Following the initiative to boost minimum standards on MPPI policies from the Association of British Insurers (ABI) and the Council of Mortgage Lenders (CML) in 1999, there has been an increase in the number of homebuyers taking out insurance to cover their mortgage payments. But, there are still too many homeowners who remain unaware of the risks they face if they are unable to work due to accident, sickness or unemployment.
As of July 2001 all ongoing MPPI policies must conform to the minimum standards put in place by the ABI and CML. This was the final phase in the sustainable home ownership project initiated by the two bodies in July 1999, which was designed to improve the clarity and the take-up of MPPI. Suzanne Moore, spokesperson for the ABI, says: ‘In 1999, we introduced a minimum baseline specification for new MPPI policies, but there were obviously policies sold before this, so we set a two-year deadline to make sure that all the mortgage protection policies in place meet these guidelines.’
The latest figures show that the baseline standards have had a positive effect on sales. By the end of 2000, over 33% of all new mortgage loans were insured, compared with 29% in 1999. And in total, 21% of all mortgage holders now have MPPI, compared with 18% before the minimum standards were introduced. Bernard Clarke, spokesperson for the CML, says: ‘The latest figures for the second half of last year show that just over one third of all home loans taken out had insurance protection. In 1998 this figure was only 23.6%, so there has been a steady pattern of progress. There are now around 2.4 million policies in place, which works out as 21.1% of all home loans. This is a 25% increase on 1998, where there were only 1.9 million in place.’
However, this still falls well short of the Government’s expectation that around 55% of borrowers should have MPPI in place and there is still work to be done by both providers and intermediaries to ensure that the Government can reach this target. But, Clarke says that this figure will probably not grow much more. ‘Not all borrowers may need protection because of job security and their ability to find another one, but something like half of all mortgage holders do need protection,’ he says.
Rick Riding, chairman of Paymentshield, says that the largest hindrance to growth in the short term is an outdated belief that the State will provide. He says: ‘The biggest problem is that the majority of people still think that they are going to get paid by the State, and they are going to make these assumptions until they are told otherwise. It is up to intermediaries to make sure that they explain it properly.’
There is still a long way to go before the Government’s target figure is reached, however, intermediaries are ideally placed to be the main driving force behind increasing sales of mortgage protection. Gill Elliot, head of creditor development at Norwich Union, says: ‘The real challenge is to find those borrowers who already have a mortgage, but do not have protection and have not considered protecting it. When IFAs are interviewing clients to discuss their protection needs it is the ideal opportunity to introduce the subject and get borrowers to look at the bigger protection picture. Getting people to understand the level of help that they will get if they lose their job is a slow process.’
In 1995, the Government introduced greater restrictions on mortgage interest relief, in a bid to shift the burden onto the private insurance sector. The Government ruled that from October 1995 borrowers would have to wait nine months following a disabling event or accident, before they were eligible for help. In addition, those borrowers with a mortgage taken out before this are not eligible for any support for the first two months, and then they will only receive half of the amount needed for the mortgage repayments for the next four months. The Government has also tightened up the qualifying criteria so that borrowers will not be eligible for relief if either partner has savings of more than £8,000, or if the claimant’s partner is working more than 16 hours per week.
One of the main reasons behind the introduction of minimum standards by the ABI and CML in 1999 was to raise the awareness of what the State will provide and the profile of MPPI. It was expected that this education process would come from both intermediaries and providers who sell the products, but some providers have reported that the number of IFA sales is quite small and in some cases has actually declined since then.
Elliot says: ‘Anecdotal evidence suggests that IFA penetration rates are much poorer than direct sales. It is unclear why this is, unless mortgage protection is just further down the agenda compared with critical illness protection, because they are concerned with such a wide range of products.’
Riding disagrees. He says that sales of MPPI through intermediaries is increasing steadily, which is partly due to the increased clarity but also due to the wider variety of products available. He says: ‘The distribution channels are changing. Lenders used to get a good level of distribution through both their branch and introducer business. Now they are finding there is much less business through the intermediary channel and so they assume that introducers are not selling MPPI. But in our experience the actual number of cases has not gone down it is just that intermediaries are searching out the best deals for their clients. Lenders are not aware of business written ‘off book’.’
The CML and the ABI also hoped that the introduction of baseline standards would improve the image of MPPI as an insurance product. For many years the poor take-up in MPPI was blamed upon unclear product information and perceived problems with claims. However, since the introduction of minimum standards the industry estimates that insurers now pay out more than 80% of MPPI claims, and a recent NOP survey found that almost three-quarters of borrowers receiving claims payments felt that it had been easy to make the claim.
