Mortgage Payment Protection Insurance has escaped the harsh criticism of PPI yet the product is in any case evolving away from its roots, says Edward Murray
Investigations into the payment protection insurance (PPI) market have been non-stop in recent years and since Citizens Advice lodged a super complaint with the Office of Fair Trading (OFT) in September 2005 the market has been under constant scrutiny.
The OFT, the Competition Commission (CC) and the Financial Services Authority (FSA) have all run their microscopes over the PPI market and it has been found wanting in many regards.
The CC is currently consulting with the PPI market over the faults it has uncovered and the remedies it wants to introduce to address them (See Box One). Unsurprisingly these are being contested and Barclays has appealed to the Competition Appeal Tribunal and will have its case heard between the 7th and 10th of September.
While the MPPI sector had avoided the worst of the criticism thrown up by these investigations, it has found itself slap bang in the middle of the FSA's cross hairs in recent weeks, after a letter was sent by the regulator to a number of distributors in the market.
The correspondence questioned the legality of the 30-day clause in many policies, which allows premiums and levels of cover to be changed at the drop of a hat and without a specific reason.
According to the regulator, this clause contravenes the Unfair Terms in Consumer Contracts Regulations 1999 and also raises a number of issues around its treating customers fairly principles and disclosure requirements.
Where this clause has been called upon to raise premiums or change levels of cover, the FSA states in its communication: "We expect any rise in premiums to be refunded to existing customers, and any decreases in cover to be reversed."
The letter goes on to say that the regulator does not expect existing MPPI customers to face any change to the initial terms of their cover in the future and that where customers have cancelled policies because of unfair variations, distributors should look at reinstating cover at the premium that was originally agreed.
The implications for the MPPI sector are massive and if the regulator is successful in securing these demands, the administrative and financial burden will be felt far and wide throughout the industry.
Giving some idea of the size of the issue, Alistair Hardie, managing director at FirstAssist Insurance Services, comments: "I would expect the number of those affected to get into seven figures."
While FirstAssist Insurance Services says it has no intention of altering the terms offered to existing customers, Hardie says he knows of one company alone that has changed premiums for over 500 000 of its standing customers.
Whether the FSA achieves remedial outcomes for all of the MPPI customers affected by changes sanctioned by the 30-day clause remains to be seen and certainly there will be challenges to the regulator's ability to question the legality and fairness of the clause and insurers' right to use it in this way. As Hardie says: "There could be quite a protracted debate with the FSA over this."
Whatever happens, the reality of the situation is that ongoing investigation into the MPPI and wider PPI sector has seen many providers and particularly distributors cut back and even put a stop to their activities.
The appetite for business has been further reduced by a rising tide of unemployment and Hardie believes the availability of short-term protection products is at its lowest ebb for 15 years. However this comes at a time when the profile of MPPI is incredibly high and client demand is soaring on the wings of a faltering economy and a struggling labour market.
So while many IFAs may have traditionally given MPPI a wide berth and may be tempted to continue doing so in light of ongoing issues in the market, there is an argument that says they should be working harder than ever to meet the current demand and seek out the new product offerings that meet past concerns head on and deliver a better and more flexible solution to clients.
Certainly this is what Liz Gill, a consultant at broker Mortgage Sorter Ltd is doing: "Clients are a lot keener to have the discussion. In the past you had to talk about MPPI and in a lot of cases clients would just dismiss it. Now they are asking me about it."
This heightened interest and awareness also means it is easier to approach existing clients who may not currently have MPPI. Although many providers have restricted the unemployment cover they offer and will only give insurance to those who are actually remortgaging or moving house, Gill says providers like Paymentshield are providing policies even for those who are not changing their mortgage.
She adds: "We have been going back to clients, particularly with the new policy that Paymentshield has brought out... we have had a good response on that."
Looking past the current pressure being applied to the sales processes surrounding MPPI policies, the future is likely to bring a sea change in the way underwriters approach the market.
Sandy McPherson, head of marketing at Paymentshield, believes there will be a growing move to underwrite risks individually and comments: "I think it will go the way of other protection policies where occupation does have an impact. I think there will be a more risk based approach in the future."
This is an opinion mirrored by Justin Harper, head of intermediary marketing at LV= and he says it is part of the reason why the insurer has been able to offer its new long term Mortgage & Lifestyle Protection product at rates which are comparable with other short term policies in the market.
Unlike the 24 month benefit limit for typical MPPI policies, LV= offers cover for as long as it is needed or until the policyholder retires. Nor can the long-term contract be changed at the whim of the insurer, giving policyholders peace of mind over the premium and level of cover over the life of the policy.
In essence, this is a traditional income protection styled product in the MPPI space in a bid to improve the cover on offer without blowing the price it comes at out of the water.
Harper comments: "The average income protection claim is seven years and so having only two years of cover is a risk."
By underwriting each risk individually and focusing attention on white collar workers, who are reasonably fit and under the age of 45, Harper says it is possible to keep prices for this target market down. Those who fall outside this group will not be refused cover, although Harper says it will cost them more, in line with the added risk they represent.
This flexible approach has also been taken by Pioneer Friendly, which has recently launched a product called Bills and Things. Again the idea is to provide a policy more along the lines of a traditional income protection policy, but this time the cover is only offered over 12 or 24 months.
Although the policy offers no unemployment cover, it does give an indication of how providers are now seeking to exploit the demand in the MPPI market but move away from linking the protection purely to that debt.
Harper says he expects to see a mix of long-term and short-term products compete in what has traditionally been the MPPI space, and offer the flexibility to cover a lifestyle rather than simply a mortgage.
The MPPI market remains in flux, and there are still investigations to conclude and issues to resolve. However as we move forward it seems the market will move further and further away from the traditional policies that were linked to a mortgage and only provided short term cover.
Increasingly there will be more flexibility in the covers available and a trend towards underwriting risks individually. Getting the best from such a market will require expert advice and this is an opportunity advisers should begin to take advantage of now.
