Over recent years, mortgage payment protection insurance (MPPI), has been subject to growing criticism about what it covers and the value it provides.
When it is compared to motor and household insurance, where customers have a fair understanding of the hoops they need to jump through to make a claim, MPPI is still regarded as opaque and inconsistent.
In a bid to change this, the Association of British Insurers (ABI) launched the ‘Consistent Interpretations’ initiative on 31 March 2003, which is a set of overriding principles to ensure all claims are handled in a consistent way.
The principle of MPPI is simple. If you have an accident, fall ill or lose your job, the policy is there to help you make your mortgage repayments. There are, of course, terms and conditions to detail the process and explain what you can and cannot claim for, and the theory is straightforward. Unfortunately, theory and practice do not always run in tandem. So how can insurers help advisers and their clients to have confidence in the policy, understand what it covers and know when it will pay up?
By adopting a common approach to handling claims, not only for MPPI but all payment protection insurance products, it is hoped the insurance industry will be able to provide customers with a better, clearer understanding of when and how claims will be paid.
This ‘Consistent Interpretations’ initiative brings with it a number of new principles that advisers need to be aware of when discussing products with their clients. These principles are those that the insurers involved in this programme will use when dealing with claims and will also provide advisers with the information needed to help assess whether MPPI would be of value to clients on an individual basis.
This initiative is an agreement between 11 insurers covering 70% of the total payment protection market, and has been designed to cover many of the most common areas of payment protection insurance. It seeks to both simplify and standardise the approach adopted by insurers, with regard to consistency and transparency, when dealing with a payment protection insurance claim, whatever of the type of product.
The ‘Consistent Interpretations’ initiative clarifies a number of common interpretations:
n In the past, one of the main criticisms was the exclusions, and borrowers have complained it is difficult to make a claim. Insurers will now have to list more clearly their policy exclusions, particularly those that relate to unemployment claims.
n With regard to claims involving unemployment, the initiative states that, in some cases, insurers will now continue to pay claims without the claimant being registered for a Jobseekers Agreement, provided alternative evidence of unemployment is given. It is thought that this will be of benefit to lone parents and people aged over 60.
n If the claimant can provide evidence of the Jobseekers Allowance, then insurers will continue to pay unemployment claims for a limited period under certain conditions, such as people taking work within the European Union and they can supply the appropriate supporting evidence.
n The Initiative states that with regard to temporary work claimants can take temporary work during the course of a claim without it prejudicing their ability to resume their claim once the temporary work has ended.
n If the claimant is self-employed, then advisers must refer to the product guide as insurers have agreed to make their literature clearer in explaining what the self-employed must do to submit a valid claim.
n However, if the claimant is a contract worker, then the new guidelines will mean insurers will not seek to decline claims at the end of a fixed-term contract, if the claimant has been with the same employer for over 12 months and had their contract renewed at least once.
n In terms of redundancy, then insurers will now accept voluntary redundancy where it is claimed under the 1996 Employment Rights Act as a consequence of short-time working.
n In line with the New Deal for Disabled People, insurers have chosen to support the Government initiative to help disabled people find part-time work. In these cases, insurers will continue to meet claims for customers for as long as they continue to receive Incapacity Benefit.
n Insurers will also now consider claims for people who leave work to become carers on receipt of appropriate evidence.
n With regard to cases involving pregnancy, insurers have enhanced their cover to accept claims for those medical complications that are not a usual consequence of pregnancy.
n However, for pre-existing medical conditions then, as a minimum, insurers will only be allowed to exclude claims for pre-existing conditions if the condition has been present during the two years prior to a claim.
n In the case of chronic conditions, the ABI has agreed insurers will include new definitions to make clear their position in excluding those serious conditions which are present at the start date of cover.
n This also relates to point-of-sale material. Insurers have agreed this literature must be clearer to ensure it is easier for advisers to find and then to bring pre-existing medical exclusions, impending unemployment and the initial unemployment deferment period to the attention of prospective buyers before the purchasing decision is made.
n Insurers have all agreed eligibility terms will be simplified to ensure the criteria is clearly explained before purchase to avoid customers buying cover when they may not be eligible.
n This may also have an impact on clearing up confusion surrounding the start date of cover. The start date will be clearly explained so consumers will understand when the various elements of cover start. Material will also explain how the policy waiting periods operate including their effect on the claim process, both for the waiting periods which apply to each claim and to the initial unemployment deferment period.
n If the claimant’s situation involves increased borrowing, then insurers will take account of increased borrowing when assessing claims, although advisers should be aware that policy exclusions may apply to the additional cover purchased.
n If the situation requires the switching of claims then insurers have agreed claimants will be allowed to switch from unemployment claims to disability and vice-versa, where circumstances demand, without applying for a fresh waiting period.
n And in terms of late notification, insurers will not now decline claims purely as a result of late notification.
The insurers involved in this initiative are convinced that these actions will improve customer understanding and set realistic expectation levels. It will also help advisers ensure the policy is suitable for borrowers’ needs, making the claims process a more consistent and understandable transaction.
While claims are already been handled in this way, from 1 July 2003, the literature for all brand new schemes will reflect the new principles and all new policy wordings will have to have been changed by 1 January 2004.
The insurers already involved are Norwich Union, Royal & SunAlliance, AXA, GEFI, St Andrews, Cassidy Davis, AON, Direct Line, Lloyds TSB, Barclays and Hamilton. The ABI hopes and expects other insurers will join the initiative in the near future.
Sustainable Home Ownership initiative
The Sustainable Home Ownership initiative was formed by the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) in 1999 and was designed to increase the amount of MPPI taken out by borrowers.
Since then it has claimed that the number of policies in place has increased by over 700,000.
The most current data on the take-up of MPPI shows that, as of the end of June 2002, there were an estimated 2,518,000 policies in force, representing 22.4% of the total number of outstanding mortgages. The data revealed almost 428,000 policies were sold or provided free in the first half of 2002.
However, over 36% of mortgages advanced in the first half of 2002 had MPPI, either free or paid for. The Sustainable Home Ownership initiative’s original target of 55% take-up of MPPI by 2004 was recently deemed unrealistic and has now set itself a new target which replaces this goal.
The new target aims to: ‘reduce the number of possessions over the economic cycle.’ This means two things. First, to try and keep the average annual number of possessions below 30,000 (the average over the last 10 years is nearly 35,000). Second, to keep possessions in any event lower than they would have been in comparable economic circumstances in the past.
The revision has been made because it has become apparent that people are using a wide range of other insurances, such as permanent health insurance and critical illness cover, not just MPPI, to offset their mortgage payment risks. And because the economic environment has been more benign than expected since 1999, the strength of the housing market has allowed many homeowners to accumulate more equity (which helps to offset risk) than could have been anticipated. Unemployment has also continued at lower levels than expected.