if the policyholder is diagnosed with a specified serious condition that meets the policy definition.

Income protection is designed to provide an income if illness or injury prevents somebody from working, subject to the policy terms.

Our guide to life insurance versus critical illness cover explains why understanding the risk being insured matters before comparing prices.

The FCA's concern is therefore not simply whether protection products exist.

It is whether consumers understand them, whether they receive fair value and whether the way policies are sold leads to good outcomes.

The FCA says the market mostly works well

One of the most important points from the interim findings is easily lost in coverage of the review.

The FCA did not conclude that protection distribution generally produces poor outcomes.

It found a wide range of products available, evidence that many consumers receive good value and high levels of successful claims.

The regulator has instead identified specific areas where improvements may be possible.

That distinction matters.

The protection-market review is not simply an investigation into whether advisers or insurers are charging too much.

It is also asking why millions of people who may have significant financial responsibilities have never meaningfully considered what would happen if they died, became seriously ill or were unable to work.

What is the protection gap?

The phrase can sound as though there is one national amount of missing insurance.

There isn't.

A protection gap is ultimately personal.

Someone with a £300,000 mortgage, young children, one main household income and very little savings could face a substantial financial shortfall if that income suddenly disappeared.

Someone with no mortgage, no financial dependants, significant investments and generous workplace benefits may have very little need for additional personal life insurance.

Our guide to how much life insurance you may need explains why mortgage debt, income, children, savings, workplace cover and other resources need to be considered together.

That is why closing the protection gap should not simply mean selling more policies.

The more useful objective is helping more people identify whether they actually have a financial risk worth insuring.

Why people do not buy protection

The FCA's research suggests lack of engagement is a major part of the problem.

Many consumers without protection have simply never considered whether they need it.

Others may misunderstand what products do, assume they are too expensive or find the subject uncomfortable.

There is also a natural tendency to postpone decisions concerning events nobody wants to imagine.

Life insurance competes for household money with mortgages, energy bills, childcare, food, savings and everyday spending.

Protection therefore has to demonstrate practical value rather than rely on fear.

For somebody wondering whether cover is relevant at all, our guide Do I Really Need Life Insurance? starts with the more useful question: would anybody be financially worse off if you died?

If the answer is no, substantial life insurance may not be necessary.

If the answer is yes, there may be a genuine protection need worth exploring.

Commission is part of the FCA's review

Commission has inevitably attracted attention.

Protection advisers and intermediaries are frequently paid by the insurer when a customer takes out a policy rather than charging the customer a large upfront advice fee.

That structure can make advice accessible to people who might otherwise be unwilling or unable to pay for it directly.

Commission itself does not automatically mean a customer has received poor value.

The concern is what incentives the commission structure creates.

The FCA has examined whether some arrangements could encourage intermediaries to recommend replacing existing policies when doing so is not genuinely in the customer's interests.

That matters because replacing life insurance is not always harmless.

A customer's health may have changed since the original policy began.

They may now be older.

A replacement policy may cost more, contain different terms or require new medical underwriting.

Our guide to increasing or changing existing life insurance explains why older cover should not normally be cancelled until any replacement policy has been fully accepted and put into force.

How large is the unnecessary-switching problem?

The FCA's interim findings provide useful perspective.

Around 80% of protection sales are to new customers who do not already hold protection.

The regulator estimates that fewer than 19,000 customers each year, around 0.1% of policyholders, could potentially be affected by unnecessary switching driven by intermediary incentives.

That does not make the issue acceptable.

But it does suggest that unnecessary churn is a targeted problem rather than evidence that the entire intermediary market operates primarily by replacing customers' policies.

The FCA wants better information to be collected around switching so firms can demonstrate that replacing a policy genuinely benefits the customer.

That seems an important distinction for consumers.

Changing insurance should solve a problem.

It should not happen merely because another policy can be sold.

Why replacing life insurance needs care

An existing life insurance policy can become more valuable as somebody gets older or develops health problems.

That sounds counter-intuitive, but the reason is straightforward.

The policy was priced and underwritten based on the person's health and age when they originally applied.

If their health later deteriorates, that does not normally mean the insurer simply cancels an existing valid policy.

Applying for replacement cover, however, means going through underwriting again using the person's current circumstances.

Someone with a new medical diagnosis could therefore discover that replacement insurance is more expensive, postponed or unavailable.

Our guide to life insurance with pre-existing medical conditions explains how insurers assess medical history and why different providers can reach different decisions.

This is why customers should be particularly cautious about cancelling existing protection solely because a new policy appears cheaper.

Price is only one part of the comparison.

Claims experience is another FCA focus

The FCA has also identified the claims experience as an area where intermediaries may be able to do more.

Protection insurance exists for the moment when something has gone badly wrong.

A life insurance customer may have paid premiums for decades before their family ever needs to contact the insurer.

That means seemingly small decisions made when the policy is arranged can matter years later.

Keeping policy information accessible, understanding who should receive the money and having appropriate trust arrangements where suitable can make administration easier after a death.

Our guide to what life insurance actually pays out for explains how policy type, cover amount and claim circumstances determine what is eventually paid.

Our guide to how quickly life insurance pays after death also looks at some of the practical factors that can affect the claims process.

Good distribution therefore does not end when the policy is sold.

