Protect and survive

Nia Williams

July 5, 2008

My eyes are witnessing something amazing.

Great-hearted Trojans I’ve just slaughtered

will rise again, up out of murky darkness,

if this man’s avoided death, returned like this,

after I’d sold him off in sacred Lemnos.


The Hero of Homer’s The Iliad is dumbfounded at the resilience of the Trojan army as he does battle with them on the river Xanthus and how they appear to have come back even stronger than before.

Like the Trojans, the mortgage intermediary sector is under attack on many sides. The supply store in the form of the packager sector is being decimated while the brokers’ armoury has been vastly reduced as lenders pull deals left right and centre. And then there is dual pricing. This siege is been played out on a theatre that is already littered with casualties and where the Financial Services Authority (FSA) governs the rules of engagement, often seemingly to the detriment of the broker.

The economy

The economy was already starting to slow down when the credit crunch arrived to produce a very unwelcome double whammy. Suddenly the engine of cheap credit and rising house prices, which had sustained the consumer boom for the last ten years, stalled. This coupled with rising fuel and commodity bills has winded the British consumer. Indeed, two thirds of Britons already believe that the country has moved into recession, according to the British Retail Consortium.

As far as the housing market is concerned, once people become concerned about falling prices, the situation tends to become self-fulfilling. It is the same process that drives volatility in the stock market, being as much about sentiment and emotion as underlying economics.

House sales slumped to a 30-year low in May, raising fears that the downturn could become a crash. Chartered surveyors reported that an average of 17.4 transactions had been completed each month between March and May, down from 18.5 in the three months to April.

All very depressing. But like the Trojans, those brokers that manage to survive will come back even stronger then before and in a position to grab a much larger slice of market share.


But how to ensure survival in such a hostile business environment? The first thing to say is that it is not all doom and gloom and there are some opportunities out there for boosting, or at least maintaining your current revenue position.

For starters there are around 1.4 million borrowers due to come off fixed rate deals this year according to the Council of Mortgage Lenders (CML). That offers plenty of opportunity in the remortgage marketplace. Ironically, here the credit crunch can play out in the broker’s favour as many homeowners will be shocked by the interest rate rise their current lenders will be inflicting and will look to brokers to source the best deals on the market for their remortgage needs.

And while it is often stated that first-time buyers are the lifeblood of the market, the fact is that there are four times as many second-time buyers as first-time buyers. There is some hope that the housing sector will be kick-started back into life when the James Crosby report on funding shortages and improving liquidity in the mortgage market is presented to the Chancellor Alistair Darling.

However the wider outlook for the economy remains bleak. The number of companies going into administration in England and Wales rose by more then a fifth in the first three months of this year, while those going bankrupt leapt 25 per cent, according to government figures.

Many companies are coming under financial pressure and the longer the credit crunch goes on the harder it will be for many to obtain new finance or renegotiate debts. Running parallel to this is the fact that personal insolvencies are set to rise from 106,000 to 130,000 this year.

This slowing economy is now feeding into job losses with the latest figures showing that the numbers of unemployed rose by 38,000 in the three months to April to bring the total to 1.64 million. This is the sharpest rise since 2006. It seems inevitable that unemployment will continue to rise sharply in the near future and with few people having any sizable savings pot best advice from the broker must to safeguard and protect the client as far as possible. Once the client is in front of the intermediary there must be one thought – cross-sell.

Mortgage payment protection

In this economic environment one of the first products to be considered should be mortgage payment protection insurance (MPPI). MPPI has been caught in the toxic fallout surrounding the Competition Commission’s investigation into the wider payment protection insurance (PPI) market.

“It is ironic that at a time when the reputation of PPI is at a low ebb, that we are entering into an uncertain financial period that means that consumers more than ever need some protection should they become ill or unemployed,” says Sandy McPherson, head of marketing at Paymentshield, a major supplier of MPPI products to the intermediary sector.

