During the past year the mortgage market has remained buoyant and been supported by a lot of remortgaging while interest rates have remained low. However, many homeowners have now been through this process and interest rates are forecast to rise next year. It would seem that for mortgage brokers, life may become a little tougher at a time when financial advisers in other sectors will be seeing some light at the end of what has been a very long tunnel.
However, there are two key areas where mortgage advisers can boost their income which in the past they might have considered peripheral to their core business: building and contents cover and Mortgage Payment Protection Insurance (MPPI).
Many advisers have already latched onto the benefits of selling buildings and contents insurance as part of the mortgage package. Not only are there good financial reasons but more importantly it enables them to offer a more complete house purchase service.
But there have been two main areas of concern so far as the adviser is concerned. What if the insurer disputes a client’s claim? This is not going to endear his client to him in terms of future business. All major insurers go out of their way to ensure claims are settled amicably and professionally these days, as the cost of acquiring clients and their associated loyalty far outweighs the cost of disputing the claim and losing them. So if there is a dispute you can be pretty sure there is good cause.
The second is the time in administering the sale, but there are a number of systems on the market that enable mortgage advisers to provide this service with comparatively little fuss.
Trust and choice
To help choose insurance products there are a number of mortgage sourcing options, such as Mortgage 2000, Mortgage Brain and Trigold, that offer products from a range of insurers. While a choice may initially appear attractive the most likely scenario is that people will gravitate towards the lowest premium not the most suitable cover. This can raise questions over suitability. So the adviser might be best to focus on one insurer he can trust with a range of products to suit his clients. Indeed many have operated in this way for some time.
There are also issues to be resolved over forthcoming Financial Services Authority (FSA) regulation, and some may chose to become an appointed representative (AR) and take on the products provided by the relevant principals. However, if an adviser has a sizeable mortgage book and is considering being regulated directly by the FSA from October 2004 he could approach an insurer or third party administration company with a view to offering his clients a bespoke product by white labelling another insurer’s product range. The attraction of this is that he adds value to his brand and that all the administration is handled by a third party.
But which way will advisers go? In a survey undertaken in July, it was found that two thirds of mortgage advisers were still unsure as to whether to become authorised directly with the FSA or become appointed representatives.
When asked: ‘Do you plan to become directly authorised or take the AR route?’, 64% of respondents were not sure, 28% said they would become ARs and only 8% were clear that they would go direct.
There seemed to be a mixture of confusion and apathy with regard to this impending regulation. This was worrying but was borne out by the fact that 78% of respondents felt that the FSA had been ineffective in its communication, but at the same time 67% admitted that they had not read the consultation papers.
The situation has improved in the last few months, but while October 2004 may seem a long way off, advisers need to consider their position well in advance and get the appropriate application to the FSA by April 2004. Failure to do so could result in them being unauthorised by October 2004 due to the number of applications to be vetted. So the message is address the issue now.
As discussed earlier, there are two insurance options open to mortgage advisers who want to boost their services and finances – building and contents insurance and MPPI.
A few years ago the Council of Mortgage Lenders set a target of 55% of homeowners having this cover. While it has subsequently questioned how realistic it would be to achieve this, the need for more homeowners to have cover is still valid. Research by CETA has shown that only 1% of advisers had a take up rate in excess of 55% for MPPI; with 49% selling MPPI to between 11%-25% of their clients.
It is interesting to note that while mortgage advisers account for some 50% of the lending market they only account for 25% of MPPI sales. Taking out a mortgage is a financial milestone for many people as purchasing their property is likely to be the biggest investment they ever make. This is why protection in the form of insurance is so important. But despite this many intermediaries are missing out on a major income stream and opportunity when it comes to selling MPPI.
It is widely accepted that there are no guarantees that MPPI will mean a home is not repossessed, but a policyholder who needs to claim due to unforeseen circumstances will undoubtedly be far better with cover than none at all. Despite this there are millions of homeowners who do not have MPPI, and far too many intermediaries who are not discussing this valuable protection with them.
With sales of new mortgages continuing to increase and providers looking to offer better value and cover, now is the time to reconsider MPPI. Talking to a client about their particular needs may reveal that they already have MPPI, but took out an uncompetitive contract, perhaps a single premium policy. If so, it is likely that they can obtain a better deal or improved cover. It is time for a fresh look at MPPI so why not find out what is on offer and how advisers can help their clients protect their homes?
So just what are the financial benefits of providing general insurance and MPPI? Look at the example of earnings for a mortgage broker who has been selling general insurance over the last ten years – as illustrated in the chart below. This is based on writing an average of five household policies per month and three MPPI policies per month. The retention rate is an important part of this growth, with the average policy staying on the books for six years in this illustration. This so-called add-on becomes a significant source of income to any broker and one that should be taken seriously.
Therefore, if an adviser wants to boost their income, without the burden of too much administration, as well as being seen to provide a value added service to their client base they would be well advised to consider the household and MPPI packages now specifically tailored for the market.
Not only that, they might also take note that some of them are designed to fit in with the manner in which financial advisers work rather than the insurer – a point which will be familiar to most people.
In summary, as well as planning their budget for 2004 advisers must consider which route they are going to take with regards to the forthcoming regulation and having done that make the appropriate application. The issue of providing general insurance and MPPI cover to clients is a factor that should also be taken into consideration.
The route intermediaries choose for regulation will determine the choice of insurance products they have to sell.
Mortgage advisers account for over 50% of mortgage sales, but less than 25% of MPPI sales.
Offering own-branded insurance can help intermediaries grow new revenue and expand the final sales package.