The creditor insurance sector is unlikely to pick up until the Competition Commission reveals the results of its review, due out later this year. Francesca Breeze reports
Definitions of credit in the Collins’ English dictionary include phrases such as; belief, trust, trustworthiness, honour or reputation ... anything that procures esteem or honour. It’s ironic that creditor is derived from this once noble word. Why once noble? Because the perception is there’s nothing much noble about credit or creditor insurance these days.
Credit providers have been accused of being too ‘free and easy’ with their loans and are suffering losses as a result and consumers are being punished for ‘living beyond their means’ by having their credit cards removed. Both sides blame each other and so the downward spiral continues.
The downward spiral in the creditor market is due to its distribution set up – put simply, the right products are in the wrong hands. This sector is commonly referred to as beleaguered and with good cause. After more than two years of scrutiny and criticism, courtesy of the Citizens Advice Bureau, Office of Fair Trading, Financial Services Authority and Competition Commission, many of the high street ‘brands’ are regarded as anything but honourable or trustworthy.
Their concerns over low claims ratios, high commission rates, price differentiations and product variations are well documented and whilst they come as no surprise to creditor insurers and distributors, they have shaken consumer confidence.
What was once discussed behind closed doors is out in the public domain and customers who trusted and respected the ‘big brands’ now question their morals. In its Emerging Thinking document last year, the Competition Commission questioned whether lenders were using millions of pounds worth of Payment Protection Insurance (PPI) premiums to prop up their credit losses. Very few sectors are being so publicly berated.
Businesses underwriting and selling creditor insurance could be forgiven for feeling battered and bruised, they’re all being ‘tarred with the same brush’ and reputationally have hit rock bottom. And these reputational issues, together with the credit crunch, repeated interest rate rises, spiralling food, fuel and utility bills and a general nervousness about purchasing PPI will undoubtedly contribute to a decline in sales.
Players in this sector recognise the main lenders have a monopoly when it comes to selling PPI - it’s a hugely profitable business - but in a scenario that smacks of David and Goliath, the smaller fish are powerless to break the stronghold of their gargantuan counterparts.
Competition Commission
They do have an ally in the Competition Commission who has made it clear that the distribution dynamics of this sector will have to change. It has already stated that the limited competition at retail level and huge profit margins cannot continue. The Commission is an advocate of consumer choice and champions the use of intermediaries in the sales process (they were singled out as making significant sales of MPPI and customers report greater trust in this sales channel).
The Commission also recognises the difficulties stand alone distributors face when trying to increase their market share. So what’s the way forward?
It’s been suggested that the future of PPI lies in separating the product from the credit provider. But given that around 90 per cent of this £5 billion plus sector is in the hands of high street lenders who do indeed bundle PPI in with their credit, they will not be in a rush to adopt this approach. The spectacle of lenders taking a panel-based approach, essentially becoming ‘super-intermediaries’ offering their products alongside those of others, may well become a reality as the Commission is considering this option.
Lenders won’t change
However, any step-change would involve a massive investment in new systems and processes and there’s a general reticence to reposition any products until it’s absolutely necessary. When responding to the latest Commission missive on the Profitability of PPI (Working Paper January 2008) lenders were unable to provide separate management reports. The Commission reported: ‘Distributors said it was not meaningful to assess the financial performance of PPI as an add-on as it is fundamentally and inextricably linked with the sale of the credit...’.
This comes as no surprise. It’s widely-acknowledged that the reason this sector is suffering from such a malaise is because lenders are unable or unwilling to change their systems and processes. After all why should they? Their infrastructure dictates that credit and PPI is sold as a package and the profits generated are huge – why change a successful business formula?
Steve Devine, chairman of Protect, the trade association of creditor insurers, believes lenders seldom change insurers because of the processes involved in doing so: “They would have to go through due diligence, satisfy regulatory demands and ensure system compatibility. Lenders are happy with their current arrangements because they are able to control the relationship.”
Many PPI providers have long been frustrated at the lenders lack of appetite to embrace new technology as an enabler for more innovative products. Ian Moffat, managing director of Assurant Solutions UK & Ireland, comments: “The larger distributors are constrained by IT, having to work within their legacy infrastructures. They use a technological platform that’s designed to work in a certain way and cannot accommodate the new style risk-based approach PPI products that are now on offer. It’s difficult for them to separate out their systems as they’re linked in with loans, etc. As a result it’s hard for those ‘thinking outside the box’ and offering a wider portfolio of products to penetrate this distribution channel.”
Risk-based pricing
Assurant’s Matrix portfolio offers around 250,000 product and pricing combinations, ensuring that each customer’s individual needs are met. Moffat explains: “We already recognise that customers don’t just want ASU (accident, sickness and unemployment), they want cover for payment holidays, divorce and having to pay university fees. People are more likely to be divorced than unemployed and creditor manufacturers and distributors must ensure their products reflect this. Lenders should be looking at offering ‘pick and mix’ options and selling products that reflect the changing dynamics of consumers’ lifestyles. For over 25 years, customers have had to accept this ‘one size fits all approach.”
