Where's our boom gone?
The housing and mortgage markets are booming – but protection sales are lagging behind. Our panel of experts tried to find out why. Georgina Kenyon reports
Johanna Gornitzki: To kick off today’s debate I thought we could start by focusing on the mortgage market. Are mortgage sales falling?
David Hollingworth: Mortgage sales are booming and purchasing power and remortgage sales remain strong. While the first half of 2005 was a difficult period consumers are confident and sales are again booming this year.
Andy Pratt: London’s housing market is very strong this year and there is a strong remortgage market.
Ray Boulger: The purchase market is very strong too.
Johanna Gornitzki: How is the mortgage market affecting sales of protection products?
David Hollingworth: While increasing sales of mortgages can be helpful in encouraging the sales of protection products, these products are not selling as well as mortgages themselves.
Bernie Hickman: Yes, sale of protection products is not as strong as mortgage sales. However, the protection marketis growing again now. The key point, however, is that it seems like the protection market is not growing as fast as the mortgage market. And that is a worrying sign.
Iain Mallon: The problem with mortgage and protection products sales is that the sales process is getting longer. We have people asking for more assistance with the sales process. Can we help borrowers by reducing the sales process burden?
Ray Boulger: The sales process may be getting longer but this can be a good thing because it means better regulation is surrounding the process.
Andy Pratt: While the burden when selling mortgages is partly to do with the regulatory side it has more to do with the fact that you are dealing with lenders and the administrative burden that is attached to this process. If you are dealing directly with lenders, there is also the burden regarding the knowledge base you have to keep up to date with. All in all, the administrative burden surrounding the protection side has increased. At least, that is what we found.
Linda Tyson: Many mortgage advisers do not understand protection fully and are not doing their jobs properly. They should be doing more to get it right rather than selling what is most profitable. Some high street firms have a tiered sales process where you see the mortgage adviser who arranges your mortgage then speaks to you about protection nonadvised and sells mortgage payment protection insurance (MPPI) and life cover. Some high street banks sell income protection (IP), but to find out about it you have to make an appointment to come back and see another adviser who also tells you about pensions. Most customers do not take the second option so they never know that a more suitable product may exist. How is this fair?
Ray Boulger: I believe that is an entirely inappropriate sales process.
Richard Verdin: We should also remember that a good mortgage adviser does not necessarily mean a good protection adviser. I think trying to be good at advising on protection is partly to do with balancing the regulation and the time involved then advising on the amount of protection a company or person needs and fulfilling the need through the underwriting process. It is an awfully large amount of work. Most mortgage advisers would rather see another customer who wants to take out a mortgage than try to use the time to convince a mortgage customer to also take out protection.
Andy Pratt: Technology around the insurance market is another issue that confuses people. Technology in the protection market is not as well directed towards the consumer as it is in the mortgage market. These things need to be looked at because the whole process of buying protection when getting a mortgage has not improved. Technology should assist this process but it takes a certain attitude to improve this process. We are often in the position where a client is ready to move into a property but the protection is just not in place.
Iain Mallon: Improving the process is one thing but quite another factor is how to change the process and lessen the burden of it. Something that could work even better is teleunderwriting.
Richard Verdin: Yes, but there is a risk involved with teleunderwriting. Technology suits insurers and it is being used by insurers to transfer the risk to the intermediary. What needs to be defined is who is actually responsible after the declaration process. It may save you 24 hours as it is quicker than the post to get an application into the insurers office but ultimately it transfers quite a lot of risk to the adviser, who is now responsible, legally and from a regulatory perspective, for keying in that data. Therefore, a large number of mortgage advisers who are looking at the statistics in the market would be thinking "that is a little bit too much risk for my liking and I’m not going to do it." That is what is happening. Mortgage advisers are looking at the market and they think there is a bit too much risk and may not undertake it.
Iain Mallon: I would agree, except for the fact that teleunderwriting takes the risk back to the manufacturer. Teleunderwriting is basically a disclosure issue. But does it create a higher risk? Sales of mortgages are increasing despite any risk. Apart from making the process simpler, disclosure is actually the biggest reason for using teleunderwriting.
Bernie Hickman: However, complications are occurring as mortgage advisers now can look back at what they said and they need to make sure that what they told the provider is the truth. While electronically entering data may have made the process easier, filling the form out in front of advisers, which will allow them to look back and see what they said and see what they have written before they sign, can only be good for customers and may not increase risk to either party. This is an improvement on a paper application form, which is filled out in front of an adviser and the client never gets to see what they have written and signed again. At least now, in the cold light of day, after the event, they can look back and see what they have said. Most providers will check it is signed and sent back to the client, to make sure that it is right. I do not agree with the point that the risk is with the adviser because that process transfers it to the customer, making them aware they must be absolutely sure that what they have told the provider is the truth.
