Following on from the Competition Commission’s review into the PPI market, that sector is now ripe for reform and some insurers are looking to develop new products. Francis Higney reports
Logic presumes that when one finds oneself in a hole it is normally prudent to desist from further digging. Unfortunately it would appear that some of those lenders that sold payment protection insurance (PPI) alongside loans have yet to hear of that maxim let alone act on it. That’s the only impression that can be garnered from the news that some customers who were mis-sold loan insurance are being offered ‘gesture’ payments, rather than full refunds in an effort to avoid real damage to what was once a very profitable book of business.
The finger is being pointed in the direction of the Royal Bank of
Latest figures from analyst Datamonitor reveals that total consumer spending last year fell, which led to a contraction in PPI gross written premiums (GWP). According to figures published in its market report UK Creditor Insurance 2008 it shrunk by £4 billion in GWP in 2007, a decrease of 12.4 per cent since 2006. At the same time the personal loan PPI market contracted markedly as penetration rates and gross advances on personal loans fell. Of course, this already fragile situation wasn’t helped by the on-going investigation into the sector by the Competition Commission. This perfect storm of poorer penetration rates, weaker underlying credit markets, regulatory scrutiny and negative publicity points towards a sector struggling to find its way. It’s a sector that is ripe for reform and that reform seems set to be driven by government agencies and consumers.
Changes afoot
Despite a large reduction, PPI products related to personal loans constituted the largest proportion of the
Penetration rates for personal loans remain high relative to other credit lines and account for the largest consumer credit product, excluding mortgages, sold in the
Work by various regulatory bodies such as the Financial Services Authority, the Office of Fair Trading and the Competition Commission (CC) in recent years has highlighted a number of structural flaws and detrimental sales practices in the creditor insurance market. These ranged from lax sales controls and failing to inform consumers of the true cost of a policy, to consumers not comparing policies before purchase or switching later on to a better deal.
The FSA review has culminated in it ordering all firms still selling single premium PPI with unsecured personal loans to withdraw the product by no later than 29 May. Any sale of single premium PPI policies will be banned after 1 October 2010.
A number of major banks had sniffed the wind and have already stopped selling such products with at least some now offering or planning to offer regular premium PPI instead of a single premium product.
This is a necessary step. However, there must be questions over lenders’ ability to penetrate the marketplace as they once had – especially now that the Competition Commission is insisting on a clampdown on how and when customers are sold the product.
Distribution
The vast majority of the
To this end it is introducing a range of measures aimed at giving consumers the time and ability to make a considered and an informed choice and other providers the chance to compete far more effectively with the initial credit provider.
Crucially lenders will be prohibited from completing sales of PPI until seven days after the sale of the underlying credit product. The CC hopes that this will give consumers time to research the market. Consumers who decide that they want the PPI offered by their credit provider can contact that provider to purchase it after 24 hours.
So where do these new initiatives leave the lender? They cannot afford to completely abandon a market worth some £4 billion plus a year, so how do they grab a slice of it? One way is to take a radical approach and ally with an independent PPI expert.
“Providers are going to lose a lot of money if they do not act quickly,” warns Simon Burgess, managing director of PPI specialist provider British Insurance. “They must quickly develop attractive products that maintain cover for their clients. These creditor products need new pricing and lenders need to take this on board. If they can’t do that themselves they should go to the market where independent providers have the experience and expertise and where suitable products can be delivered to them off the shelf.”
Sandy McPherson, head of marketing at Paymentshield, believes that the new regulations could be a real boon for brokers.
“Traditionally brokers have struggled to access the market as lenders locked in their clients as the same time as the loan was agreed,” he says. “The enforced waiting period provides brokers and their product providers with an opportunity to get in front of customers and recommend the most suitable cover tied to their circumstances.”
But Burgess is of the opinion that consumers will do their own product research in the absence of anything being offered by the lender.
“The internet will be the outlet of choice for consumers seeking cover,” he says. “Lenders should look to get their products white-labelled to meet this new online demand.”
Genworth Financial provides banks, brokers, advisers and other financial institutions with mortgage insurance, payment protection and other products.
“We offer products through intermediaries and hope the sector does have a future. That said, it remains to be seen if the channel will adjust to the new framework for selling PPI,” he says.
MPPI
Mortgage Payment Protection Insurance premium income fell to £1,049 million in 2008, reflecting a slowdown in growth for mortgage gross advances and lower penetration rates, according to Datamonitor.
According to the Council of Mortgage Lenders (CML), banks and building societies continue to dominate the distribution landscape of MPPI, with 73 per cent of polices being sold through this channel. Intermediaries, such as mortgage brokers, constituted the second largest distribution channel for MPPI, accounting for 26 per cent of policies sold while only 1 per cent were sold via the direct channel, which includes dedicated insurance brokers as well as direct insurers.
This reflects the fact that most MPPI is sold at the point of sale, with many consumers unlikely to seek MPPI from standalone providers or direct players. But will the new rules change this landscape?
Paymentshield is of the opinion that the intermediary market will benefit from the fall-out over the CC review and has recently signed preferred provider agreement with a number of mortgage networks to further tap into this distribution channel.
“Brokers will be much more to the fore as the demand for financial advice increases as the recession continues to bite. There is no substitute for face-to-face advice from a broker that can tailor products to the customers’ needs,” says McPherson.
