While sales of MPPI remain fairly stagnant, Angela Faherty finds that economic uncertainty and tighter underwriting on the unemployment element of cover are the main issues currently affecting the MPPI market Click here to download pdf
The mortgage payment protection insurance (MPPI) market has remained competitive in recent years despite being affected by factors such as 11 September terrorist attacks in the US in 2001, as well as the global economic slump that followed.
While the MPPI market has indeed seen continued sales, it is the unemployment element of cover that has caused concern for underwriters and insurers alike in the past 12 months.
The main worry here it seems, is that insurers and underwriters are reluctant to cover people in occupations where the current unstable economic climate dictates that their jobs are perhaps not guaranteed in the long-term.
A continuing struggle
Similarly, insurers do not want to discourage people to take out MPPI cover at a time when consumers are already under insured. But making the proposition attractive while maintaining affordability is a continuing struggle.
"There are a lot of issues surrounding cover for certain occupations in the MPPI sector, and particularly in the unemployment part of the cover," says Nick Kirwan, head of protection, product development at Scottish Provident.
"The travel and holiday industry, especially airline staff and those on the manufacturing side of these businesses are particularly volatile. There have been a lot of redundancies in these areas over the last few years and it has had an impact on the market as a result. The days of having a job for life are well and truly gone," Kirwan says.
An increase in redundancies also means a rise in claims, which ultimately affects the level of risk providers are willing to cover. More payouts may lead some providers to reassess their books and question the viability of taking on more clients.
"There has definitely been an increase in the number and length of claims on MPPI policies, particularly on the unemployment element of cover and it does have an effect on the amount of business we can take on, particularly when you look at what is already on the books" says Bob Martin, director at asu ltd.
In1999, the Council of Mortgage Lenders (CML) and the Association of British Insurers (ABI) launched their Sustainable Home-ownership initiative and set a target of 55% take-up of MPPI cover by 2004.
Despite these organisations' best efforts to promote awareness and increase the take-up of MPPI, by the end of June 2002 there were only an estimated 2,518 million MPPI policies in force. This represented almost 23% of the total number of mortgages outstanding at the end of the period.
Since then, the CML and the ABI have revised the target and the aim now is to keep the average annual number of possessions below 30,000 and to keep possessions in any event lower than they would have been in comparable economic circumstances in the past.
It also estimates that while approximately 55% of all homebuyers need MPPI or an equivalent form of insurance cover, the remaining 45% do not need MPPI because their risk is limited.
The target change was prompted by the rising number of people using other forms of protection, such as critical illness (CI) and income protection (IP) to offset their mortgage payment risks. Similarly, the strength of the housing market has enabled many homeowners to accumulate more equity and also use this to help offset the risk posed by their mortgage.
A statement issued by the CML said: "Bearing down on the number of possessions over the long term is a more comprehensive objective than insurance take-up alone in making home-ownership truly sustainable."
Repossessions
As the number of repossessions and households facing mortgage arrears continued to fall in the first half of 2003 according to figures from the CML, it seems the new target could be more realistic. However, the CML's director general Michael Coogan warns against complacency.
"The continuing reduction in arrears and possessions is obviously good news. But at the same time it makes sense to plan ahead for a less benign economic environment. We do not foresee major problems in the near future, but interest rates are expected to rise next year, albeit modestly, and economic uncertainty remains," he says.
With the housing market remaining strong, it would be easy to assume that MPPI is likely to see an increase in growth. In particular, the large multiples many homeowners – first-time buyers especially – are willing to take out on a mortgage suggests that MPPI or indeed, some form of protection, is more important than ever. However, Kirwan believes that while many people may think this to be the case, economic factors suggest otherwise.
"People's desire to get on the housing ladder has seen many consumers stretching themselves and pushing the income multiples significantly. While this does mean that they need protecting more than ever if they become unemployed or fall ill, it also means that they have less money left over to take out this sort of insurance. Every last penny is being utilised to make the mortgage repayments," says Kirwan.
Growing criticism
One of the problems facing the MPPI market over the last few years has been the growing criticism about what the product covers and the value it provides when compared to other protection products such as IP and CI.
One of the main issues is centred on woolly terms of cover and the criticism has stemmed from consumers not knowing exactly what they are covered for until they have a claim turned down.
"The existing protection gap in the UK shows that the majority of the population are underinsured, and in that respect, having mortgage payment protection insurance is better than having no protection at all. However, consumers need to be aware of the pitfalls of mortgage payment protection insurance before taking it out. They need to fully comprehend what the cover can do and what it will pay out in the event of a claim," says Roger Edwards, product director at Bright Grey.
A major point which consumers should be aware of says Edwards, is that MPPI benefit typically lasts for one to two years only. While this should not be a problem for those claiming unemployment benefit, those receiving benefit as a result of accident or sickness could face problems.
"If you are receiving benefit for one year for being unemployed, then that should be fine as it is more than likely you will find a job within a year. However, for those with long-term sickness that extends beyond the benefit term, there could be trouble. When the benefit stops, how will the mortgage repayments be met if the claimant cannot return to work? Customers need to know this before they get to the claim stage," Edwards says.
Raising awareness
Edwards' point highlights the need for advisers to ensure they clarify the terms of MPPI and explain what it can do for the person taking out cover. Another issue is the need to raise awareness among consumers about the differences between the various forms of protection.
"The biggest problem surrounding the selling of MPPI is that people do not know what it is," says Martin. "It is not a well known product and until there is greater awareness of what this product can do, this will not change. Many people may buy income protection and critical illness and assume it is the same as mortgage payment protection insurance. It isn't."
With Financial Services Authority (FSA) regulation just around the corner, there is no doubt that the regulatory regime will have some impact on the market. Whether this will be positive or negative, is anyone's guess. However, certain changes made to the initial proposals suggest things are looking up.
"Prior to CP187, there was concern in terms of specific exams that had been proposed," says Kirwan. "However, changes laid out in that consultation paper simplified the way insurance is to be sold and a lot of the threats posed in terms of selling have receded."
Like much of the protection market, MPPI's profile needs to be raised in order for people to become aware of what the product offers. The CML and ABI's estimate that only 55% of homeowners need MPPI cover, suggests the terms of cover are not necessarily universal and as a result, not appropriate for all consumers.
Raising consumer awareness of what the product offers and its suitability to each individual's situation is essential to future growth. The main problem in the current economic climate however, is that large-scale redundancies in certain employment sectors, are leaving underwriters and insurers with little choice but to limit the number of clients on their books as claims continue to rise.
Nevertheless, with the continued boom in the housing market, more and more people will need protection. It is here that the adviser will play a crucial role in providing people with the information they require and to ensure they are adequately covering their protection needs.
