Mortgage payment protection insurance

Payment protection insurance has had a bit of a hard time recently and as a result, adviser confidence in mortgage payment protection insurance (MPPI) has suffered somewhat.

This is partly a result of MPPI being tarred with the same brush as loan payment protection insurance (PPI) as well as the bad press around single premium MPPI.

This is unfortunate because the concept of single premium MPPI is fundamentally good. It is the selling practices around loan PPI in particular that has tarnished the payment protection sector as a whole. As it stands, many believe PPI is too expensive, commission payments are too high and the product lacks transparency.

If borrowers are paying up front for a single premium product, then they would expect to get a substantial discount over and above the cost of an equivalent monthly priced product. If someone asked me to pay my car insurance for five years in advance then I would expect some kind of discount for doing that.

It could be argued that most people, if given the option of having a substantial sum added to their loan at the outset as a result of single premium insurance, or paying a reasonable monthly sum, would probably opt for the latter option.

We don’t think it is made clear enough at point-of-sale to borrowers just what single premium MPPI is all about and what the monthly premium alternatives are.

A ban needed?

Whilst I wouldn’t go as far as calling for a ban on single premium MPPI, I think there should be an overhaul of how the product is constructed, priced and sold.

I have heard talk about introducing ‘time and distance’ rules to the selling of single premium PPI as part of finance or mortgage arrangements. This would result in a break of up to 30 days between the sale of the two products and make the distinction clear in the eyes of the borrower.

This would also ease Office of Fair Trading (OFT) concerns that consumers wrongly see PPI as an integral part of a loan rather than a separate product which they, or their adviser, can shop around for. Intermediaries are in a far better position than banks or loan providers to do this because they can offer their clients a choice of products from the whole market. Unlike the PPI sector, mortgage intermediaries compete head on with the lenders for MPPI business creating a vibrant and competitive market that results in better value products for the consumer.

Intermediaries should be proud of the role that they play in creating this competitive environment and continue to do all they can to drive up penetration. Intermediaries contribute only 25 per cent of sales of MPPI despite introducing 70 per cent of new mortgage business and our research shows the overall market was in a bit of decline last year.

Our figures estimate that by not selling general insurance (GI) brokers could individually be missing out on £35,000 or more a year. When calculated over a five-year period, GI accounted for some 42 per cent of the total income opportunity around a mortgage sale.

The reasons for the fall in sales, uncovered by our recent research, include Financial Services Authority (FSA) regulation making the advice process longer, media speculation about the value of PPI, a relatively flat housing market and also some degree of borrower indifference.

But intermediaries can address this situation, in particular the attitude of borrowers, by explaining how many good MPPI products there are and how vital the cover they provide is. Brokers should be selling MPPI with great confidence as there is hard evidence it works. Figures from Omnicheck reveal that 694,000 claims were paid out during the period 2000 to 2004.

Horror stories

But I can understand why intermediaries may be a bit wary of pushing MPPI too aggressively because of fears of being accused of mis-selling, particularly in light of the recent media horror stories on PPI.

Just a few days ago on the radio I heard the first advert, from a company called More Advice, encouraging borrowers to complain if they think they were mis-sold accident, sickness and unemployment insurance with their loan. In today’s claims culture this is not what intermediaries want to hear and is probably the start of more to come.

But rather than focus on doom and gloom, advisers should be educating their clients to some of the great deals available. They should also have confidence that they are leading the way in growing the competitive monthly premium MPPI market that unlike the loan PPI market, brings such good value to mortgage borrowers. Advisers must not forget that many clients have a real need for this valuable protection.

In the last year, more providers have entered the market, adding to the vast range of competitive insurance products that exist.

At Paymentshield we’ve led the way with a number of product innovations, such as free periods for clients when they don’t have to pay premiums and for advisers we introduced annual indemnity commission.

Like all providers, we’re constantly looking at what further improvements can be made.

One area being examined is the idea of extending benefit periods to cover the full term of the mortgage.

Another issue being investigated is why borrowers get into arrears with a mortgage in the first place and how MPPI can be applied in a wider range of situations to help prevent this.

Any number of unforeseen circumstances can force people to stop working and unless they are lucky enough to have a massive nest egg to fall back on, they will benefit from taking up MPPI.

Encouraging take-up

MPPI products should be tailored to help the broker look at a client’s situation in a more holistic manner.

Life events such as having a family or getting divorced can lead to people falling behind on mortgage payments. Providers like ourselves are working to make MPPI more relevant to consumers changing lifestyles and protect against unexpected changes.

We’re also doing what we can to make the sales process as easy as possible for the adviser. Our Inertia quotation software is designed to ease the burden of compliance and let the intermediary concentrate on meeting their clients needs rather than getting caught up in masses of administration and paperwork.

At the touch of the button it lets intermediaries produce price and product quotations for MPPI and electronically sends the applications direct to our policy underwriters.

But more work is needed to encourage the take-up of MPPI to protect borrowers and generate more income for intermediaries.

The Council of Mortgage Lenders (CML) and the Association of British Insurers (ABI) are both looking at what can be done to ensure borrowers are covering themselves adequately.

The government’s Sustainable Home Ownership Initiative five years ago, in particular the ABI/CML baseline specifications, helped bring MPPI on leaps and bounds.

I believe the government should revive this initiative, which petered out when it realised it was not going to hit the target it had set of 55 per cent take-up of MPPI. The government’s aim was for the industry to hit this mark by the end of 2004 and have up to 5 million borrowers insured, but it reached less than 30 per cent.

Rather than accept failure, the government and industry must come together to look at what else they can do and it’s up to the industry to lobby for some action rather than just moan about the situation. Some sort of state intervention is needed to take MPPI to the next level and ensure all borrowers are adequately protected.

Nobody would like a nanny state so I wouldn’t argue for MPPI to be compulsory, but the state must realise it does have a role to play to ensure borrows are protected, after all, increased private provision results in a lower reliance on state provision.

In the meantime, the industry must innovate and we, at Paymentshield, will be building on our position with some significant structural changes to our MPPI products planned for this year.

And intermediaries should realise they are in pole position to grab a larger share of the MPPI market as they can advise and recommend from a far more competitive products from a wide range of providers.

All in all, this should be a good year for MPPI with providers like ourselves looking to launch new products and add to the features of existing ones.

Graham Boulger is group commercial director at Paymentshield