A belief echoed by Norwich Union: “Brokers are in the front-line speaking with customers about their mortgage and protection needs. It makes excellent sense for the customers’ needs for MPPI to be addressed via a broker,” says a spokesman.
Ted York, managing director of wholesale broker Berkeley Alexander, believes brokers can play a part if they partner with the right providers. “As unemployment hardens some underwriters will pull products altogether and advisers should develop a relationship with those of us firmly committed to the market,” he says.
Product innovation
Homeless charity Shelter has warned that one in five homeowners with sub-prime mortgages are at risk of losing their homes in the next six months, as they struggle to keep up with monthly payments.
New figures from the Centre of Economics and Business Research suggests that this is already happening. Its findings reveal that the average family has seen its disposable income drop by more than £150 a year. This is happening because pressures on wages is downwards in a worsening economy where unemployment is also rising. Increased taxes and higher basic expenses such as utility bills contributed to the fall-off in disposable income. So will providers have new products in place to meet the government timetable for the end of single premium policies?
Lane at Genworth Financial says: “We have a strong team developing new products and have invested in perfecting our understanding of current consumer needs. Until very recently distributors were reluctant to commit to new products until the outcome of the Competition Commission inquiry was known. We're looking forward to launching some new approaches with our clients this year.”
Norwich Union too is also keen to develop new products. “Work is well progressed to develop an alternative regular premium products to replace single premium,” claims a spokesman. “As the impact of the economic recession and Competition Commission remedies are understood it is likely that we will see further changes to the product in response to the new and very different market.”
However, HBoS appears to see no urgency with a spokeswoman only saying the firm is “committed to providing our customers with valuable products which are suited to their needs” and refused to speculate further.
But there is some concern that products currently on the market are not meeting customers’ needs as they struggle to cope with a worsening economic environment.
Ian Moffatt at Assurant Solutions believes it might be time to reinvent the product to move away from being a product that exists only to protect income into an insurance product that helps consumers mitigate against the exposures they face to their household budgets from increasing costs.
He’s concerned that current products do not cater for the stresses and strains of modern life such as divorce and separation where often one person is left to make the mortgage payments when a joint mortgage was originally agreed. CML figures from the 2005 Repossession Risk Review indicate that these life events accounted for almost a third of all mortgage arrears yet these factors are not typically covered by existing payment protection insurance products.
Yet
Where’s the cover?
New data from the Association of British Insurers (ABI) shows that unemployment claims on Payment Protection Insurance (PPI) rose to 19,105 in November 2008, up from 8,772 in November 2007 - an increase of 118 per cent.
At the same time the number of home owners seeking debt advice soared by 114 per cent in the three months to January 2009 compared to the same period last year. Debt management provider EuroDebt reports that unsecured debt for home owners rose to £38,683.33 in December 2008 from £37,087.36 in December 2007. The number of home owners approaching the company with existing mortgage or secured loan arrears remained static at 21 per cent. EuroDebt says it has seen a ‘significant’ shift in the number of clients who are home owners looking for help from debt management in the last six months.
Given this seismic shift in customer circumstances it is of no surprise that insurance underwriters have been furiously tapping at calculators to ascertain what this will mean for their PPI books of business. For some this has meant closing the book altogether – especially where standalone unemployment insurance is concerned.
Jo Roberts, press officer at HBOS General Insurance, says: "The decision to make changes to our product range is not taken lightly and has only been made after all other options were explored. Customers who wish to purchase MPPI can do so through our network of branches if they have a mortgage within the HBOS Group brands.”
It says that the moves were dictated by market conditions and the actions of others in the market. Major competitor Norwich Union has stopping selling MPPI policies unless taken out within 30 days of taking out a mortgage. And as well as inserting premium increases, NU is no longer writing unemployment only cover but unemployment is available when purchased with accident and sickness. This is due to the current and projected unemployment figures, as well as a significant rise in unemployment claims.
This decision hardly helps intermediaries at a time when they are seeking to diversify into new fields to try and make up for lost income resulting from the massive slowdown in the mortgage market. Norwich Union is also the underwriter for Paymentshield - the biggest independent supplier of mortgage related general insurance products to intermediaries. Its decision to review its PPI business, in particular unemployment only benefit, has caused a bit of a headache.
Head of marketing Sandy McPherson said: “We perfectly understand that NU had to look to balance the books in the light of rapidly changing economic circumstances. At the same time, we want to provide our intermediaries with the widest choice of cover that we can for clients. We are presently scouring the market in an attempt to come up with suitable alternatives.”
Ted York, managing director of wholesale insurance brokerage Berkeley Alexander, comments: “There is a change occurring in the ASU/income protection market, presumably triggered by the increasing unemployment figures. Insurers exposed are removing cover for unemployment only and restricting ASU cover to new mortgages.“
Furthermore, the market for income protection has virtually disappeared, i.e. the unemployment cover for say rent can now only be obtained from a reduced number of providers.
“I am glad to say that we remain in the complete market enabling intermediaries to obtain online quotes for unemployment only cover or full ASU with no restriction on existing mortgages,” says
Chris Biles, active underwriter syndicate 5820 at Cassidy Davis Insurance, is another bucking the trend. “Unemployment only cover remains part of our portfolio along with wider accident, sickness and unemployment options. There are no currently no plans to change this situation,” he says. However, he did add that it will continue to monitor the situation closely on a scheme-by-scheme basis.
Francis Higney is a PR consultant and freelance journalist
Date: 31st, March, 2009
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