Brokers might be forgiven for thinking that insurers are no longer interested in selling mortgage payment protection policies. Since the beginning of the year, we’ve seen a number of insurers and providers making changes to the availability of MPPI with some withdrawing from certain sectors of the market altogether. Others have taken less drastic steps but are constantly reviewing their prices, distribution channels and terms and conditions.
These moves have not gone unnoticed by the national consumer press and have led to banner headlines screaming ‘Insurers squeeze job loss victims’ (The Independent 14.4.09) and consumer bodies including Which? accusing insurers of behaving unfairly. Such statements are hardly likely to encourage a homeowner to think about taking out MPPI. So what is going on?
Claims up
It’s no secret that the levels of unemployment not seen since the early 1990s have seen claims go through the roof over the past year. In January, the Association of British Insurers revealed that unemployment claims on MPPI were up 118% on the year.
The most recent government figures regarding the number of people unemployed represents the largest quarterly increases in the unemployment level and rate since 1981. The claimant count has not been higher since August 1997. The level of redundancies for the three months to March 2009 is the highest figure since comparable records began in 1995.
As a result of what is happening in the wider economy, the total number of claims that we’ve experienced at Assurant Intermediary has increased by 166% over the past year. Unemployment claims accounted for around half of all claims at the beginning of 2008 and now account for almost 90%. No doubt, others are experiencing similar volumes.
But it’s not just the high level of unemployment that is impacting pricing, terms and conditions and availability right now. Nearly every factor ASU insurers take into account when rating their products has changed considerably over the past twelve to 18 months. They have little choice right now but to increase prices as they have to maintain an adequate insurance pool in order to meet future claims.
Underwriting
Where have the actuaries and all their modelling tools been and what have they been up to, I hear you cry. To understand how we’ve reached the current state of play, I think we need to understand how the product itself has been traditionally underwritten.
At its very essence, an MPPI policy is a temporary or short-term contract. The rate is determined by the claims experience of the insurer at that particular time as opposed to long-term income protection or permanent health insurance which has to take a view over a far greater period of time and so is priced accordingly.
Perhaps it is worth drawing a parallel between guaranteed and reviewable life term assurance. Guaranteed cover provides the consumer with certainty of budget – the price never goes up and never goes down – whereas a reviewable policy is pitched at a lower rate but this is not guaranteed. The insurer reserves the right to increase the price depending on the claims experience at the time.
Peaks and troughs
Clearly actuaries have to plot what they think will happen over the course of time based on historical fact for both types of policies, but they are far more vulnerable to peaks and troughs in the short-term. They have to respond to a situation and effectively make an assumption on the run. This can of course result in significant hikes in premiums as we’re experiencing now – but it can also lead to price reductions as was the experience in the 1990s when rates were actually reduced at one point given the low volume of claims.
This cumbersome approach is clearly not ideal but it is mainly a result of the one-size-fits-all product that has traditionally been sold since MPPI was first introduced to the UK back in the 1970s, and a downside of trying to create a simple offering.
Claims
It also impacts the way that claims are dealt with. We’re currently seeing insurers reviewing and in many cases tightening their terms and conditions. Some have reduced or capped the maximum monthly benefit available while others have extended the claims waiting period. It’s also becoming the norm for insurers to apply more rigorous testing at the point of claim. For example, policy definitions of ‘reasonable’ or ‘prior’ knowledge of impending unemployment are being strictly adhered to. At the turn of the millennium, it was likely that most insurers would have accepted a claim for redundancy without too much digging. Now the reverse is true. Insurers are demanding far more evidence that the claimant had no reasonable prior knowledge of their redundancy, and there are even companies out there now supplying them with data as to firms in the ‘danger’ zone.
Consumer bodies have long argued that the claims failure ratio for payment protection insurance is horrendous. I’m not saying that insurers are turning down valid claims – the fact that some 80% of all claims are settled is by no means trivial – but shouldn’t the industry be working towards ensuring that figure moves closer to 100%? The way that the product has traditionally been underwritten and packaged has perhaps made it more vulnerable to a high level of declined claims or consumers not really understanding what they can claim against. Firms have historically made a play on the fact that it is underwritten at the point of claim, but this is now working against them and has created a vicious backlash from regulators and consumers alike.
So what direction is MPPI taking?
Despite the challenges that insurers are facing in managing the current situation, there are signs of innovation and some are re-entering certain sectors of the market again. However, my concern is that little is being done to actually address the way the product is priced which will only leave it vulnerable to future peaks and troughs depending on market conditions.
As Assurant Intermediary, we believe that payment protection products have got to be more closely aligned with the way that other personal insurances are rated. The right risk has to be priced in the right way. In my opinion, we have to move towards underwriting the product at the point of sale and creating annually renewable policies. Such a move should mitigate the risk of future significant price fluctuations. Yes, prices will go up – but they will not be applied with a broad brush. Low risks will pay the right price according to their individual exposure, whereas the high risks will experience a higher increase. This is no different to what happens in the motor and home insurance markets and an annually renewable policy provides the consumer with the opportunity to shop around as they already do for motor, home and travel cover.
I also believe that a move in this direction would lead to a far higher percentage of claims being paid. If the risk is underwritten at the point of sale, then the risk of a high decline rate on claims is vastly reduced. The policy is tailored to the individual’s risk profile and therefore it is unlikely that there would be a situation against which the consumer couldn’t claim.
Current government initiatives to prevent homeowners losing the roof above their heads are clearly not working. Arguably they were never designed to offer any real support, rather generate a few positive political headlines. While there may be some green shoots of recovery, the shadow of unemployment raising the threat of repossession will loom over many consumers for some time to come. When the shadows lift, consumers still face the ever present risk of accident and sickness. Insurers and distributors have to provide consumers with a tool to protect their home that is both affordable and does what it says on the tin. There simply isn’t a viable alternative.
