The issue of borrowers signing up for their lender’s buildings and contents insurance has received a bad press recently, as it can prove to be more expensive than shopping around for a cheaper deal.
However, while it is imperative to source the best deal for the client, taking out the buildings and contents insurance from the same source as the mortgage in a ‘block’ should not necessarily be dismissed out of hand.
People reportedly spend longer looking for a holiday than they do an insurance policy, but when it is a person’s home and possessions at stake this seems foolhardy. In a market that is becoming increasingly competitive, the message mortgage advisers should be giving to homeowners should be to take a long hard look at their insurance requirements and buy a policy to match, regardless of whether a few pounds in premiums could be saved by going elsewhere. Admittedly not all lenders will pay brokers an extra fee for the introduction of buildings and contents insurance on top of the mortgage, but a number do and in any case repeat business may be generated from goodwill if it is indeed the best complementary product for the mortgage.
When a client is looking to buy buildings or contents insurance there are three routes that can be taken: letting them go direct to an insurer, sourcing quotes from a number of providers, or helping them take out a policy with a lender that has an affinity link with an insurer. This last option is referred to as block insurance.
Buying in block
The ‘block’ relates to the group of policies the provider has with the insurer ‘ some of which, according to the postcode sector rates, will be profitable for the insurer and some will not. But as with any industry that buys in bulk this gives lenders the opportunity to negotiate rates on behalf of its customers, and offer other deals that people with single policies do not necessarily have the power to obtain.
There are advantages for the insurers as well. As lenders are, on the whole, selling these policies to new borrowers, there is no need for front-end acquisition costs, such as marketing and advertising. It is also the lender that administers the policy, employing and training its own staff, which again reduces costs.
As for the lenders, they benefit from offering an additional service to the mortgage borrower and, as is the norm, also gain commission for every policy sold.
New entrants to the market
For many years, block insurance with a lender was the most common way for people to take out buildings and contents cover. However, as with every other area of the house-buying process, new entrants to the market, such as Direct Line, have changed the way people buy insurance. Because new entrants are often able to compete aggressively on price as they have low overheads, block insurance can seem an unattractive prospect, as top-line charges tend to be more than for policies bought direct, or sourced through a broker.
But there are many benefits to block policies that brokers should consider, especially if the client requires a comprehensive insurance package.
The ultimate test of an insurance policy is what would actually be paid out if a claim is made. The problem with comparing a block policy quote with one obtained through another method is that often the borrower is not comparing like with like. For example, a block policy may have unlimited cover for contents whereas a direct quote may only cover a set amount. Quite often people unintentionally underestimate the value of their possessions, so unlimited cover can avoid people being left underinsured. For buildings insurance, block policies typically offer guaranteed rebuilding costs so that, if the sum insured has accidentally been set too low, the policyholder will not suffer.
For people wishing to pay their insurance fees monthly, policies tend to carry an additional fee that can add around 12% to the cost of a policy. Monthly payments for block insurance are interest free (if paid on time), and if the policy is linked to the customer’s mortgage, the payment is simply added to the mortgage’s direct debit. This avoids the need to set up another payment and also ensures there is no danger of the policy lapsing due to an oversight.
Some lenders, typically building societies, offer a discount on a mortgage if an insurance policy is also bought from the lender.
One of the biggest issues facing the insurance industry is that of flooding. Although a moratorium is in place until the end of 2003 that stops householders being refused cover if they are in flood risk areas, some may find themselves unable to renew their policies in the New Year.
However, householders who have block insurance won’t suffer the same fate because policies are normally renewed automatically. This reduction in industry ‘cherry picking’ also applies to other properties which can be difficult to insure, such as those that are unoccupied for long periods of time, or are undergoing major renovation work.
If cost is the most important factor to a householder when they are looking for insurance, a policy sourced externally by a broker can often be cheaper. However, in many cases it is just the initial cost that is lower, and some people may find when they come to renew their policies that charges have risen by as much as 10%-15%. With block insurance, the lender is actively involved in the negotiations on price setting, with the objective for both parties being to gain from the relationship and for the insurer to achieve its return. In this way, borrowers should benefit from careful portfolio management and be protected from substantial increases imposed by insurers with other distribution channels that are trying to address shortfalls in performance. Some block policy providers have even managed to maintain their policy charges at the same level for the last two years.
Nevertheless, block policies may be harder to sell if they are significantly more expensive than those on the open market.
David Hollingworth, mortgage specialist at London & Country, says: ‘Lender insurance is often more expensive than that sourced on the open market. And with a lot of deals not coming with compulsory insurance, it is a selling point of the mortgage as the borrower can find cheaper insurance with a quick search. But when brokers are shopping around they should obviously check the small print, as the cheapest policy is not always the best. And if it looks like it may be a difficult property to insure, the lender’s policy may actually prove to be more flexible.’
And although there are some advantages to block policies, they are not necessarily right for everybody. As the Association of British Insurers points out, a policy must suit the individual and providers must take care to explain any exclusions along with the customer’s rights to cancel the policy.
But for many borrowers, it may be wise to spend a little less time thinking about their holidays, and a little more time thinking about their homes.
Jennifer Holloway is head of corporate communications at Skipton Building Society
In 1988, Mr and Mrs Willis took out a mortgage and at the same time they took out buildings insurance through the lender’s arrangement with an insurer, which in turn enabled them to receive a discount on their mortgage rate.
Living in Ripon near the River Skell, the couple were unfortunate to be one of many victims of the nationwide flooding that occurred in 2000. On 31 October, the couple’s floor disappeared under six inches of water. Unbelievably, the flooding happened again on 2 November, but this time the water rose to two and a half feet. Major refurbishment was required involving the replacement of skirting boards, floorboards and plaster.
Mrs Willis says: ‘The whole process in dealing with our claim was dealt with quickly. On the second occasion the loss adjuster was on the doorstep before we’d even called him as he was dealing with so many other claims in the area. Although some people say getting your insurance with your provider can work out more expensive, we are happy with the deal and we’re not going to change.’
Source: Skipton Building Society