MPPI rates remain competitive, however tighter underwriting on unemployment cover could be on the cards if the economic slump continues, writes Kirstie Redford
The mortgage payment protection insurance (MPPI) market has, like many other markets, been affected over the past 12 months by the terrorist attacks in the US last year.
With the resultant recession hitting many City of London firms and massive redundancies announced by many of the world's largest employers, it is the unemployment element of cover that has caused underwriters the most concern.
Insurers have had a tough job on their hands trying to cover the heightened unemployment risks in many industries while continuing to make cover seem affordable and attractive to the majority of borrowers who still do not have cover.
Despite the best efforts of the Council of Mortgage Lenders (CML) and the Association of British Insurers (ABI) to increase take-up of MPPI to 55% of homeowners by 2004, the figure stood at less than half this target figure at the end of 2001, with just 2.5 million policies in force ' representing only 22.5% of outstanding mortgages.
In March last year, the ABI published research carried out by NOP Financial concerning consumer attitudes to MPPI. It found that those who had made a claim on their policy were overwhelmingly satisfied with both the payout and the smooth running of the process, with almost 75% of those claimants saying the process had been easy.
Worryingly, the research also revealed that one in five consumers believe they can rely on the State to meet mortgage payments if they are unable to work. As most advisers will know, this is not the case and even if borrowers qualify for support, they may have to wait nine months before benefits kick in. Judging by the slow uptake of new policies it seems that attitudes have changed little since this research was conducted.
A survey conducted by Birmingham Midshires in August this year revealed 22% of people in the UK could face financial difficulties should they experience a lifestyle change such as being unable to work. A total of 81% of those surveyed said they would be unable to support their family if they became unemployed.
Tim Hague, head of savings and investment marketing at Birmingham Midshires, says: 'These findings highlight the potential difficulty many of us could run into if an extraordinary expense occurred. Most of us could be doing a lot more to make sure that a financial cushion is in place.'
Recent data from the CML shows that mortgage arrears and possessions fell in the first six months of this year. It put the outcome down to low interest rates and rising property prices. According to its data, the number of properties taken into possession was 6,480 ' the lowest figure since 1984. Possessions were found to be 12% lower than in the second half of 2001 and 35% lower than the previous 12 months. The number of mortgages in arrears for six months or more also fell to 60,000 ' the lowest proportion of mortgages since 1982.
However, during the same period mortgage rates have been historically low. According to the CML's director general Michael Coogan, we may well see an increase in arrears if economic factors change. He urges borrowers not to be complacent.
'These figures are a testimony to lenders' commitment to sustainable home-ownership and the benign economic conditions,' he says.
'However, the current volatility of the stock market makes the economic outlook more uncertain. Borrowers have enjoyed a long period of continuing improvement in arrears and possessions, which has been extended by low mortgage rates. But the trend could be reversed if we have rising unemployment in the next 12 months.'
Coogan continues: 'Borrowers often over-estimate their ability to pay their mortgage if they lose their job and now is a good time to take stock. Sales of insurance to cover mortgage payments are rising but more people need to take cover for a rainy day if we are to avoid an increase in arrears in the future.'
Making provision
It appears that underwriters are already making provision for the CML's prediction. Although unemployment as a whole has not risen too fiercely over the past year, it has hit certain industries hard. If unemployment is expected to rise over the coming year, insurers are likely to take cover.
Although products still appear competitively priced, action is being taken. The key for advisers when looking at products is to skip past the headline rate and find out whether excess periods have been lengthened or certain occupations excluded.
Ted Yorke, managing director of Berkeley Alexander, said the last 12 months has seen underwriters tightening their criteria for applicants in particular occupations. This is a direct result of the economic downturn experienced in the aftermath of the events of 11 September 2001.
'Underwriters are hardening their attitudes to the risk of unemployment. This is not obvious from any rate changes, but some insurers are imposing upper limits on benefits and introducing longer excess periods to protect against known redundancy. The IT industry has not been popular over the last year, neither have insurance staff or general service workers, such as those in banking,' says Yorke.
Insurers have always had to protect themselves against known redundancies with new applicants. Initial unemployment exclusions for new customers are 120 days for some providers. If you compare this figure with the average exclusion periods for existing policyholders, the risk gap becomes apparent.
