Insurance Fair Value: Meeting Consumer Duty in Insurance Distribution

What It Is

Fair value in insurance is the requirement for firms to ensure that the price customers pay for insurance products and services is reasonable in relation to the overall benefits they receive. Under Consumer Duty Outcome 2, every firm in the insurance distribution chain — manufacturers, distributors, and intermediaries — must assess and evidence that the products and services they provide or distribute offer fair value to customers in the target market.

This obligation sits within a layered regulatory framework. The Insurance: Conduct of Business Sourcebook (ICOBS) establishes baseline conduct requirements for insurance distribution, including demands and needs assessment (ICOBS 5), disclosure obligations (ICOBS 6), and claims handling standards (ICOBS 8). The Product Intervention and Product Governance Sourcebook (PROD) requires manufacturers to define target markets and conduct value assessments. Consumer Duty Outcome 2 then imposes an overarching requirement that the relationship between price and value must be fair — not just for the product in isolation but across the entire distribution chain.

The concept extends beyond premium pricing. Fair value encompasses all costs borne by the customer: the premium itself, broker fees, administration charges, mid-term adjustment fees, cancellation charges, and any other amounts paid in connection with the insurance. On the benefit side, the assessment must consider the scope of cover, the quality of claims handling, the accessibility of support services, and the actual outcomes customers experience — not just the theoretical benefits described in the policy documentation.

The insurance sector carries specific legacy issues that make fair value assessment particularly important. The FCA's General Insurance Pricing Practices review (2019-2021) found widespread harm from price walking, where loyal customers were charged progressively more at each renewal. The resulting pricing reforms, effective from January 2022, addressed the most egregious pricing practice but the FCA has been clear that eliminating price walking was a floor, not a ceiling. Consumer Duty demands that firms demonstrate positive value, not merely the absence of the worst practices.

Why the FCA Cares

Insurance is a product that customers buy hoping they will never need to use. This creates a fundamental information asymmetry: at the point of purchase, the customer cannot assess the true value of the product because they have not yet experienced a claim. The quality of the insurance — the breadth of cover, the fairness of the claims process, the responsiveness of support — only becomes apparent at the point of claim, by which time the customer is locked into the product and vulnerable.

The FCA has identified persistent fair value failures across the general insurance market. The pricing practices review found that customers were paying materially different prices for identical cover based solely on their tenure. Multi-firm work on add-on insurance products — including GAP insurance, travel insurance sold with packaged bank accounts, and mobile phone insurance — found products with claims ratios as low as 10-15 per cent, meaning insurers were paying out less than fifteen pence in claims for every pound collected in premiums. The FCA considers claims ratios at this level to be prima facie evidence of poor value.

Commission structures in insurance distribution have been a particular concern. The FCA has found distribution arrangements where the commission paid to intermediaries represents 50 per cent or more of the premium, raising serious questions about whether the product can deliver fair value when half or more of the customer's payment funds distribution rather than coverage. The FCA's Dear CEO letter to general insurance intermediaries (2024) specifically addressed commission levels and required firms to consider whether their remuneration was proportionate to the service provided.

Consumer Duty has transformed the FCA's ability to act on fair value concerns. Under previous rules, the FCA could challenge specific pricing practices (such as price walking) but had limited tools to address broader value questions. Consumer Duty Outcome 2 gives the regulator an explicit basis to challenge any insurance product or service that does not deliver reasonable value, and the FCA has signalled that it will use this power proactively. The multi-firm reviews already underway in general insurance, protection, and commercial lines all include fair value as a central assessment criterion.

Who It Affects

The fair value obligation applies to every firm in the insurance distribution chain. Product manufacturers — insurers and managing general agents that design and underwrite insurance products — bear primary responsibility for ensuring that the product itself represents fair value. This includes the design of coverage, the pricing methodology, and the claims handling approach. Under PROD 4, manufacturers must define a target market and assess whether the product delivers fair value for that market.

Insurance distributors — brokers, intermediaries, and appointed representatives — have a distinct fair value obligation relating to their part of the distribution chain. Even where the distributor does not control the product, it must assess whether its own remuneration (commission and fees) is justified by the service it provides, and whether the products it distributes offer fair value to its clients. A distributor that places clients into poor-value products, or that adds costs to the distribution chain without adding proportionate value, is failing the obligation.

Aggregators and comparison websites that facilitate insurance distribution are also within scope. The FCA expects these firms to consider whether the products they list deliver fair value and whether their own revenue model (typically commission-based) creates incentives that undermine value for customers. An aggregator that promotes products on the basis of commission income rather than customer suitability raises fair value concerns.