Chris Biles, syndicate underwriter at Cassidy Davies, agrees: “Consumers should be able to choose a product that meets their needs - those who do not have risk-based products in their portfolio are not working within the Treating Customers Fairly (TCF) guidelines. Money will have to be spent on enhanced web-based systems that take into account the differing lifestyles of customers.”
Not all lenders have their head in the sand, some are beginning to embrace new products and ditch the unpopular single premium policies. Biles continues: “We’re providing PPI to lenders who are selling it separate to the credit and the premium isn’t collected with the monthly repayment. At last I’m beginning to see evidence of widespread engagement across the industry. There appears to be a genuine cross-sector desire for innovation and to improve the customer offering. If one or two of the major lenders change their proposition, others will follow.”
Perhaps the profits made on PPI could be re-invested in technology and processes, allowing more lenders to de-bundle PPI and extend their portfolio.
Training
Manufacturers such as Assurant and Cassidy Davies firmly believe training is crucial. Moffat comments: “We have a duty of care to our distributors, so run TCF workshops, individual training and train the trainer programmes. It’s important we prove to ourselves that our products are being sold to the customers they are intended for.”
Simon Burgess from British Insurance believes the sales process falls down for many distributors because there are no generic cross-industry (mortgage and insurance) education and training programmes in place. He says: “As a non-advised general insurance product it only needs to meet the FSA’s training and competence requirements. Consumer education will help, but greater training, education, clarity and collaboration is needed on the sales side. Lending institutions need to work with trade bodies, insurers and intermediaries to raise standards.”
TCF
Despite intermediaries being identified as ‘trustworthy’ and ‘meeting the needs of customers’ in the Commission’s Emerging Thinking document, there’s a worry that more will reduce their involvement in PPI due to the reputational crisis, increasing demands of the FSA regulatory regime and the threat of litigation. “All people want is clarity re: rules and requirements. Often distributors struggle to interpret the principals-based announcements from the FSA,” explains Biles.
Burgess warns: “If the intermediary hasn’t demonstrated TCF, then litigation could be looming. Those who provide credit have a responsibility to ensure the recipients have sufficient funds to repay that credit. Otherwise intermediaries could be faced with a scenario where customers sue them for not offering facilities to repay the debt.”
Despite the doom and gloom surrounding this sector, many believe creditor has a crucial role to play and should not be abandoned. Moffat comments: “Consumers need protection - PPI is providing financial security for a whole raft of society and where sold properly it IS meeting a need. We shouldn’t lose sight of that.”
Burgess echoes these sentiments: “The State will not provide substantive help to people in difficulty so PPI is a valuable safety net for those who may not be able to keep up repayments – it does add value and is acknowledged as being beneficial.”
Lack of confidence in the product is not only resulting in consumers and some intermediaries turning their back on PPI, but also insurers are considering moves out of the market. Burgess reflects: “Insurers who choose to leave the market will leave their customers without cover, whilst those who have not purchased PPI, due to a lack of confidence, also leave themselves exposed to further financial hardship.”
News that the Ministry of Justice is considering proposals to grant consumers a 12 month amnesty on debt repayments if they fall into financial difficulties will only serve to push potential purchasers further away from PPI. Consumers who need extra time to pay off their debts will have to go to court for a new Enforcement Restriction order and if granted, could receive temporary relief from the debt being enforced and collected. It’s not clear who will benefit and clarification is needed on which debts will be included. The consultation ends on 16 April 2008.
Repairing reputation
What is clear, however, is that creditor insurers and distributors must move swiftly to win back the hearts and minds of consumers. Those being lambasted the most are keeping quiet and waiting for publication of the Commission’s recommendations, but given this is not due out until later this year and the implementation of remedial measures is not scheduled until February 2009, it’s vital consumer confidence is restored now. The minority must act now to repair a reputation that’s been damaged by the majority.
In its recent Coping with Crises, Household Protection Needs Market Study, the Association of British Insurers found a quarter of people have no idea how they would cope if they were to lose their regular income and out of 2000 interviewed, only 15 per cent had PPI. Key barriers to purchasing insurance were; affordability, confidence (knowing what would pay out) and advice (locating neutral sources).
The ABI reports that PPI reduces the debt and essentials gap by three quarters in the first year, so players in this sector must restore PPI’s credibility. Equally, the Commission should be recommending and implementing remedial measures this year.
It’s been suggested that lenders are in a state of denial and not facing up to their responsibilities. Burgess comments: “They know they will not be shut down by the FSA because of their size – it gives them an extra tier of protection. It’s incredulous that lenders do not have the processes or systems to empower consumers, the people at the end of their supply chain, to make a choice when it comes to PPI. They do for other forms of insurance.”
Moffat concludes: “ We have to change the mindset of the distributors – lenders separate other insurance products from their loans, look at life and home insurance, these aren’t bundled in with the mortgage, so why PPI?”
And while the debate rumbles on, those in the minority concede that one person’s threat is another’s opportunity. The creditor distribution landscape will change, so let’s hope those responsible for this debacle are receptive to change. It’s going to be a long year.
Francesca Breeze is a freelance journalist
Date: 14th, July, 2008
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