Partner Insight: Mortgage protection and Consumer Duty - Why price isn't always the answer

When clients are stretching themselves to buy a home, it's only natural that affordability dominates the conversation. Every monthly payment is scrutinised, and when it comes to protection, the temptation can be to opt for the lowest premium.

But under the FCA's Consumer Duty, advisers are expected to deliver fair value; not simply recommend the cheapest policy.

Everyone loves a bargain, but when you're advising on mortgage protection, the lowest price is unlikely to deliver the best outcome. A few pounds saved each month could mean compromises elsewhere, whether that's the type of cover recommended, policy definitions, underwriting outcomes or the flexibility a client may need later in life.

A key pillar of Consumer Duty is fair value, but Emma Thomson, Chair of the Protection Distributors Group, warns that it's a concept that's easily mistaken for low cost.

"There will be some advisers that, regardless of what their compliance team determines, will still default to the cheapest price."

"A narrow focus on 'cheapest available' risks poor long-term customer results, like inadequate cover, unsuitable definitions, or policies that lapse because the client never properly understood them."

— Tony Müdd, St James's Place

Protection is fundamentally different from many commoditised financial products, says Tony Müdd, Third-party Products and Services Director at St James's Place.

"A narrow focus, often driven by over-enthusiastic compliance departments, on 'cheapest available' risks poor long-term customer results, like inadequate cover, unsuitable definitions, or policies that lapse because the client never properly understood them."

From reviewable versus guaranteed premiums to illness definitions and classes of occupation, protection policies contain many variables that can materially affect the outcome for clients.

He adds: "This complexity makes like-for-like comparisons difficult and increases the risk that certain customer groups receive materially different outcomes, for example those with pre-existing conditions, higher-risk occupations, or vulnerability characteristics."

An overemphasis on price alone also risks undermining the value of both the cover and the advice, says Nick Telfer, Head of Protection Development at Vitality.

"As consumers become more comfortable with AI it is important for advisers to remember that protection advice is more than just picking the cheapest product for a customer."

Distinguishing Between Price and Value

Roy McLoughlin, consultant at Plan Money says that it's in this ability to create a tailored recommendation, that balances price with quality and suitability, that advisers really stand to add value.

"The skill of the adviser is to have the prices in one hand but the research tools in the other, along with criteria like the admin for that company, its speed of underwriting, claims experience and so on."

"Fair value is in choosing an insurer who has a competitive price but also has a quality and easy to underwrite product where you have no nervousness or compunction to worry about a speedy and efficient claim process."

Complex Cover

The biggest challenges lie with critical illness cover and income protection recommendations.

With CIC, where there are huge differences in conditions covered and illness definitions, Thomson says tools like CI Expert are invaluable. But it's also important to factor in the client's own health situation and look beyond the initial quoted premium. "Undertaking pre-sales checks where the adviser ascertains the health factors that need to be taken into account, is helpful," she explains. "For example, calling underwriters or using a system like UnderwriteMe, to help determine what the end premium is actually going to be and what's going to give the best outcome."

"Protection should give people choice when they need it the most. Many mortgage holders don't use a payout to clear their mortgage debt, making plans that continue even after a full claim has been paid all the more valuable."

— Nick Telfer, Vitality

It's also important to consider how clients may use a payout in the event of a claim, which can have implications for product recommendations according to Telfer.

"Protection should give people choice when they need it the most. CI Expert research showed us that many mortgage holders don't use a payout to clear their mortgage debt, making plans that continue even after a full claim has been paid all the more valuable."

"There will be some advisers that, regardless of what their compliance team determines, will still default to the cheapest price. But fair value is a concept easily mistaken for low cost."

— Emma Thomson, Protection Distributors Group

With IP there's the need to check that occupational definitions are appropriate and you've got the full picture of their earnings — including whether they have multiple jobs or run a business. McLaughlin says: "It's important the adviser fact finds correctly and knows where all forms of remuneration come from, as well as their tax status. Different insurers have different rules around dividends."

But even with simpler life insurance only policies, the cheapest option won't normally be best, says Thomson. "If you're defaulting to the cheapest option, chances are you're defaulting to joint life cover, but again that won't always be the best outcome."

"Advisers need to be utilising consumer duty to think about foreseeable harm, particularly in relation to joint cover."

Use of joint policies, for example, can be problematic in the event of divorce, separation or economic abuse.

Price Sensitivity

"There are some consumers that are very price sensitive, but there are others that will see the value in what you're trying to convey because you're bringing it to life," she adds.

"You're not just tagging it onto the end of a mortgage conversation. You're absolutely making sure they understand the value of it."

Added benefits can be a helpful part of the 'value' conversation too, says Thomson. "Take 24/7 GP services. If you have a client utilising those, that's a tangible benefit to them and their families."

There's merit in regularly reviewing all clients' cover, but it's particularly important for the most price sensitive clients. She adds: "There will be clients that just want the cheapest option and advisers can struggle to get them to move past life insurance."

"But, a year down the line, are they in a better position? They might have had a promotion at work or a better grip on their outgoings. They might have had a baby in that time or seen a friend get seriously ill."

This process helps ensure cover remains suitable and — at the very least — the client is made aware if they're underinsured.

"The FCA is really focusing on the protection gap," says Thomson. "But, it's not just about customers that don't have any cover at all, it's also about those that have some, but not enough."

Ultimately, protection products and pricing models should reflect the needs and expectations of today's clients says Telfer.

"Protection advice now and in the future should protect clients in a way that delivers value and enables them to pursue their financial objectives while avoiding foreseeable harm," he says. "We must embrace 21st century solutions.".