The obligation extends to firms managing back-book portfolios. Insurers and intermediaries with closed or legacy books must assess whether those products continue to deliver fair value. Products designed years ago may no longer represent good value given changes in the market, regulatory expectations, or the insurer's claims handling capabilities. The FCA has identified firms charging high premiums for legacy products with low claims ratios and limited benefits — and expects remediation.

What Firms Get Wrong

The most common failure is conducting a fair value assessment that is really a price benchmarking exercise. Firms compare their prices against competitors and conclude that because they are in the middle of the range, they offer fair value. This misses the point entirely. Fair value is about the relationship between what the customer pays and what they receive — a mid-range price for a product with narrow cover and a high claims decline rate is not fair value. The FCA expects firms to assess outcomes, not just prices.

Second, firms fail to assess value across the entire distribution chain. A manufacturer may conclude that its product offers fair value based on the ex-factory premium, without considering the cumulative costs added by distributors, aggregators, and service providers. Conversely, a distributor may focus on its own commission without considering whether the total cost to the customer — product plus distribution — represents fair value. Consumer Duty requires each firm to consider the total proposition from the customer's perspective, even where it does not control every element.

Third, firms neglect claims data in their fair value assessments. The ultimate test of insurance value is whether it pays out when the customer needs it. A product with a premium that looks reasonable but a claims acceptance rate of 40 per cent is delivering poor value — the customer is paying for protection that they are more likely than not to be denied. The FCA expects firms to analyse claims ratios, decline rates, and settlement times as core components of fair value assessment. Firms that do not have access to this data, particularly intermediaries, should obtain it from their product partners.

Fourth, firms apply a one-size-fits-all approach to fair value across different customer segments. A product that represents fair value for one customer group may not for another. For example, a travel insurance policy with standard exclusions may offer good value for healthy, low-risk travellers but poor value for older customers or those with pre-existing conditions who are more likely to need to claim but face exclusions that prevent them from doing so. The FCA expects segmented fair value analysis that considers whether different customer groups within the target market experience different outcomes.

What Evidence Is Expected

The FCA expects firms to maintain a documented fair value assessment framework that sets out the methodology, data sources, assessment criteria, and governance arrangements. The framework should specify how often fair value is assessed (at minimum annually, with more frequent assessment where there are indicators of concern), who is responsible for conducting the assessment, and how findings are escalated to senior management and the board.

For product manufacturers, the evidential requirements are extensive. The FCA expects documented target market definitions, pricing methodology (including the assumed claims ratio and expense ratio), commission structures across the distribution chain, and actual claims data — including claims ratios, decline rates by reason, and settlement times. The manufacturer must demonstrate that it has considered whether the product delivers fair value not just on average but for identifiable sub-groups within the target market.

For distributors, the FCA expects evidence that the firm has assessed whether its remuneration is proportionate to the service provided. This means documenting the services delivered (advice, administration, claims support), the time and cost involved in providing those services, and the resulting assessment of whether the commission or fee is justified. The FCA has been clear that simply disclosing commission to the customer is not sufficient — the firm must assess whether the commission represents fair value, not just whether the customer is aware of it.

Both manufacturers and distributors must maintain evidence that their boards or governing bodies have reviewed and challenged fair value assessments. The FCA expects to see board minutes, challenge questions, and actions taken in response to fair value concerns. A fair value assessment that is produced by the compliance function and rubber-stamped by the board without meaningful engagement is unlikely to satisfy supervisory scrutiny.

Good Implementation Looks Like

A firm with an exemplary fair value framework starts with a clear definition of what value means for its products and services. For an insurance broker, this might include: access to a panel of competitively priced, well-rated insurers; expert advice on coverage selection; efficient administration; and proactive claims advocacy. The firm then assesses whether its charges are proportionate to the value of these services, using data on time spent, cost of delivery, and client outcomes.

The assessment is data-driven. The firm obtains and analyses claims data from its insurer partners — not just at the aggregate level but segmented by product, customer type, and claim reason. Where claims ratios are low, the firm investigates whether this reflects good risk selection (customers are well-matched to the product) or poor value (the product has exclusions that prevent legitimate claims). Where decline rates are high, the firm engages with the insurer to understand the reasons and considers whether the product should remain on its panel.

Value chain transparency is a hallmark of good practice. The firm maps the total cost to the customer across every link in the distribution chain: insurer premium, broker commission, any additional fees, and third-party charges. Where the distribution costs represent a disproportionate share of the total, the firm examines whether each element is justified. If a particular distribution arrangement adds cost without adding value, the firm renegotiates or replaces it.