Richard Verdin: Can I draw your attention to a recent issue debated in COVER regarding complaints. The Financial Ombudsman Service said it very often has customers who complain about their advisers giving advice on how to fill out the forms inaccurately. That constitutes a reasonable number of claims for them now. The risk as seen from these complaints is certainly sitting with the intermediary.
Bernie Hickman: There will be times when information is not sent on to the customer where that is a possibility. But if the information is sent on with relevant warning notices, then customers should be reading through the information at the point of sale and risk should be minimised for all parties.
Johanna Gornitzki: Would you encourage mortgage brokers to give advice on protection? Is there anything that we can do to encourage mortgage brokers to advise their clients on protection products?
Andy Pratt: I think that generally the regulator has been very negative about insurance over the past six to 12 months. Insurance has to be addressed by the regulator to tackle this problem. Otherwise it will come back to bite them in some shape or form at some stage.
Richard Verdin: In this meeting we have three well-organised mortgage brokers who are obviously very competent, but there are mortgage brokers who are one-man bands that are working in small offices in isolation and the amount of training and oversight that they have is negligible.
David Hollingworth: There is a need for borrowers to be properly educated. The press can be pretty negative and this does effect the way people think about mortgage protection.
Andy Pratt: You can certainly see a situation where there is a need for education and attention, in particular in the press.
Richard Verdin: Since February we have been running training programmes and a lot of people out there are interested in protection. Without any advertising, we have over a thousand people interested, simply from word of mouth. There are a lot of people out there who want to learn more about protection. Ultimately, it is up to distributors to educate people about the need for protection. This includes insurers. You have to forget the glitzy campaigns talking about the name of certain companies and get down among the people who may want to buy protection, and have a conversation about what is really important and have a good discussion about protection. Generally speaking, I do not see insurers doing this, but overall I just see insurers promoting their own wares. Ultimately, mortgage brokers want to be seen as professional.
Andy Pratt: Insurers are happy to offer training for brokers – we may have someone on the end of a phone to answer queries from brokers.
Richard Verdin: The mortgage market drives between 60% and 70% of all protection sales but mortgage brokers are not as effective as they could be.
Iain Mallon: The manufacturers could help more.
Richard Verdin: It is about constantly updating the adviser, it is keeping them apprised of what is new, what the areas of interest are, what’s going on right now, new sales ideas and so on. Consultants need to relay their successes to other firms, tell them why they were successful and spread that success.
Johanna Gornitzki: So does this mean we need the insurer to help the broker so the broker can then be confident enough to advise properly?
Andy Pratt: Yes, a broker is not going to pick up every magazine or log on to every website and know everything about the mortgage and protection markets. You need someone to be constantly imparting that information, especially if you are a smaller broker.
Richard Verdin: You need to impart confidence to these people and the only way you are going to do that is by ensuring they have gone through a mandatory level of training and examination so they have the confidence to advise. The more knowledgeable intermediaries are going to select the best products for their customers.
Johanna Gornitzki: And that leads us to how to best protect a mortgage. Are any protection products more suitable than others?
Ray Boulger: When deciding what protection product is most suitable for a particular client you need to know, for instance, what a customer’s relationship is with their employer. The situation in terms of employment cover is not so much "will you lose your job?" but "if you do lose your job, what is the risk of not getting another?" Too often, and wrongly, they ask what is the risk of losing your job. For example, someone working at a factory in a town where there is one major employer is in a different situation to someone who is living and working in London where they can easily change to another employer. But for accident, sickness and unemployment (ASU) cover, because the premiums with most companies are the same with regard to the risk, a good broker should be able to identify where IP is going to be better value than ASU or MPPI. If you have identified IP is better value then you are going to have to look at those options. The other key issue is that, with ASU, normally you can only buy protection which covers mortgage payments plus 35%, but most customers are going to have other commitments. For most clients, IP is better value than ASU except in cases such as when clients want employment cover.
Richard Verdin: I do not think people do that analysis very much. If you look at the Council of Mortgage Lenders website for MPPI sales and contrast that with for statistics for IP you will see that ASU is outselling IP four to one. But why is that? It is interesting – people are taking it out but how long are they keeping it for? If you look at the past five years, 3.4 million AS and ASU policies have been sold. However, the growth in the in-force policy count has been equal to none.
Ray Boulger: I suspect a lot of people take out free policies without the intention of paying for them. But we sell more IP policies than ASU because we think it is better value for most of our clients.
Linda Tyson: When it comes to price, there are firms like Pioneer which don’t underwrite on occupation class, gender or if you are a smoker. This could scoop up the people that thought they could not get IP because of their job or health so they can still get more comprehensive insurance and not have to turn to mortgage payment protection insurance (MPPI) as their only option, but of course they won't know this exists unless they seek advice. Budget IP, which has a greatly reduced premium, is also a better option than taking out MPPI.
Richard Verdin: ASU should represent the minority.