Cassidy Davis Group's ASU Care excludes for 120 days for new customers, but only 30 days for existing policyholders. Both Legal & General and Birmingham Midshires have also extended the exclusion period to 120 days for new policyholders, whereas existing customers get away with just 60 days. In fact all providers taking part in the survey asked a minimum of 60 days initial unemployment exclusion for new customers. With more redundancies expected over the coming year, these exclusion periods show no sign of abating and could be set to grow.
Other indicators of tightened criteria for unemployment cover can be seen in the length of benefit periods offered by providers. Norwich & Peterborough, for example, offers 24 months' benefit for accident and sickness cover on its Safeguard product, but cuts this to 12 months for unemployment cover.
One development in the market which looks likely to continue is the inclusion of more add-on benefits on MPPI products.
Berkeley Alexander recently launched a product, Mortgage Guard, which has the added benefit of legal cover attached to unemployment cover. This provides up to £50,000 cover for unemployment disputes and death or injury. Helplines offering services as varied as tax advice to veterinary assistance are also included.
Additional benefits
Yorke predicts more providers will soon be developing products with add-on benefits as consumers become more savvy about how these benefits work and the value they can offer.
'We will see more products that are not specifically mortgage-related, such as cover for people who are renting property. Longer benefit periods, over 24 months, and other add-ons such as help lines and support services will be more frequently seen,' he says.
Indeed Berkeley Alexander offers a counselling service with its unemployment cover, which helps policyholders deal with the daunting reality of being out of work. It helps policyholders with everything from writing an effective CV to searching for a new job.
According to Yorke, this has been a great success. 'Customers have really noticed the benefits of the service and we have received many letters from satisfied policyholders thanking us for the help,' he says.
Kay Martin, head of creditor development at Norwich Union, agrees that add-on services will be a growing trend. She also cites flexibility and portability as features that will soon become standard on products.
'We are keen to expand our claims management with more rehabilitation services aimed at helping people get back to work. Flexibility is also key. Products now allow customers to mix and match benefit periods to make plans more individual to meet customers' needs.
'Research we conducted among customers also found that being able to take the product with you when you remortgage is popular. More portability in products will be seen in the future,' she says.
Norwich Union now offers individually rated MPPI through its direct sales force. For young, healthy applicants in low-risk occupations, this could bring premiums down significantly. According to Kay, the provider may expand the product to be sold through intermediary channels, so this could be a product to look out for.
Pricing issues
When it comes to price, there has been little change over the past 12 months. However, there is a significant price difference between providers. According to table two, the cheapest ASU policy stands at £4.99 per £100 of cover with 12 months' benefit. This rate is quoted by three providers, Berkeley Alexander, Nationwide and Norwich Union.
Standalone unemployment cover remains more expensive than standalone accident and sickness, again reflecting the added risk of redundancy. The cheapest unemployment-only cover was found to be Coventry Building Society's plan, with cover costing £3.10 per £100.
Three providers ' Legal & General, Norwich Union Healthcare and Scottish Provident ' included in the survey also offer mortgage income protection products (see tables four and five). This type of protection differs from traditional income protection in that it offers cover for a percentage of mortgage repayments, rather than the applicant's full monthly income. Unlike MPPI, cover can extend to the end of the mortgage term.
Income protection is increasingly being offered through menu products to offer customers full lifestyle, rather than just mortgage, protection by incorporating other cover such as critical illness into the plan. However, standalone income protection products aimed at covering just the mortgage are still available and can offer the best solution for some clients.
Tailor made
According to Nick Homer, product marketing manager at Norwich Union Healthcare, some mortgage income protection products can dovetail with MPPI plans to produce cost-effective long-term protection.
'These products are tailored so that they protect the mortgage. As the amount of cover is reduced from traditional income protection plans and mortgage holders are seen as a better risk, premiums can be reduced significantly. If clients already have short-term ASU in place, they can extend the deferred period on their mortgage income protection plan to coincide with when cover runs out, creating smooth, continuous protection,' he says.
At current rates, customers are still getting a fair deal with MPPI products and although providers are moving more towards menu-based products to encourage customers to opt for comprehensive protection which extends further than mortgage repayments, it is still better than having no protection at all.
Application processes remain quick and simple with a tick-box mentality, meaning minimum hassle for advisers. The only element that could rock the market is if the economic downturn suffers a further slump and unemployment rises. Rates are unlikely to be affected, but it appears it would be wise to keep an eye on exclusions on unemployment cover over the next 12 months.
Kirstie Redford is deputy editor
