Borrowers are steering clear of a truly accessible policy plan, seemingly based on bad PR and lack of information. Barbara Cockburn asks why so many homeowners are avoiding MPPI Click here to download pdf
Homeowners are increasingly choosing not to protect their mortgage payments with a seemingly easy-to-arrange policy such as mortgage payment protection insurance (MPPI), which is designed to cover payments if mortgage borrowers lose their jobs through redundancy or illness.
The Post Office's financial services arm recently published research showing that while, in 2003, 33% of new homeowners took out MPPI, in 2004, the figure had dropped to 27%, and in 2005, the figure fell down to 25%. While the figure has not quite halved, the drop is still significant. There are currently 2.45m policies in force, which represents 21% of existing mortgages.
According to figures from the Council of Mortgage Lenders (CML), 481,400 MPPI policies were sold in the first half of 2003, representing 36% of all new advances. In the second half, the number of policies dropped to 444,700, representing 31% of all new advances. By the second half of 2005, the figure dropped to 273,500 MPPI policies accounting for 24% of all new advances.
In 2002, the Government launched the "sustainable home-ownership initiative" which encompasses both securing the ability to meet the financial commitment of regular mortgage payments and setting a target for 2004 whereby 55% of all new advances would have MPPI cover. These CML figures demonstrate that the current figures are wide off the mark.
Many industry experts put this down to the negative publicity the product has been getting in recent years.
Peter Richmond, Legal & General's general insurance business development director, believes the bad press mainly refers to payment protection insurance sold alongside credit cards and personal loans.
In 2004, the then regulator, the General Insurance Standards Council (GISC) was condemned for "failing in its duty to protect" MPPI policyholders because it was "ignoring" the "excessive" commission charged by intermediaries.
An industry expert said at the time that MPPI lines the coffers of intermediaries, and said the GISC was "more than happy to turn a blind eye to the charges sold by banks and building societies to unsuspecting consumers".
Product offerings
Legal & General offers a general insurance product which can be used in conjunction with a life policy. The accident sickness, unemployment cover pays out in the event of any of these for up to 12 months and the life product pays out on sickness for the length of the mortgage term.
Assurant Solutions' product – the Matrix – is a new entrant. Adrian Fowler, Assurant's head of marketing, says that the generic product needs lots of work to fend off the negative PR it has received. "The product's development should be about giving the consumer more choice," he says.
Richmond agrees and says that the product should be tailored to the individual customer which addresses the affordability of cover issue.
Fowler talks of short-term protection, but by using the same criteria as that of a long-term protection policy - with age-banding and gender considerations - to give the consumer value and choice. Age-banding, he explains, is important because a 50-year-old is likely to have a very different health risk profile to that of a 21-year-old.
"We have been working with several online providers who are keen to innovate the product and they are looking at this concept as well as offering payment holidays," Fowler says.
He recommends that IFAs attract new business by identifying that there is an opportunity within this marketplace, especially since the Government wants to encourage 55% take-up of the product as part of its sustainable home-ownership initiative. IFAs are well placed to educate the consumer about the value of MPPI by giving them information on price and cover.
He boasts that while most MPPI policies are a one-size-fits-all – the Matrix has 250,000 different variables and therefore can meet the needs of the consumer by tailoring the product to a client's individual needs.
He cites an example of a civil servant. Typically they have very good benefits provided by their employer. But if they were to take out such a policy, they could extend the deferred period so that it will not overlap with another policy that it has through work, such as income protection (IP).
He is convinced there are opportunities to increase sales in the market. He says that 80% of UK consumers have mortgages and two million are entering the mortgage market each year. The CML says that of those people who had mortgage arrears, 75% of them would have been covered if they had MPPI."
Ronnie Martin, principal at Adalta Consulting, says there is confusion surrounding the product. "People in the industry, such as intermediaries, say that it really means life insurance, whereas the consumer thinks it is to do with the payments they are making. So what does MPPI really mean?"
The industry is far too negative and argues that IP is better because you have full cover for your mortgage, while MPPI just works after 12 months or 24 months.
Despite the bad press the product gets, he defends MPPI, acknowledging that it is easier to arrange because there is no underwriting involved.
He explains that by taking out an IP policy, the consumer has to fill out a full medical application, IP is also more male oriented, and customers will find it difficult to get if they have a hazardous occupation and may find it less accessible because it is aimed at those within a higher socio-economic group, the professional classes.
Martin adds: "IP covers the consumer over a longer term while MPPI is very much a short-term product that will help the consumer out if they lost their job. People tend not to think of the long term. We may become ill but we don't want to think of the long term and there may be numerous reasons for this, such as affordability."
Some independent financial advisers are less inclined to support the product. Ruth Whitehead,
principal of Ruth Whitehead
Cont. p 36
Associates, says: "I'm not fond of it as a product at all. It only covers you
for a year, very occasionally two, and my understanding is that the statistics show that if you're off work for a year it's very unlikely you'll go back at all."
She adds: "It covers mortgage payments if you're ill or you've been made redundant. The implications of being ill for a long period go far beyond mortgage payments, and your whole income needs to be protected. Also, people are more pragmatic about being made redundant nowadays and are more likely to get another job. In my view, it's a lacklustre product sold by people who don't know much about health cover."
Still, other commentators believe MPPI has a bright future. Martin cites the UK's buoyant housing market, "which is bubbling along" as a good opportunity for the success of the MPPI product. People's needs are more apparent.
Agreeing with Martin, Simon Burgess, managing director of British Insurance, says: "The MPPI market is a huge untapped one. We have been concerned about affordability for younger people. The high cost of mortgages and housing means younger people often don't have money left to protect themselves."
The firm recently launched a new age-related MPPI product, entitled Best Insurance. In a statement at the launch, Burgess said that a 25-year-old buying a policy with the most expensive lender will end up paying £11,430 more than necessary - even the cheapest lender's policy results in a £5,940 over-spend.
"This is because of the over-inflated commissions, often in excess of 80%, that are taken by most mortgage lenders. In comparison, we take a comparatively modest 20%, allowing 70% of the premium to pay claims."
Advisers, he says, "should give a little more in terms of product information and value and take a little less commission. MPPI is a massively untapped revenue opportunity."
Barbara Cockburn is a freelance journalist
