Unemployment leads to the loss of 30,000 homes a year, affecting more than half the population at so...
Unemployment leads to the loss of 30,000 homes a year, affecting more than half the population at some stage in their lives - and there is still a misconception that the State will provide help. As a result, the unemployment insurance market has huge potential, but as yet there has been little participation from IFAs.
Over the years, unemployment insurance has suffered a bad press. But fortunately, the historical view that the product is expensive, offers limited cover and is hidden behind a wall of small print making it unlikely ever to pay out, is increasingly inaccurate.
The combination of the low level of state benefit support, the initiative by the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) to standardise product features and the growing number of products with unemployment insurance as an optional rider benefit means that there are now new opportunities emerging for insurers and IFAs.
Unemployment insurance has been available in the UK since the early 1960s. It is usually included as one of the benefits on an accident, sickness and unemployment (ASU) product. The main markets include covering payments for personal loans, motor finance, credit cards and most importantly for IFAs, mortgage repayments. In recent years ASU policies have become available 'unbundled', for example 10% of mortgage-related products cover unemployment only.
Unlike income protection insurance, unemployment cover does not look to replace salary. The highest amount of cover generally available is set to be equal to the mortgage repayments. Higher levels of cover are not offered due to the problem of managing claims. For example, if a client's income from an unemployment insurance policy were similar to their salary before they became unemployed, there would be a significant reduction in the incentive to find a new job - increasing the cost to the insurer.
In the absence of viable income protection unemployment products, the mortgage-related unemployment cover market is the one that offers opportunities for IFAs.
To qualify for benefits under a policy, a policyholder would typically need to be made redundant through no fault of their own or sacked for reasons other than misconduct. Different rules apply for contract workers reaching the end of their contracts who would only be covered if the contract had either been in force for at least two years or had been renewed at least twice. The self-employed would qualify if they had involuntarily ceased trading and declared this to the Inland Revenue.
A general condition for qualifying for benefits is that the claimant has registered for Job Seekers Allowance. Needless to say, cover is not offered in respect of impending unemployment that the claimant was aware of at the time the policy was taken out.
New specifications
This complex pattern of eligibility for benefits seems to support the criticism that unemployment insurance is all small print.
However, in February 1999 the ABI and the CML published a baseline specification for cover purchased by borrowers. This highlighted a minimum set of standards that policies are expected to meet and aims to ensure products exceed basic quality thresholds in areas such as eligibility for cover, payment of claims, exclusions and treatment of pre-existing conditions.
One consequence of this is already becoming clear. The most recent claims statistics show that 86% of claims under ASU plans in the second half of 1999 were accepted. This is a figure that compares well with critical illness and income protection and suggests that this is a type of cover can be recommended by IFAs with greater levels of confidence.
Unfortunately, the State does not provide a solution. Job Seekers Allowance for a single person is only £52.20 per week and there is no help with mortgage costs for the first nine months of unemployment. If your partner is working or you have more than £8,000 of savings, then you may not qualify for assistance. Overall, more than 70% of people will not qualify for assistance.
In the UK, there are almost 11 million mortgages. The CML commissioned research into the number of mortgage holders who would have resources to tide over the loss of a sole or main income for 12 months. It found that only 50% had sufficient wealth, either through savings or a second income, to be able to do so. Of the 5.5 million people without adequate resources, over three million do not have unemployment insurance in place. This presents a massive opportunity for IFAs.
Government support
For once, the insurance industry has the Government on side. According to the housing minister, Hilary Armstrong, homebuyers "need better, more effective insurance to protect their mortgage payments against unforeseen periods of financial difficulty caused by problems such as accidents, sickness and unemployment." The Government has set a target of increasing the take-up rate to 55% of all mortgage holders by 2004.
Even better news for IFAs is the Government's attitude to advice. Armstrong says: "Everyone with a mortgage or applying for a mortgage should consider carefully whether mortgage payment protection insurance is suited to their needs and circumstances. If it is, they should shop around for a policy that best suits their needs and offers value for money. As with purchasing all financial products, home buyers should seek professional information and advice." IFAs are well-placed to take a broad view of a client's financial position and find the best value solution.
The appetite for this product among customers appears to be growing. In the second half of 1999, 28% of new loans were sold with mortgage payment protection (ASU) up from 24% in the previous six months.
Until now, it is the mortgage lenders that have done the most to exploit the unemployment insurance opportunity. According to research from Scottish Provident, almost 50% of those with ASU policies thought it was compulsory to take the lenders' policy. This mind-set, combined with the ease by which the policy can be bought - simply ticking a box on the mortgage application - explains the lenders' dominance in the market. According to Pinnacle Insurance, at present IFAs introduce only a quarter of new ASU policies.
However, an increasing number of insurers are offering mortgage protection products which include optional unemployment insurance and these give IFAs an excellent opportunity to advise on and sell cover.
Seamless packages
A number of life insurers have introduced unemployment as a rider to their mortgage protection products. Guardian, Legal & General, Norwich Union, Scottish Amicable, Scottish Provident and Zurich Life now offer products which include unemployment alongside the usual options - critical illness, waiver and mortgage income protection. While these unemployment products are legally separate contracts, the insurers have gone a considerable way to make the packages appear seamless. To all intents and purposes, the client is buying a single package.
Scottish Provident and Guardian have taken the package concept one step further. Both offer initial commission on a Lautro indemnity basis which differs from normal creditor policies where a high level of renewal commission is offered. Because Scottish Provident and Guardian can be confident about the quality of business from IFAs, they can do this without the borrower having to pay a higher premium.
Scottish Provident has also tried to introduce some of the positive features of income protection products. Applicants for its Self Assurance product are quoted premiums which reflect their current age and occupation. It is an obvious advantage for those customers of IFAs who are in low risk jobs that they should pay lower premiums to reflect this. For example, a 30-year-old professional purchasing £800 of unemployment cover from Britannia Building Society for a term of 20 years would pay £24 per month. The corresponding figure from Scottish Provident would be £18.21 per month. Another feature of the Scottish Provident product is that it aims to quote a premium level that will be sustainable for the whole term of the policy.
In spite of this, take up rates remain low. Although around 70% of mortgage term assurance policies now include critical illness cover, the corresponding figure for unemployment cover is less than 10%.
According to Roger Edwards, product marketing manager at Scottish Provident, IFAs could bring unemployment insurance into the advice process. He says: "Many IFAs see that the client has purchased ASU with their mortgage and are happy simply to advise on life insurance and critical illness. By extending the advice process to encompass unemployment cover and mortgage income protection, they could be selling more flexible, better value packages."
In a world where both IFAs and insurers will feel the detrimental impact of Stakeholder pensions, unemployment insurance represents an untapped opportunity to add genuine value to a customer as part of the advice process. Products are better value than ever, and can be recommended with more confidence. The market is growing and IFAs are well-placed to make the most of it.
Ross Ainslie is product actuary at GeneralCologne Re