A well-arranged policy should also be understandable and usable when the claim eventually happens.

Income protection is attracting particular attention

The FCA's interim review also highlighted the claims ratio for income protection.

Its analysis found an income-protection claims ratio of around 40%, lower than for some other pure protection products.

But the regulator did not simply conclude that this meant the product provided poor value.

It noted that income protection is more complex and expensive for insurers to administer and can involve long-running claims where benefits may be paid for years.

The FCA has said it will refresh its analysis using newer data before reaching final conclusions.

That is an important example of why claims ratios need context.

A policy cannot be judged solely by asking what percentage of premiums was paid out in one particular year.

Product design, administration costs, duration of claims and the nature of the insured risk also matter.

Price is not the same as value

Consumers naturally compare premiums.

That makes sense.

A policy has to remain affordable for potentially decades.

But two policies charging the same monthly premium may not provide exactly the same protection.

Differences can include the amount of cover, policy term, critical illness definitions, income-protection deferred periods, guaranteed or reviewable premiums, additional services and underwriting terms.

The cheapest available policy may still be perfectly suitable.

But price alone cannot establish that.

Value comes from whether the policy covers the risk the customer actually needs covered at a price they can sustain.

This is particularly important where several products are being compared at the same time.

Someone concerned mainly about what happens to their family after death has a different financial problem from somebody concerned about surviving a serious illness but losing their income.

Advice can help — but customers should understand the relationship

Life insurance can be bought through several different routes.

A customer may approach an insurer directly, use an online comparison process or speak to a protection adviser.

Each route can work.

The important thing is understanding what service is being provided.

A direct purchase may suit somebody who already understands exactly what they need and is comfortable comparing products themselves.

Advice may be particularly useful where circumstances are more complicated, such as significant medical history, unusual employment, larger cover requirements or the need to compare several types of protection.

Customers using an intermediary should understand whether advice is being given, which insurers can be considered and how the intermediary is remunerated.

Commission can allow a customer to receive help without writing a cheque for advice at the outset.

The regulatory question is whether that remuneration ever changes the recommendation in a way that produces a worse result for the customer.

That is one of the issues the FCA's final report is expected to address.

Customers should not wait for the FCA report to review their cover

The final findings could influence how firms operate.

They will not change the basic financial question facing households today.

If somebody already has life insurance, it is worth periodically checking whether the cover still matches their circumstances.

A policy arranged before children, before moving home or before a major change in income may no longer match the financial risk it was meant to protect.

Equally, a policy taken out years ago may still be entirely suitable.

Reviewing cover does not automatically mean replacing it.

Our guide to changing or increasing life insurance explains why sometimes retaining the existing policy and adding additional cover can be preferable to starting again.

Accuracy during underwriting still matters

Whatever changes eventually emerge from the FCA's work, one responsibility remains with the applicant.

Questions on a life insurance application should be answered honestly and accurately.

Insurers use information about health, smoking, occupation, lifestyle and other relevant factors to decide whether cover can be offered and at what price.

Giving incomplete or inaccurate information can create problems later if a claim occurs.

That does not mean customers need to volunteer information they have not been asked for.

It means they should answer the insurer's questions properly and seek clarification where they are unsure what is being requested.

For people with a complicated medical history, our guide to pre-existing medical conditions and life insurance explains what the underwriting process may involve.

What would a good outcome from the FCA review look like for consumers?

The useful measure will not simply be whether the protection industry sells more policies after the review.

More sales and better consumer outcomes are not automatically the same thing.

A stronger market would help people recognise genuine financial risks, understand the products available and decide whether insurance is an appropriate way of addressing them.

It would also make it easier for customers to understand why a particular policy is being recommended, what the intermediary receives for arranging it and whether replacing existing cover genuinely improves their position.

At the same time, the industry needs to avoid turning the protection gap into an assumption that everybody is underinsured.

Some people genuinely need substantial protection.

Others need only modest cover.

Some may already be adequately protected through savings, pensions, employer benefits and existing policies.

And some people may reasonably conclude that they do not need personal life insurance at all.

The final report could shape the next stage of protection distribution

The FCA currently intends to publish its final Pure Protection Market Study report during Q3 2026.

That report is expected to contain its final findings, industry feedback and proposed next steps.

The areas to watch include the protection gap, switching incentives, claims experience and the regulator's updated assessment of value across different protection products.

But the interim findings already provide a useful message.

The protection market appears broadly capable of delivering good outcomes when customers engage with it.

The challenge is helping the right people recognise when they have a protection need, understand what product addresses it and retain suitable cover once it is in place.

That is a much more useful objective than simply trying to sell more insurance.

For anyone reviewing their own position, a sensible starting point is working out how much life insurance you may actually need.

You can also explore Life Insurance Explained for guides covering policy types, underwriting, claims, families and mortgage protection.

If you want to explore available cover based on your own circumstances, you can request a life insurance quote.

Sources

Financial Conduct Authority — MS24/1 Pure Protection Market Study

Financial Conduct Authority — Market study into the distribution of pure protection products to retail customers: Interim Report, January 2026

Financial Conduct Authority — Pure Protection Market Study: Consumer Research Report, January 2026

This article is for general information only and does not constitute personal financial or insurance advice. Protection needs, premiums, underwriting and policy terms vary according to individual circumstances.