With so much attention being paid to pensions and retirement planning at the moment, it is perhaps a welcome shift in focus for the regulator to conduct a market study on protection products.
Pensions have undoubtedly risen high up the political agenda as their investments are now considered to be key to improving economic growth. But we do not need to go back too far to see how the role of protecting people against life shocks was part of the national rhetoric.
The pandemic brought a renewed focus on the need for families and individuals to consider their protection requirements, and it is important that we learn from this experience.
It is not so much that we all need to prepare for the next outbreak, rather, the kind of life-shocks that took place during that period happen to families in the absence of a pandemic. And the government doesn’t ordinarily step in to protect people’s incomes.
The Financial Conduct Authority’s own statistics illustrate the scale of the protection market in the UK, with more than £4bn paid out in claims in 2022 alone, and some 19mn policies in force. Despite that, some commentators would say that there is a gap in protection cover that can be measured in the small trillions.
In a philosophical sense, you could argue it is a little odd that we have mandatory protection for cars and houses, and many people take out voluntary cover for white goods, but there is less focus on protecting the inherent value of people themselves, and their families.
Auto-enrolment into workplace pensions has probably left us with more people investing in tomorrow, than the number who are protecting today. True financial resilience requires a combination of both.
In practical terms, the protection market diverged from investment products over a decade ago, with the Retail Distribution Review removing commission on the latter, but not the former. One of the main reasons is that protection products are typically sold, not bought.
Few people with a stable income and in good health wake up in the morning thinking they need to protect themselves against the unexpected. But when the unexpected does happen, having the right protection in place to reduce or remove the financial impact makes a huge difference to people’s lives – those directly impacted and their families.
In the research we have carried out on the meaning of value, advisers tell us that peace of mind is high on the list of clients’ priorities, and carefully selected protection products give precisely that.
Sales generally require incentives, and commission has provided this in the protection market.
But the market has developed in many ways since the RDR, with professional standards constantly rising. The consumer duty heralds a new era of principles-based regulation, bringing much greater transparency through the value-chain with the launch of fair value assessments.