The fair value assessment results in action, not just documentation. Where the assessment identifies products or segments that are not delivering fair value, the firm takes remedial steps: renegotiating commission, adjusting fees, improving service quality, engaging with manufacturers on product design, or — where remediation is not feasible — withdrawing the product. The board receives a clear summary of fair value findings and the actions taken, and monitors implementation through subsequent reporting. The firm treats fair value assessment as a continuous discipline rather than an annual compliance exercise.

Related Tool

The MEMA Consumer Duty tool provides insurance firms with a structured framework for conducting and documenting fair value assessments that meet FCA expectations. The tool guides firms through each stage of the assessment — cost analysis, benefit mapping, claims data evaluation, distribution chain review, and segmented outcome analysis — producing documented outputs that satisfy both PROD requirements and Consumer Duty Outcome 2.

The financial promotions module supports insurance firms in ensuring that their marketing materials, quotation documents, and renewal communications present value information clearly and accurately. The FCA has been particularly critical of insurance communications that emphasise low premiums without making clear the limitations of cover, and the tool helps firms identify and address these imbalances before communications reach customers.

The tool also generates MI dashboards that track the fair value metrics the FCA monitors: claims ratios by product and segment, decline rates, commission-to-premium ratios, complaint volumes relating to value or cover, and renewal retention rates. This information supports ongoing monitoring between formal assessments and provides early warning of emerging value concerns.

Related Service

Our Consumer Duty implementation service provides insurance firms with expert support in designing, conducting, and embedding fair value assessments. We work with brokers, MGAs, and insurers to develop fair value frameworks that go beyond compliance and genuinely improve customer outcomes. Our approach is practical: we start with the firm's actual products, distribution arrangements, and customer data, and build a fair value assessment that reflects the firm's specific circumstances rather than applying a generic template.

For firms that need to improve their fair value position, we provide remediation support. This may involve renegotiating commission arrangements, redesigning fee structures, engaging with insurers on product terms, or withdrawing products that cannot be remediated. We help firms navigate the commercial sensitivities involved — fair value improvements often require difficult conversations with business partners — and develop transition plans that protect customer outcomes while managing commercial impact.

We also provide training for boards, senior management, and front-line staff on fair value principles and their practical application. Our training helps boards ask the right questions when reviewing fair value assessments, helps compliance teams design assessments that are rigorous and evidence-based, and helps client-facing staff explain value to customers in a way that builds trust and meets regulatory expectations. For firms preparing for FCA multi-firm reviews or supervisory visits focused on Consumer Duty in insurance, our preparation service ensures the firm can demonstrate genuine fair value delivery, not just fair value documentation.

Related Sectors

Fair value in insurance intersects with several adjacent sectors and regulatory frameworks. General insurance brokers face the broadest fair value challenge because they operate across multiple product lines — motor, home, travel, commercial, and specialist — each with distinct value dynamics. A broker that offers good value on motor insurance but distributes poor-value add-on products (GAP insurance, excess protection) is failing the fair value obligation even if its core product is sound. The FCA's multi-firm work has specifically targeted add-on insurance as an area where value failures are endemic.

The London and specialty market presents a different set of fair value challenges. Complex commercial and specialty risks involve multiple layers of intermediation — brokers, wholesale brokers, coverholders, and syndicate capacity — each adding cost. While the sophistication of the customer base may reduce some consumer protection concerns, Consumer Duty still applies where the end customer is a small business or micro-enterprise. Firms in this market must map their distribution chains and assess whether the cumulative cost of intermediation is justified by the value each participant adds.

Protection insurance — life, critical illness, and income protection — is an area where fair value assessment requires particular nuance. These products provide cover for low-probability, high-impact events, which means that claims ratios are naturally low without necessarily indicating poor value. The FCA recognises this but still expects firms to assess whether the terms of cover, the claims process, and the support provided represent fair value at the price charged. Protection providers that apply complex definitions, onerous evidence requirements, or slow settlement processes may be undermining value even if the headline cover appears comprehensive.

The embedded insurance market — insurance sold alongside non-insurance products, such as travel insurance with bank accounts or gadget cover with mobile phone contracts — has been the subject of sustained FCA concern. These products are often sold without meaningful demands and needs assessment, carry high commission loads, and have some of the lowest claims ratios in the market. Firms involved in embedded insurance distribution face intense fair value scrutiny and should expect the FCA to continue challenging arrangements where the customer is paying for insurance they did not actively seek, do not fully understand, and are unlikely to successfully claim on.