Is debt waiver insurance the next big thing?

The protection gap

Following an almost blanket ban on PPI products, 83% of borrowers in the UK are now without any protection against redundancy as a result of unemployment or sickness, according to research undertaken by CUNA Mutual, thus increasing the ‘protection gap’.

This lack of protection has had a knock-on effect on lending, according to ResPublica, as financial institutions become more risk-averse in the unstable job climate.

Phillip Blond, the paper’s author said: “In the wake of the PPI mis-selling scandal, consumer confidence in lenders, and lenders’ confidence in their borrowers’ ability to make repayments is at an all-time low.

“Our green paper confirms that to get the economy moving, lenders need to gain a renewed confidence in order for them to feel secure in lending. We think this is best achieved by introducing a tried and tested successful protection product already available in the US and Canada: the ‘debt waiver’.

“This lack of protection has made lenders wary of lending to those who desperately need credit. Protection will both increase the demand and unlock the supply of credit that our economy so urgently needs.”

Early adopter

The UK is set to see the first major debt waiver protected loan launch this year, but despite wide-spread MP backing, the early adopter isn’t a recognisable high-street bank or building society. CM Debt Waiver will go live in months with an 8,000-strong credit union to the aviation industry – Plane Saver.

James Marshall, marketing manager at Heathrow-based Plane Saver said: “We surveyed our members, and more than 70 per cent of them responded, saying that they would be looking to borrow funds from us in the next 12 months.

“We’ve been concerned for some time about the ‘protection gap’ and wanted to protect our members. We’re a trusted financial partner, and we always have our members’ interests at our core. At the same time, with so many new loans to cover, we had some concerns from a company perspective around covering any loans where there may be an inability to pay. The CM Waiver seemed to be a fair and straightforward solution for both our members and ourselves.”

In its recommendations, ResPublica calls for debt waiver to be fast tracked by the industry, by both lenders and government and calls for reviews into best practice from the US to ensure its effective adoption.

Similar to mortgages in Canada, it should be made compulsory for lenders to provide some form of credit protection and safeguards on certain loans.

It also calls for a review into the protection gap, and for a working group to be established along with a safe insurers kite-marking system to ensure that a similar situation doesn’t occur again.

But what of the immediate future? The OFT and FSA gave the green light for waiver in January this year, and yet, no loans in the UK are currently available with a debt waiver built in.

The time has arrived for lenders to respond proactively to consumers’ needs and help them overcome their fears and address this inertia in the lending market.
Many lenders want to offer a real solution to the protection gap that would benefit and protect both them and their customers. The CM Waiver will and can provide that credible and workable solution.

Paul Walsh is CEO of CUNA Mutual Europe

What is ‘debt waiver’?

• Essentially, the lender offers a ‘debt waiver’ facility to their customers which would be written/integrated into the loan agreement, guaranteeing that should certain events arise they would waive that loan instalment on behalf of the customer.

• The lender would purchase a business-to-business insurance policy to transfer this risk off their balance sheet (meaning that this is an agreement between two businesses).

• The result is a fair, ethical and transparent way of protecting those who borrow, primarily by shifting the onus onto the lender to indemnify their loan, rather than the customer insuring their ability to repay in the event that they become unemployed due to sickness or redundancy.