The need to raise standards in the mortgage payment protection insurance (MPPI) market has not been overlooked by industry regulators. New benchmarks were introduced in July 2000 in a joint initiative by the Government, the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) in a bid to increase confidence in products. It worked and a significant increase in the take-up of MPPI was recorded following widespread product relaunches.
Now the dust has settled since this last initiative, there are whispers in the industry that more standardisation is needed. With remortgaging at an all-time high, the need for portability appears to be growing. So should this be made a standard feature in the market?
Minimum standards
The benchmarks brought into force include minimum standards regarding selling and marketing principles, policies, claims and complaints resolution. As it stands, baseline cover includes a minimum of six months’ notice of changes to policy conditions, a shorter excess period and an extension of cover for the self-employed and contract workers. All providers were required to meet these new standards by July 2001.
Mike Dobson, group communications manager at Portman, says the initiative is working well. ‘MPPI has come a long way in recent years and the new benchmarks are doing a good job. Since they were introduced we have seen more people taking out policies than ever before,’ he says.
Although the industry appears to agree that the benchmarks have helped improve the image of the market and increase sales, there is concern that standards will have to be updated regularly to keep up with new mortgage innovations.
Jill Elliot, head of creditor development at Norwich Union, says the current benchmarks may restrict the development of cover for more flexible loans.
‘Mortgages are changing and becoming more flexible, as can be seen with current account mortgages. Although the benchmarks work well at the moment, they could be potentially restrictive. There is every need to regularly review and update standards to make sure they do not restrict the development of new products,’ she says.
Improving portability
Portability is an area which is not included in baseline products. According to the CML, the baseline standards should encourage the introduction of more standalone products, but unfortunately some providers may stick to the minimum standards and fail to use it as a springboard for adding further flexibility to products.
‘Baseline products should help to improve portability overall, but not all providers will want to go beyond these standards, making it hard to transfer the policy from one mortgage provider to another,’ says Bernard Clarke, communications manager at the CML.
Most MPPI products have exclusions for pre-existing medical conditions. According to Simon Burgess, managing director of Goodfellows Group, this is one of the main reasons why portability should be made mandatory. ‘Where there are pre-existing medical exclusions, having portability so the policy can move with the client if they change lenders is essential,’ he says.
Brian Humphreys, managing director of IFA firm 1 to 1 Mortgages, says it should be the right of borrowers who remortgage to carry over policies to their new lender.
‘The whole point of taking out cover is to protect mortgage payments. With new and improved mortgage products appearing almost daily, everyone should have the right to change their lender. The pre-existing medical condition clause is an essential part of these policies. Anyone selling non-portable policies cannot be giving best advice, especially when there are such excellent mortgages currently on the market,’ he says.
Practical problems
However, Clarke says making portability a standardised fea-ture of MPPI products may, in practice, be difficult to implement. Both pricing structure and risk levels need to be evaluated.
‘The problem with portability is that lenders offer their own protection products to cover risk that they regard acceptable to their own particular mortgage products. These protection products may therefore not be suitable for risks attached to another lender’s mortgages.
‘The pricing of products also needs to be considered. Some lenders take different approaches by subsidising products in order to offer a reduced rate. It is difficult to see in these circumstances how products could be portable when premiums are heavily subsidised ‘ it may be impossible to transfer the product to another lender and pay the same premiums,’ he says.
Portman’s MPPI products, like many other lenders’, are not transferable if the policyholder remortages to another lender. The lender has no plans to change its products and does not see the sense in trying to please borrowers who have fled to remortgage with another lender. ‘Primarily, we focus on our own members ‘ they are our first priority. If someone is remortgaging, it may be a good time for them to review other financial products anyway. Although I can recognise the benefits of portability, it is not something we are planning to introduce,’ says Dobson.
Mark Smitheringale, head of corporate communications at Skipton Building Society, says if portability was included under the market benchmark, lenders may feel uncomfortable with their mortgage customers having protection supplied by a rival lender.
‘If the market moved that way, then we would move with it. We would have no problem retaining policies from customers who remortgage to another lender, but if the boot was on the other foot I do not think we, or other lenders, would feel comfortable with customers bringing in another lender’s protection plan,’ he says.
However, Burgess says the reluctance of lenders to keep products non-portable comes down to profit margins. Although he believes it should be a standardised feature of all products, he says it is unlikely to come to fruition while there is still money to be made on tied policies. ‘Unfortunately, lenders that do not provide standalone policies are making too much money for the CML to bring about changes. In my view, lenders that tie MPPI policies to mortgages should provide the cover free ‘ it really is a scandalous approach.’
Unlike some other lenders, Norwich & Peterborough Building Society has made its MPPI products fully portable. David Farringdon, head of insurance at Norwich & Peterborough, says with more borrowers remortgaging, it makes sense for portability to be standardised.
‘We have decided to make our MPPI policies available to borrowers moving their mortgages to other lenders. I do not see the sense in losing out on MPPI customers just because they remortgage. I think this is the way the market will inevitably go and portability will need to become a standardised feature on all policies,’ he says.
A conflicting view is that if all products are made portable it could reduce consumer choice. Smitheringale believes that more comprehensive benchmarks may work negatively in the market. ‘In some ways, further standardisation in the market may remove consumer choice and instead of being able to choose lower premiums for a lower scale of cover, they may be forced to purchase higher premiums,’ he says.
Offering choice
Legal & General (L&G) Insurance offers both portable plans, which it sells on a standalone basis, and non-portable plans, which it underwrites for lenders. Steve Bryan, head of marketing at L&G Insurance, says although consumers should be given the choice of buying standalone policies, it would narrow choice if it was to become a standard feature.
He says: ‘Portability spreads risk, so there may be some impact on price as rates reflect the selection against risk. But if it were to be made mandatory, it could detract from consumer choice.’
Due to the high numbers of borrowers remortgaging, consumers are becoming increasingly aware of the importance of portability when choosing an MPPI product. Suzanne Moore, spokesperson for the ABI, says that it therefore makes sense for providers to at least give customers the choice of buying a standalone policy or they may decide to turn to a different insurer.
‘The issue of portability is key and forward-thinking companies will make sure the plans they offer are portable as part of their marketing strategy. Consumers are definitely beginning to recognise the benefits portability can bring,’ Moore says.
On the flipside, portability may encourage consumers to stick with the same plan without reviewing other choices on the market. Unless policyholders are aware of new innovations on the market which could suit their needs better than their current policy, there could be a risk that they stay with the same plan without taking into account other products or their own changing needs.
Staying ahead
Roger Edwards, head of product development at Scottish Life, says that if portability becomes standard, it is important that policyholders regularly review the terms and conditions on their policy to make sure they are getting the best cover.
‘Portability is absolutely essential. However, policyholders should be given the opportunity to review their cover and make sure they understand their options. If policies are carried over to another mortgage lender, the policyholder’s needs may well have changed,’ he says.
In today’s market, it seems that portability is becoming an increasingly valuable feature on MPPI policies. As more consumers become clued up on the benefits that portability can bring, such as being able to carry over criteria for pre-existing medical conditions when they remortgage to another lender, demand for the feature as standard could grow.
However, if standardisation in the market is rolled out further, there is also the risk that consumer choice could be narrowed and lenders could lose money from tied deals. As mortgage products become increasingly flexible and loyalty to individual lenders begins to languish, it is essential that MPPI products move in the same direction. Consumers need to have access to protection that is equally flexible if providers want to keep a tight hold on borrowers.
