Have sales of mortgage payment protection insurance been affected by the introduction of general insurance regulation earlier this year? Johanna Gornitzki investigates Click here to download pdf
Mortgage payment protection insurance (MPPI) has, since the turn of the millennium, enjoyed impressive growth. Seen as a low-cost product, easily purchased by simply ticking a box, MPPI was made readily available to the flood of first-time buyers entering the booming housing market – a winning formula that saw this market going from strength to strength.
However, this trend came to an abrupt end in 2004. Sales suddenly slumped from 926,100 to 731,700, with 23% of all mortgages in the UK being covered by MPPI down from 24% in the previous year, according to recent figures from the Council of Mortgage Lenders (CML). The outlook for this sector does not look too bright either as industry experts predict that this latest fad is here to stay.
Poor sales
There are a number of reasons this sector has failed to live up to its limited successes. The ever-increasing property prices have forced first-time buyers – who are the ones most likely to opt for MPPI – out of the market, while there has been increased activity in buy-to-let sales and remortgaging levels – both areas of low penetration for the cover.
Other reasons have also played an important part in the poor sales result. "People may have other protection in place, may feel that they cannot afford it or are not prepared to pay the premiums. Or maybe they have become complacent because of the benign conditions in the housing market, the economy generally and the labour market," says Sue Anderson, head of external affairs at the CML.
Anderson also thinks the bad press the cover has been hit with recently may have had a direct effect on sales. "The relatively poor public image of payment protection insurance generally, which tends to be applied to mortgage payment protection insurance as well, may also have contributed to the decline," she says.
Is this criticism justified? According to statistics published by the CML, just under 91,000 new claims were registered in 2004, and of those, 89% of claims were successful.
"Moreover, less than 1% of complaints received by the Financial Ombudsman Service relate to payment protection insurance," says David Lane, regional manager at Western Europe of Genworth Financial.
However, several industry commentators have voiced grave concern that MPPI has been sold to customers who do not understand the cover at all, with many ending up buying it without fitting the qualifying criteria – a mistake that does not tend to be discovered until the policyholder submits a claim and it is too late to change the policy.
These individuals, who should never have been sold the product in the first place without fully understanding it, end up not being able to claim at all and therefore do not tend to be included in the claims statistics, argue advisers.
The data currently available may therefore not necessarily mirror the reality of MPPI claims. Another point worth noting is that customers buying MPPI without advice – which is said to be the case when it comes to the majority of MPPI sales – have also forfeited their rights to the Financial Ombudsman Service (FOS) should they buy an unsuitable product as they have no one to blame for mis-selling the product.
The Financial Services Authority (FSA) has picked up on the recent criticism and has launched an investigation into the sale of payment protection insurance, including MPPI, after suggesting that it may pose a higher risk to consumers. The report is due out later this autumn.
"We are looking at whether the selling processes have been bridging on what is unacceptable. If we do highlight failings, we may do a follow up investigation next year," reveals Robin Gordon-Walker, spokesman at the FSA.
Inextricably linked with the bad reputation is the fact that MPPI is often compared to its sister product, income protection (IP). The latter offers comprehensive long-term protection that usually lasts until retirement, while MPPI only covers the cost of mortgage repayments for a typical period of 12 months.
Ronnie Martin, consultant at Adalta Consulting, thinks it is wrong to compare these two protection products on a like-for-like basis. "People try to draw comparisons between income protection and mortgage payment protection insurance, but they are not comparable products. The claims criteria and the processes are completely different. And while income protection is not a mass market product, mortgage payment protection insurance is," he says.
Still, it seems as if the two products are competing with each other, with MPPI sales to a large extent outdoing IP. This is mainly due to three different reasons. MPPI is anecdotally seen as the cheaper option of the two, making it more accessible to the larger population. The cover is also usually sold alongside a mortgage sale, which makes it an easy sale, says Peter Chadborn, principal at Chadborn Baker and Kearle.
Thirdly, IP has always been depicted as too complex to sell to customers whereas the one-size-fits-all MPPI cover has been seen as a simple and straightforward product to sell, he adds.
Higher risk
However, following the introduction of general insurance and mortgage regulation, sales of MPPI have become more complex, and while prior to regulation it was sold by simply ticking a box, intermediaries now have to tell clients about what alternatives are available.
Although it is still too early to tell whether regulation has dented MPPI sales, it is clear that the new rules have taken away some of the product's simplicity. The cheap price of the product could also be disputable argues Chadborn, revealing that he has done some comparisons and found that it was not less expensive than IP.
Considering the two main reasons for buying MPPI over IP seem to be unfounded, this begs the question whether MPPI is a viable product at all. Despite criticising the cover, Chadborn thinks it is. "There is certainly a place for the product in the market, although I think it is oversold," he adds.
Indeed, there are a number of circumstances where MPPI could prove to be a better deal. One is when a customer wants a reduced cover, in particular when cost is an issue, and another is when MPPI is the only option for a client who would otherwise have suffered from a huge loading due to their occupation.
In general, MPPI also seems to work well in combination with IP. For instance, an IP/MPPI combination could be a perfect solution for people who would like immediate cover. While it usually takes an average of three months for an IP application to go through, an MPPI policy gives instant cover and therefore should be an option to consider while waiting for the IP policy to come into force. Combining these two protection products could also prove to be a cheaper option than, for example, relying solely on IP.
"One idea that I have seen being used quite a lot is getting mortgage payment protection insurance and then getting an income protection policy with a 52-week deferment period. Although it depends on an individual's circumstances, it could work out to be a cheaper option," says Roger Edwards, products director at Bright Grey.
Positive outcomes
Providers are aware that the short period of cover that MPPI offers is one of the major problems with the product, as many consumers are unaware that it only offers temporary protection, and there are indications that an MPPI product with a longer payment period is about to be launched into the market. There are even suggestions that an MPPI/IP hybrid may be on the cards. Whatever innovation may be launched, it will surely be applauded by both providers and intermediaries as a step in the right direction.
Looking ahead, the FSA enquiry should, together with the new regulatory regime, hopefully put an end to the poor reputation the MPPI market so far has been tarnished with.
Agreeing with this sentiment, Lane says: "We can only see positive outcomes from the new regulation. With the introduction of statements of demands and needs, we can be confident that products are being matched to individual requirements and that borrowers understand the product that they have bought."
What impact this will have on sales, however, is too early to tell. One thing is certain though, the next twelve months will see the MPPI market undergo a lot of changes that is likely to see it either sink or swim.
