What is stolen device protection?
Stolen device protection is an iOS feature which provides an additional layer of protection to a phone when it is away from familiar locations such as home or work. The additional protection is designed to protect your information by preventing an iPhone thief who has discovered your passcode from using your passcode to change your Apple password or to gain access to your passwords stored in Keychain. Several other important protections also apply. If stolen device protection is turned on, when your phone is away from familiar locations, all protected actions can only be performed with TouchID or FaceID and there is no passcode alternative. Furthermore, a second TouchID or FaceID is required after a one hour delay in order to change your password or access passwords stored in Keychain. The enhanced protection applies only when the iPhone is away from familiar locations. There is an option to enable the protection even at familiar locations. I recommend that you consider turning this option on only if there is a high risk of theft at one of your familiar locations.
Stolen device protection is turned off by default and I strongly recommend that you turn it on using the switch which you will find in Settings / TouchID & Passcode or FaceID & Passcode, depending on your iPhone model.
However, please don't turn it on until you have read and understood Apple's description of the stolen device protection feature.
Of course, even if you have stolen device protection turned on, you still need to take care to avoid others discovering your passcode. A thief who knows your passcode will still be able to make ApplePay purchases until you report your iPhone as stolen or cancel the relevant payment cards. You may report your iPhone as lost or stolen using the FindMy app on your iPad or Mac or the Find Devices app on your Apple Watch.This can also be done on someone else's Apple device or at at icloud.com on any computer, tablet or smartphone so long as you know your AppleID and password. Apple provides full instructions on reporting your iPhone as lost or stolen.