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Inside insurance

Angela Faherty

September 29, 2007

The payment protection insurance (PPI) sector has been operating under a cloud for some time now. Regulatory investigations have tarnished both products and providers and unfavourable press headlines continue to blight the market.

Much of the criticism is directed at failings, both perceived and real, to do with price and cover. Now there is an attack on another front, with the credit crunch asking real questions of product providers and intermediaries.

Lenders have known for some time that they will need to re-adjust their books in the light of the adverse publicity that has plagued this market. But now their commitment to the sector itself will be tested as PPI may no longer be the cash cow it once was and some lenders may figure they could do without the intrusion of the regulatory microscope with the possibility of yet more damaging headlines.

Not all doom and gloom

But it is not all doom and gloom. The criticisms have forced the sector to take a long hard look at itself. Over the past year providers have been asking if they are developing and delivering products that actually meet market demands. This desire to create more flexible products aimed at target audiences has seen the introduction of new found innovation in the sector and some very competitive offerings.

Unfortunately, many of these products have remained a well kept secret to many intermediaries who have stuck with the tried, and now not so trusted, method of linking the protection product with the originator of the loan or mortgage.

Following regulation, and the fact that the regulators have now put the PPI sector under close scrutiny, if you do decide to go with the lender’s products, you must be able to demonstrate that this was the best decision for the individual customer. In many cases, going down the road of the old single premium product added to the loan will be difficult to justify.

This is especially true in the mortgage arena, where there have been great strides with products in the mortgage payment protection insurance (MPPI) market. The introduction of monthly rated, fully age-banded MPPI products has been a key development in this market.

This has resulted in vastly reduced premiums for younger policy holders and these tend to be first-time buyers and therefore most at risk in the current economic climate. Age-banded MPPI products can cut the cost of cover by nearly half for a 25-year-old in comparison with products sold by the lenders on the high street and these should be first up for consideration before any other policy.

Standalone alternatives

Some customers with single premium loan products are now being encouraged by others to cancel, receive a refund and then buy a cheaper monthly standalone alternative. While this seems sensible, there is a problem with this practice. While most policies sold alongside personal loans cover the policyholder for full life, accident, sickness and unemployment (ASU), typically the standalone facilities are for ASU, only meaning there is no life cover to pay off the loan if the customer dies. They are therefore in effect being asked to transfer to a worse – albeit cheaper – product.

There are products available that include the flexibility to build monthly premium PPI products that will still include life cover designed to pay off the loan.

Researching the market

Intermediaries should take the time to research the market and in doing so, serve their clients best and meet the regulator’s ‘Treating Customers Fairly’ guidelines. The best product providers will also have a web-based electronic system to help intermediaries sell this cover.

A combination of high interest rates and the credit crunch will see borrowers come under intense pressure . Mortgage payments are already making up the biggest share of take-home pay for 17 years, according to figures from the Royal Institute of Chartered Surveyors (RICS). This puts the first-time buyer in a very difficult position in having to spend up to five times more to get on the property ladder than a decade ago.

At the same time, new research conducted by the Post Office revealed that if they were to lose their regular salary, only 50 per cent of first-time buyers would be able to meet their mortgage repayments for six months. Despite this, 44 per cent of the respondents questioned in the survey said they felt ASU PPI was still too expensive. But one in 20 of those questioned said they would have to sell their house if they lost their job.

With RICS predicting that the number of repossessed homes is set to double to over 45,000 next year as mortgages become more expensive, the need for insurers to develop MPPI products that are tailored to meet clients’ specific requirements and for brokers to recommend these products to borrowers is clear.

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