Iain Mallon: IP – occupation class one and two – is significantly cheaper than ASU. If you start losing one and two sales through proper advice, the cost of providing ASU or MPPI cover for occupational class three or four will significantly go up. In the longer term, the difference in price between ASU and IP through sales should balance out. IP will be more competitive across all bands rather than being skewed towards classes one and two.
Richard Verdin: If you take out a 25-year mortgage cover you cannot take out 12 months of protection cover unless there is no other sensible alternative available – in which case it is better than nothing.
Ray Boulger: Most people still think a mortgage is on a 25- year term but this is not the case. In most cases you will have to pay it off until you are 60 or 70. You need to look at your different options, which a good adviser can do.
Bernie Hickman: For me, IP is important and it is key to have confidence in the product.
Linda Tyson: The time it takes to explain to a borrower about IP can be too long. They may not want to take half an hour to understand it. If you’ve just sat through a lengthy mortgage application, it can be quite stressful. If they say to you, "would you like to tick this box and be protected against the loss of salary if you are unable to work with MPPI – or do you want to discuss your employment and state benefit entitlements for about half an hour for an IP policy?" the customer will want the first option. Fatigue is a problem when protection is an add-on to the end of a mortgage process.
Ray Boulger: But what is half an hour? We can watch Coronation Street on TV in that time each week and we don’t mind half an hour then.
Johanna Gornitzki: Are mortgage lenders and brokers helping to close the protection gap or contributing to it?
Linda Tyson: LifeSearch conducted research which showed that 20% of people felt that no protection products were appropriate for them. So there is clearly a need for better sales processes and education for advisers and consumers or the protection gap will continue to grow. Protection is an event-driven purchase and a mortgage is one of the only events that is a financial transaction, so mortgage brokers are arguably best placed to make the sale, but are clearly not doing enough.
David Hollingworth: Some mortgage advisers think if they talk too much about protection they will jeopardise the mortgage sale, so they minimise the time they talk about it.
Johanna Gornitzki: What about high street lenders?
Linda Tyson: Most people tend to trust their bank or the firm they borrow money from, which is worrying when they sell products that aren’t the most suitable or best value. Banks such as HSBC, which sells IP, are helping but those which don’t sell appropriate products are giving their customers false peace of mind. We need the Financial Services Authority (FSA) to take action to ensure consumers are sold the most appropriate products because now MPPI is too profitable for companies to change of their own accord. For example, LloydsTSB took 17% of their total profits from the sale of MPPI. The FSA’s Treating Customers Fairly initiative should help but while banks think they are doing a good thing selling MPPI only regulatory change will work.
Andy Pratt: In effect, most people believe that if they don’t have a problem with their bank, that is as close as they will get to trusting the bank and they will stay with their bank when they are looking to borrow.
Johanna Gornitzki: So do people take out the right type of protection cover?
Linda Tyson: MPPI is the most widely sold product along with life cover. MPPI offers the least benefit with the most exclusions, so no, not many consumers take out the most appropriate cover. Death is less likely to happen than you being unable to work throughout the term of your mortgage so along with life insurance or family income benefit, comprehensive IP insurance should be a priority, with critical illness cover if you can also afford it.
Johanna Gornitzki: With house prices rising, should mortgage policies be placed in trust?
Ray Boulger: There needs to be a cost benefit analysis. I am very critical of the Chancellor in regard to this. People are unsure of the rules surrounding trusts. People are simply too nervous about putting their money into trust in so many cases.
Bernie Hickman: We are not sure if trusts will minimise inheritance tax.
Ray Boulger: Some tax advisers are now not even advising on wills. Experts are reluctant to advise on trusts and wills until further indication is given by the Government on these issues.
Johanna Gornitzki: Looking to the future, what if there is a house market crash?
Ray Boulger: There won’t be a house market crash.
Bernie Hickman: Generally, the press includes stories all the time on the doom and gloom of the mortgage market.
Iain Mallon: The mortgage adviser has the first contact with these clients – that is the ideal time to talk about protection.
Bernie Hickman: Selling mortgages provides an ideal opportunity to tell people about proper protection.
Ray Boulger: Yes, but some people may not be in an appropriate position to take out comprehensive cover and they may just take out short-term cover as they can’t afford more.
Johanna Gornitzki: So what lies ahead?
Linda Tyson: The problem is that most people are buying MPPI and life cover. What the industry needs is a single, affordable product that does a better job than life and MPPI together. If a single product is put together, it is generally more affordable.
Bernie Hickman: I think that IP really needs product development and it is and will be a hard battle to do this.
Iain Mallon: In the past few years in this role, the main change I have seen is that regulators are now reviewing the IP/MPPI relationship.
Richard Verdin: But if a major company such as AXA comes up with a great product, it should reach the main market.
Bernie Hickman: Yes, IP product development is the challenge the market is facing.
The HAC, London
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