A criticism of MPPI has always been that it is seen as being an expensive product for the amount of cover it provides. But Table 2 shows that ASU premiums are falling with prices starting from £2.93 per £100 of cover with a 60-day deferment period, whereas at the same time last year the cheapest equivalent policy would have cost £3.75.
Getting value for money
However, there are still some valid criticisms of MPPI, for example, the limited benefit periods when compared with other products such as mortgage income protection (MIP) policies, which pay out until the claimant recovers or finishes the mortgage term.
Dale Tranter, senior researcher at Misys IFA Services, says: ‘For a difference of a few pounds per month it may be worth going for the better product. The percentage difference in the premium is only a small amount of the total monthly outlay, and so if you are one of the 5% of claimants whose claim goes on past two years, you would be glad that you had MIP.’
Nevertheless, he concedes that there is still a place for MPPI. ‘If the client had all the possibilities explained to them and they decided to take the risk that they would not be among the 5%, it would be understandable if they chose MPPI,’ says Tranter.
However, Riding feels that unfav-ourable comparisons to MIP lead to misconceptions about the value of MPPI. He says: ‘While MIP does pay out longer on disability, it does not on unemployment and the majority of people we have questioned still perceive unemployment as being the greatest risk to themselves. According to our research, 70% of our clients fear unemployment compared with 30% who fear disability. The average unemployment claim is six months, and the average accident or sickness claim is five and a half months. 95% of claims are settled within the first 12 months. MPPI is a short-term solution to a short-term problem.’
Despite this, there are now a growing number of providers who are entering and developing the MIP market. Richard Verdin, director of housing and protection markets at Legal & General, says: ‘According to our income protection (IP) sales, which include both mortgage specific and non-mortgage specific IP, the market has grown by 27% over the last six quarters. This has been helped largely by the reductions in Government support and the greater array of products on offer, but it is still a significant growth area.’
While MIP with an unemployment rider policy has a number of advantages over MPPI policies, it is not suitable for everyone and those people in high-risk occupations may find that premiums are too high, if they are accepted at all. There are advantages and disadvantages with both policies, and borrowers will need to have both policies explained to them to ensure that they get the right one for them.
Verdin says: ‘I would advocate the provision of choice. For some people short-term cover will be the best option, for others a long-term plan, and others a combination of the two. The benchmarking has brought the products closer together in terms of what cover they provide, and growth has come from tied agents and the number of IFAs selling the products.’
ABI/CML baseline standards for MPPI
• All policies will offer accident, sickness and unemployment cover. Insurers may also offer a split unemployment or A/S-only policy as an option.
• Initial qualifying period for unemployment is up to 60 days from date of completion if arranged at same time as mortgage, or up to 120 days from application if arranged after the mortgage.
• Excess period is maximum of 60 days.
• Joint cover is possible up to 100% of mortgage payment for each joint borrower; joint cover can be apportioned, or both can purchase up to full cover.
• Re-qualification after maximum benefit paid for disability claims where a different disability occurs once the maximum benefit has been paid, the borrower will claim for subsequent claims after one month’s employment.
• Monthly benefit must cover at least the mortgage repayment to the lender at the start of mortgage; it is the borrower’s responsibility to ensure monthly benefit is adequate to their needs, but lenders/insurers must take all reasonable steps to remind customers to ensure adequacy of cover levels.
• Can include mortgage payment, mortgage repayment vehicle (endowment and PEP, but not pensions) and buildings/contents insurance at borrower’s option. Monthly benefit will cover the MPPI premium if not already waived in the claim period.
• Minimum periods of notice for change of contract is 30 days for cover changes, 90 days for withdrawal/cancellation if no substitute scheme offered, 30 days if substitute scheme offered or 180 days’ minimum period between consecutive changes.
• Contract worker eligibility:
• Annually renewable: if contract has been renewed at least once or under contract with same employer for a period of at least 24 months (unemployment benefit paid for up to 12 months if contract not renewed or terminated early).
• Individually negotiated contracts: if employed by the same employer for at least six months and the contract has been renewed at least twice (unemployment benefit only paid if contract terminated early and benefit ceases at end of contract term).
• Claim eligibility for self-employed: the need to have ceased trading involuntarily and declared this to the Inland Revenue and have registered for Job Seekers Allowance even if not eligible for benefit (as will still receive National Insurance credit).
• Pre-existing conditions which have been treated/diagnosed/investigated during the 12 months before inception.
• Pre-existing chronic or continuing disease.
• Drug abuse.
• Pre-existing chronic or continuing diseases.
• Radioactive contamination.
• Pregnancy (normal complications, for example morning sickness, post-natal depression).
• Insured persons must live and work in the UK or meet certain criteria if their job takes them to the EC.
• Borrowers must not be in arrears.
• Employees must have been continuously employed for six months even if with more than one employer.