In Text with JD – The FCA’s Pure Protection Market Study puts the protection gap back in focus
John Doughty explores the findings of the Financial Conduct Authority’s (FCA’s) Pure Protection Market Study and the challenges facing the industry in closing the protection gap, drawing on insights from his recent conversation with Vikki Jefferies, market development director at Legal & General (L&G).
The FCA recently published the final report of its Pure Protection Market Study and the top-line finding makes for positive reading – the protection market generally works well for existing customers. Not only is competition generating a wide range of products, but payout rates remain high across the market.
Of course, existing customers are just one part of the story. The report highlights the age-old challenge facing the market: the protection gap. More than half of people (58%) do not hold any protection product. It’s something that the regulator wants to tackle and has suggested multiple measures as part of its report to try and close that gap.
Recently, I sat down with Vikki Jefferies, market development director at L&G, to discuss all things protection. Somewhat predicting the findings of the report, we discussed the current affordability challenges that are undoubtedly impacting protection take-up. While protection conversations have always been challenging, Vikki rightly pointed out that the current economic picture and ongoing cost-of-living pressures have added an extra layer of complexity.
After all, we’re not talking to customers with sub-1% mortgage deals anymore, we’re asking clients with interest rates of 4% or 5% and above to take on protection. While larger outgoings increase the risk and make that conversation all the more important, it doesn’t make it any easier. That’s particularly true when you think that many consumers don’t really have an emotional connection to protection – any connections to life insurance or critical illness cover are often negative, compared to the dream home or independence that comes as a result of a mortgage.
As the report correctly identifies, though, affordability is only part of the issue.
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The challenges
It points to challenges around low awareness, limited understanding and behavioural factors, as well as challenges in the sales journey itself – whether that’s long applications, underwriting or delays in medical evidence. Speaking with Vikki, she also identified supply-side challenges for advisers – from the sheer variety of products available and differences in features and benefits, to how products are displayed across portals and the pace at which providers introduce new developments and enhancements.
For many of these issues, the regulator is looking to work proactively with bodies such as the Money and Pensions Service (MaPS), the Digital Property Market Steering Group and the Association of Mortgage Intermediaries (AMI) to increase access to information, boost knowledge and confidence on both sides of the conversation and explore opportunities to digitalise parts of the process.
In my conversation with Vikki, she was quick to point out the need to react and adapt to the changing needs of customers, particularly around how they want to interact with advice. There’s no question that younger customers consume information in a different way and expect a different style of interaction – we need to be where they are, and so does good information on protection.
We cannot forget the elephant in the room and how artificial intelligence (AI) will change both adviser and customer journeys. I completely agree with Vikki that AI has the potential to transform how we deliver advice, all while keeping the adviser as a pivotal part of that conversation. The issues identified by the regulator – particularly around lengthy application times and underwriting – could all be advanced through digital improvements and AI adoption to better service advisers and customers. So could consumer access to information around the importance of having protection in place.
Speaking of consumer information, it’s great to see in the report that the Protection Distributors Group will lead a market-wide consumer awareness programme – based on the FCA’s remit of a sustained programme – not a one-off advertising campaign. It is hoped that this will go ahead of advisers and make the topic of protection much more familiar and far less daunting.
Closing the protection gap
Like Vikki, I believe that mentoring will remain a critical part of closing the protection gap – giving advisers the knowledge, support and confidence to have proper protection conversations. As she explains, it’s just as important that we empower advisers to know when to refer or call for backup if they are unable or not confident enough to have that conversation.
From our perspective at Just Mortgages, we continue to see a high number of protection referrals coming through our internal system, as well as a growing proportion of principals within our self-employed division recruiting protection-only advisers – recognising not only the need, but the clear business case for having those quality conversations around protection. That’s in addition to ongoing training and mentoring from managers and our learning and development team.
The protection gap won’t be closed by one initiative or one part of the market. It will require providers, advisers and the wider industry to address the barriers at every stage of the journey – from helping consumers understand why protection matters to making it easier for advisers to have those conversations.
The FCA’s report provides a useful starting point. The challenge now is turning those recommendations into meaningful change and, ultimately, making protection both a natural part of the advice conversation and, as Vikki identifies, a plausible and viable part of wider financial planning.
