With so many contentious issues in the mortgage regulation arena it is easy to put the statutory regulation of general insurance, not due to begin until January 2005, on the back burner. However it is just as likely to impact on a mortgage adviser’s business as mortgage regulation.
Swiss Re is the largest life and health reinsurer in the world. It deals purely with reinsurance and it has no retail presence at all. Working at the wholesale end of the market, its business comes from life insurers and general insurers but it also undertakes research and works closely with product providers to help develop products. As a result it could be said to be a neutral party with its ear close to the market.
Within the company the man tasked with keeping abreast of present and future trends is Ron Wheatcroft, its technical manager. Frequently quoted within the industry, as much for his ability to explain complex issues without resorting to statistical jargon, as his in depth knowledge of the market, his remit includes reading and interpreting the numerous Consultation Papers (CPs) emanating from the Financial Services Authority (FSA) in the run up to regulation of the mortgage and general insurance markets.
While confessing that he has not yet worked through all of its ramifications, Wheatcroft is, in general, pleased by the latest FSA paper, CP187 Insurance Selling and Administration. A previous paper, CP160, had proposed that critical illness (CI), income protection (IP) and private medical insurance should be treated as high risk products and have different, unspecified, sales constraints. But in CP187 this definition has been dropped.
‘I did not believe that the high risk concept was appropriate at all, it is not a simple matter of saying the product is complex and is therefore high risk. If the FSA had gone ahead with its proposals it could have skewed the market to such an extent that it could lead to consumers buying short-term products rather than long-term products, and reduce access to long-term products,’ says Wheatcroft. He points out the FSA’s own figures suggest that up to 70% of intermediaries writing high risk products would have withdrawn from that market if it had forced it through.
However CP187 indicates the FSA now intends to treat long-term care (LTC) insurance as an investment product. Wheatcroft sees a risk of this plan overlapping into other products. He says: ‘One thing we will need to watch, as the process develops, is that consultations on LTC do not inadvertently capture either CI or IP products. There is a danger of this happening, as Swiss Re told the FSA in its response to CP174.’ On the whole though he believes this CP is ‘good news.’
Mortgage intermediaries will be pleased that CP187 says there will be no mandatory general insurance sales exams, however Wheatcroft thinks firms may well look for examinations however, to prove competence. He says: ‘What the FSA has done is put the ball back in the court of the product providers. A growing theme is that regulation is becoming more permissive, but companies will always have to be able to justify what they are up to. There is likely to be a debate in the industry as to whether there will be exams to help firms meet competency requirements.’
One interesting development relates to the use of the word independent. In the investment world the term independent cannot be used unless you offer whole of market advice, while it is proposed that in the mortgage market either whole of market or a ‘representative sample’ will be needed. The FSA has not taken a similar approach for the general insurance market. CP187 says it is not appropriate to require a whole of market approach and has decided not to apply any restrictions on the use of the term independent. Abuses will dealt with under the requirement that communication will be fair and not misleading.
While the future of general insurance regulation would seem to be mild, Wheatcroft sees several other issues affecting protection products sold in partnership with mortgages. Swiss Life was the first reinsurer to refuse to reinsure guaranteed rates on CI. This was done in the face of changing definitions. Wheatcroft explains: ‘The decision was based on our general view, with medical science having such an impact on definitions, that what could be critical today would just be minor in the future. The definition of critical is not sufficiently robust to take us 25 years into the future. We do not believe it is a quantifiable risk and it is therefore an unsound business to be in.’
Although heart attack and prostate cancer definitions have changed recently, Wheatcroft sees no new changes on the horizon but believes there will be more changes as the product evolves. ‘What we will see is debate about what constitutes a CI policy, there is a new generation on the way. It is an interesting business as the numbers show that CI has an appeal but there is scope for a product that better meets consumer needs, rather than being thought of a windfall benefit, ‘ he says.
He believes IP is a better fit for a mortgage than CI because it does not have the CI windfall element, and conditions that could leave a person out of work for a very long time are not covered on a CI policy. He says: ‘IP is much better aligned to meeting income needs during periods of disability. But the public seem to prefer the appeal of a lump sum payment. I think it should be possible to package a lump sum with an income, the key would be to get to a level of income that is sensible.’
Although mortgage-related business has been a big driver of CI, IP business is beginning from a much smaller base.
Term life insurance sold with mortgages is less controversial. Wheatcroft notes that, as lack of confidence on the part of the public and the 1% commission world has effectively made investment advice uneconomical to provide, IFAs have rediscovered protection markets, and it has become more competitive as a result. This has led to a dramatic cut in market rates.
Wheatcroft says: ‘The market will begin to stabilise, with prices settling, although I think we are probably near the bottom in terms of cost, there is not much scope in improvement of rates. There have been quite a lot of opportunities in the past for rebroking but these are reducing.’
Levels of life insurance are still a worry for Wheatcroft who thinks mortgage advisers should try to increase the amount insured: ‘What is interesting is that when borrowers buy a protection product they still prefer face to face advice, even for something as simple as life insurance, but they are much more confident when buying alongside a mortgage. This is mainly because the level of the mortgage determines the level of cover they believe they need. However, generally, people underestimate the level of life insurance they need. Swiss Re estimates that the gap is at least £2trillion suggesting that, purely for personal protection, the amount of UK life cover needs to double,’ he says.
Mortgage Payment Protection Insurance (MPPI) contracts are retained by their providers, and not therefore reinsured, but, as Wheatcroft points out, they can also be used to extend the deferred period on a long-term cover, making it a lot cheaper. Also there is no real alternative to unemployment insurance, as legislation does not allow MPPI providers to write long-term unemployment cover. ‘The difficulty of an unemployment rider is that it has to be written by a general insurer so there would generally be two parties to the contract, one to write the long-term benefit and one the short. Life offices are not allowed to write the short-term benefit either.’
He adds: ‘I have no problems at all with MPPI ‘ provided customers know what they are buying and are aware of its limitations. Perhaps regulation will make it more transparent to consumers.’
In the immediate future Wheatcroft believes mortgage brokers are going to have to look at whether it remains a viable option to sell insurance. ‘There is a decision to be made about whether firms have the ability to manage an in house compliance process for both mortgages and insurance. As with mortgages the decision is whether to become directly regulated or an appointed representative. Or, with insurance not being core business, there may be a role as a straight introducer, although we are still waiting on the final rules. Whatever happens, we are bound to see a fall in the number of advisers as a result of regulation,’ he says.
He concludes: ‘Over 90% of all protection sales in 2002 were conducted face to face so mortgage advisers have a fantastic opportunity. The whole process of regulation as a positive is that it gives businesses an opportunity to decide what business model they wish to provide, brokers would be advised to take that chance.’