It is encouraging that independent intermediaries have the edge on sales of mortgage-related insurances over company salesforces, high street lenders and direct insurers. But this does not mean that consumers are automatically seeking independent advisers when they need to take out mortgage-related insurances.
According to the Association of British Insurers (ABI), the total household insurances taken out in 1999 totalled £4,377m. 55% of this was carried by independent intermediaries which included national, chain and telebrokers and other intermediaries and brokers, compared with the 19% carried by company agents, 6% by banks and building societies and 17% by direct business.
Independent intermediaries took 45% of £5,740m worth of personal insurance business in 1999, against 18% picked up by company agents and 9%-21% by banks and building societies and direct retailers respectively.
Opinion is divided as to just how worthwhile a business mortgage advis- ing is to the independent intermediary. The average introductory fee is £150-£200 per mortgage.
Whether mortgage business looks worthwhile depends on the nature and level of business the adviser takes on.
‘Average introductory fees vary tremendously,’ says Mike Green, sales director at Mortgage Brain. ‘Some mortgage providers do not pay it at all, some pay more than others. Adverse credit lenders can pay £500 per introduction, though high street lenders tend to pay between £150-£200, depending on the generosity of the lender.
‘But take an adviser who wants to earn £40,000 a year,’ continues Green. ‘Divide that by an average of £150 per mortgage and you are talking about roughly five mortgages a working week, one a day, which is not out of the question.’
With the issue of time spent arranging a mortgage, the loan itself is not the problem. Green points out: ‘The time spent in mortgage business is tied to the house buying cycle. You can fast track a mortgage and get an offer out in anything from a couple of hours to a couple of days. It is the follow up to keep the mortgage on the hook while the client goes through the buying process that takes the time.’
The mortgage is one thing, but how lucrative a business is it to advise on term assurance and buildings and contents insurance, the basics for most homeowners?
Take the cost of an average building insurance, for a three-bedroom house, of £20 per month ‘ which works out to be £240 a year. According to Green, an intermediary can expect 15% commission on buildings insurance, which will give the adviser £3 a month or £36 a year.
Creditor insurances should pay slightly more in introductory commissions and an intermediary should expect around 20% of premium. Take mortgage payment protection insurance (MPPI) based on a £500 mortgage repayment premium as an example. A premium of £15 to £20 per month will provide the intermediary with up to £4 a month or £48 a year.
Calculating these two basic forms of cover alone to the earlier example of an intermediary setting him or herself a target of five mortgages a week and you are looking at additional income on insurances of £9,576 for building insurance and £12,768 on MPPI.
Three key factors for consideration are becoming clear. First, the intermediary advising on a mortgage already has all the information they need to advise on protection insurances related to the mortgage loan. Second, there is a cumulative effect on doing more business in the area. And third, the independent intermediary holds a unique position in offering the best advice to a client.
Sticking to the rules
The Financial Services Authority (FSA) expects mortgage advisers to comply with client information rules, incorporating all the information needed to recommend the best product for a client and to supply a ‘reason why’ letter to support that advice.
While buildings and contents insurances are relatively straightforward to arrange, which may prompt the client to question why they should not do this themselves, what is not straightforward is sourcing the best, most cost-effective product and provider. Few lenders will make it a condition of borrowing that borrowers also take out associated insurances, but it may not be explained to the client that they have an option to look on the open market.
With everything else the borrower has to consider, they may feel tempted of signing up there and then and having one item on the agenda sorted easily. Which is where the adviser has the advantage of being able to take on that chore and save the client money.
Life insurance is almost a must. The independent adviser is in a position to consider alternatives to life assurance, depending on the clients situation. For example, a single person with no dependants or a couple in a similar situation may find critical illness (CI) insurance a more appealing option, certainly initially.
It may suit them as well, to have a CI sum assured to cover the costs of the mortgage, in the event of an illness, which may not be fatal. And if fatal, the purpose of life assurance to cover the mortgage amount has been met. Either way, the financial pressure of a single person or a partner losing their income if they are unable to work has been met at a time of emotional and physical stress.
Clients with children or other dependants have different needs. Taking out insurance to cover the mortgage is a bare minimum, which will fail to support a family despite the clearing of the mortgage repayments on death. A broad application of insurance protection should include a sum assured to cover the mortgage and funds to cover the loss of income of the breadwinner.
Another option is family income benefit, paying out income on a regular basis rather than in a lump sum. If the purpose of the insurance is to meet the needs of the dependants on the death of the main earner, this type of cover may suit a family with growing children, as the financial responsibility for them will diminish as they get older and leave home.
Some lenders will offer accident, sickness and unemployment (ASU) or mortgage premium protection pay- ment (MPPI) insurance free for the first year or so of borrowing. Certainly this is an option to be considered, but so too should alternative arrangements and/or providers at the end of this period. ASU should at best be considered as a temporary measure in the event of the mortgage repayer not being able to work because it will cease to be a comfort in the long term.
Aside from the convenience to clients of having their entire mortgage needs catered for at one organisational source, better deals financially will depend on the trawling the adviser carries out on the client’s behalf. It will also depend on the client’s attitude to fees and commissions. An adviser able to levy a fee has the option to rebate their introductory fees.
Intermediaries may want to consider dealing with specialist general insurance brokers such as Select and Protect which specialises in monthly household insurance plans, or insurers like Sterling Life which specialises in non-regulated insurance products. Mortgage Brain provides software which allows the mortgage intermediary to introduce business through these sources and benefit from enhanced commission packages, allowing the intermediary greater margins for rebating commission to clients.
No issue in the world of finance would be complete without a look at regulatory considerations, especially when looking at non-regulated business.
Currently the ABI issues a code of practice for intermediaries selling or acting an introducer of life insurance which does not have an investment element and advises on the professional indemnity cover required for non-registered independent intermediaries.
However, membership of the General Insurance Standards Council (GISC) is becoming more of a necessity for intermediaries wishing to sell general insurances such as buildings and contents. From 1 September 2001, member insurers of the GISC will only be able to deal with intermediaries who are also members.
The only alternative would be for an intermediary to become an appointed agent of a GISC member, which of course will restrict their ability to advise, sell and compare products across the relevant product market.
‘It will not be impossible to conduct business, but it will be difficult,’ says Rachel Maidment, press officer for the GISC. The Office of Fair Trading has cleared Rule F42, which makes the stipulation that GISC members will only be able to do business with other registered members.
As with most new strands of business, once the adviser has established a comprehensive structure of advice, the development of the business will be dependent on building the level of business. Advisers can then promote this service through local advertising, advertorial pieces in newspapers or the adviser offering services as a commentator on mortgage issues with a local radio station.
Existing clients can also be sent leaflets on an annual basis with the idea of reviewing their building and contents insurance to promote the service. Similarly for those clients for whom a full package of loan and insurance protection has been advised on or arranged, the door is ajar for the adviser to keep note of when the client’s insurances are due for renewal or, more especially in the case of life, critical illness or family income benefit (FIB), a review of cover is needed. A single client getting married or a couple starting a family are examples of times when life assurance needs should be revised and cover put into place.
The basic mortgage loan itself, depending on just how proactive an adviser wants to be, is also up for review along with everything else. With the groundwork the adviser will have done, no-one is better placed to be aware of the end of initial discount periods and fixed or discounted options for those on variable rates for a client.
The potential for mortgage business for the independent broker is as wide as they want it to be.