Bridging the divide in insurance product value: Legal and regulatory insights

Latest analysis from the Financial Conduct Authority (FCA) reveals a stark divide in the value delivered by insurance products across the market.

Core covers like motor and home insurance return roughly half of premiums in claims payments, whereas some add-on policies pay out as little as 20%–25%. For instance, motor insurance returns roughly 54% of premiums in claims (with 99% of claims accepted), whereas some add-on covers such as personal accident insurance pay out only about 20–25%. 

These value gaps raise legal and regulatory concerns: Are insurers treating customers fairly when certain products appear to provide such minimal benefits? This analysis examines the competitive and consumer protection implications of these disparities and offers practical insights for insurers.

Regulatory conduct obligations

UK insurers are legally obliged to ensure products represent fair value. The Consumer Duty and Existing Product Governance Requirements put the onus on firms to prove that their pricing is reasonable relative to the cover and service provided. If a policy consistently delivers minimal payouts or has excessive claim denials, it likely fails this fair value test.

The FCA has explicitly warned it “will continue to take action” against products that don’t offer fair value. In a high-profile move, the FCA even halted sales of Guaranteed Asset Protection (GAP) insurance until providers addressed extremely low payout ratios. Regulators consider such gaps a breach of the obligation to deliver good outcomes for customers, and firms risk fines or remediation orders if they don’t proactively fix sub-par products.

Consumer protection and litigation risks

UK consumer protection laws complement FCA rules by banning misleading or exploitative sales. A product that gives most customers almost nothing in return for their premiums could be deemed inherently unfair, especially if marketed aggressively. We have seen analogous scenarios trigger mass redress (the PPI mis-selling scandal being a prime example).

If regulators don’t act swiftly, insurers could even face group litigation from disgruntled customers on grounds like misrepresentation or breach of duty. In short, failing to ensure fair value isn’t just a compliance issue – it exposes firms to reputational damage and legal liability. Insurers would do well to recall that poor consumer outcomes often end in costly compensation schemes.

Recommendations for insurers

To navigate these developments, insurers should act swiftly to ensure their products deliver fair value and remain competitive. Key steps include:

• Conducting product value reviews: Regularly audit each product (including add-ons) to assess claims ratios, declinature rates, and complaints. Identify offerings that are outliers and investigate why.
• Enhancing product governance: Strengthen oversight per FCA Product Governance rules. Set up committees to vet new and existing products against fair value criteria and document those assessments.
• Rebalancing or retiring poor-value products: Where a product shows consistently low value (e.g. very low payout percentage), consider repricing, improving cover, or withdrawing it. Proactively fixing issues can prevent forced regulatory action later.
• Improving transparency and sales practices: Clearly inform customers about what a policy covers, typical claim success rates, and key exclusions. Avoid high-pressure or automatic add-on sales; instead, give customers the chance to shop around or opt in deliberately.
• Ensuring compliance with consumer duty: Align internal policies so that customer outcome metrics drive decision-making. Train staff and intermediaries on the importance of fair value and on spotting products that might not meet the Duty’s standard

Conclusions

The FCA’s findings on insurance value disparities have put the industry on notice: delivering fair value is now a regulatory imperative and a competitive differentiator. Insurers who embrace this shift – by redesigning products, adjusting prices, and focusing on genuine customer benefit – will not only avoid fines and lawsuits but also build trust and loyalty.