Pure Protection – the lesser known general insurance product

As part of the FSA’s (predecessor of the FCA) programme to implement changes to the investment advice market, following the Retail Distribution Review (which came into effect in early 2013), the regulator amended their rules to allow firms to sell pure protection products under COBS (the part of the sourcebook that governs the activities of investment advisors), rather than ICOBS (which governs what you do, as a GI broker).

To do this, investment firms, must make a formal election to transact business under COBS and thereafter, with the exception of ICOBS 4.6, must treat pure protection products as a life policy and a designated investment, rather than a non-investment insurance contract.

A pure protection contract is defined as: 

  • A long-term insurance contract, in respect of which, the following conditions are met: 
  1. The benefits under the contract are payable only on death, or in respect of incapacity due to injury, sickness, or infirmity. 
  2. The contract has no surrender value, or the consideration consists of a single premium and the surrender value does not exceed that premium. 
  3. The contract makes no provision for its conversion or extension, in a manner which would result in it ceasing to comply with (a) or (b). 
  • A reinsurance contract covering all or part of a risk to which a person is exposed under a long-term insurance contract.

 

BUT WHY AM I WRITING THIS?

Simply put, unless there has been an election, as described above, pure protection contracts remain a general insurance product and therefore, fall within the scope of the array of risk solutions you are capable to advise on.

We know of GI firms that have set up introducer relationships with investment advisory (IFA) firms to whom they refer clients seeking advice on pure protection.

We know of GI firms whose sole mandate is to advise on pure protection business only. Nothing more.

But in our travels, we have also met numerous brokers that are neither: They do not refer to an IFA, nor are they specialists in this field. Instead, pure protection business flies largely under the radar.

This article is not to highlight the possible business opportunities that exist here but to highlight something that we routinely discuss with clients when delivering our compliance support.

Look at your current TOBA. I bet one of your opening paragraphs says something like the following:

 

XYZ is permitted to arrange, advise on, deal as an agent of insurers and assist in claims handling with respect to of all types of General Insurance policies.  Our Financial Services Register number is 000000 and you can check our status and permissions on the FCA’s Register by visiting the FCA’s website https://register.fca.org.uk/or by contacting the FCA on 0800 111 6768.

 

Based on the above, it would not be unreasonable to assume that this firm also offers advice on pure protection contracts. However, the particular firm, from whom the above extract was obtained, does not offer pure protection advice and therefore, in our opinion, is exposed to criticism for not providing such advice.

 

SO, WHAT’S THE SOLUTION?

 

We have always recommend that TOBAs are reviewed by lawyers to ensure that they are robust because a well-drafted TOBA should act like a manual or recipe book for doing business and provide absolute clarity on what should happen in a given situation.

 

They are also likely to help reduce liability and risk of doing business, something that PI Insurers would welcome.

But probably the most important part of any engagement letter must be Scope of Service.

Once you and your customers set expectations, your TOBA should clearly lay out what’s included (and agreed upon) within the service you provide and in doing so, reduce scope creep (going beyond what was originally agreed) and guard against your customer developing unreasonable expectations.

Where we have felt brokers’ TOBAs to be weak in this area, we have suggested incorporating the following paragraph:

The FCA has authorised us to advise, arrange, deal in, and assist with the placing and administration of all types of General Insurance policies.  However, we do not offer advice on Pure Protection policies such as, but not limited to: Term Assurance, Private Medical Insurance, Payment Protection Insurance, Permanent Health Insurance, Key Person Insurance or Shareholder Protection Insurance.  We are also authorised to undertake certain Consumer Credit activities.

So, rather than viewing a TOBA as a regulatory hassle or a non-value-added requirement, consider it a tool that helps galvanise client discussions and manage expectations.

This leaves more time for delivering your services and less time spent resolving misunderstandings related to scope of services or fees.

The result is a win-win – isn’t it?

For more information, please contact your RWA Business Manager.

About the author

Bruce has worked in financial services for the whole of his professional life, including 11 years as a Compliance Director of a US owned Independent Financial Advisory and Wealth Management business. At RWA, Bruce leads the Audit and Conduct Risk department from our Manchester office. He is RWA's lead consultant to the Guernsey Financial Services Commission (GFSC).

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