But one look at the market statistics confirms that most intermediaries that offer protection advice are doing little more than slipping a little term insurance into their customers’ pockets as they pass through another transaction – probably mortgage-related. Advisers need to step up a gear, and offer a more rounded protection planning service to their clients.

The penetration of new MPPI policies sold on new mortgage business has fallen (from 34 per cent to 24 per cent in the period 2000 -2005). The most recent statistics from the Association of British Insurers reveals that in H1 2007, the number of MPPI policies in force decreased by 8 per cent year-on-year, to 2.2 million. Much of this fall can be linked to the recent bad publicity on the wider unsecured lending and credit card payment protection market.

Payment protection cover

The Competition Commission’s latest report has slammed lender’s practices in the PPI sector. Simon Burgess managing director of British Insurance says: “The Competition Commission has rightly recognised that the PPI market, as it currently operates, is dysfunctional.

“What this report does is provide brokers with the opportunity to make a real difference in this marketplace by introducing an element of best advice into the process.

“Lenders have been the root of the problem but if brokers actively sell PPI with an emphasis on customer concern, and at a much cheaper premium than the banks and building societies, they can generate much-needed income for themselves.”

This is a sector that mortgage brokers have the opportunity to make a real difference in. Currently, the purchase of MPPI is typically lower when a mortgage is arranged through a broker channel than through a bank (70 per cent of sales are made by lenders, while only 20 per cent are made by intermediaries). By redressing this balance brokers can be seen to be serving their clients better and developing a new and valuable income stream for themselves.

While the introduction of new regulations, which have tried to ensure that customers are treated fairly, has added additional complexity into the sales process and perhaps reduced the incentive to sell MPPI, there is an onus on intermediaries to treat customers fairly and offer best advice and that must include making them aware of the pitfalls of ignoring MPPI.

A couple of years ago the FSA publicly recognised the high standards of compliance in regular premium MPPI sold with prime mortgages. Moves have also been taken aimed at reducing and making changes to exclusions to ensure that more claims are covered. Product literature is also improving, with clear marketing brochures, leaflets, and policy summaries to offer clear information about levels of product cover and suitability.

New products

Products have also been redesigned to ensure policies sold more closely reflect risk profiles and there have been real recent improvements in this area.

2006 saw the launch of a significant number of innovative new products, particularly age-banded MPPI that gives younger borrowers a better deal. There have also been signs of a downward trend in the price paid by consumers, thanks to some healthy market competition. At the same time, insurers are recognising that brokers need more of an incentive to push MPPI products.

Paymentshield has recently introduced a new bespoke MPPI product, Mortgage Protector. It boasts cover up to an additional 33 per cent of clients’ monthly mortgage payment and related insurance costs so helping to protect other household expenses. Alongside such initiatives it offers free legal expenses and back-to-work assistance. More crucially, the product qualifies for the Double Indemnity flexible commission option. This pays two years’ commission upfront meaning a broker can earn 50 per cent commission within one month of the policy start date.

“It means that in these testing financial times advisers can immediately see a real benefit to their bottom line,” explained McPherson.

Current estimates suggest that only 50 per cent of mortgages have associated protection polices. So even when the housing market was at the height of its boom, there was still an opportunity to write up to 50 per cent more protection.

It is true that the application process for protection products is not as simple as it was, but that does not make it any less important. Rather than ignoring the protection conversation, why not simply supply a quotation and arrange a follow up meeting to get the protection in place as quickly as possible after the mortgage transaction?

With only a little extra focus, it would be possible to increase mortgage protection sales by an amount sufficient to offset any decrease in mortgage sales. Expanding your protection sales beyond the mortgage is guaranteed to offset the effects of a housing slump.

The UK population is vastly under-protected. It should not have required an expected downturn in housing to get us to look at growing the protection market in other ways but if it presents us with an opportunity let’s grab it. By doing so you not only serve and protect the customer, but potentially ensure the survival of your own business.

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