HIPs

HIPs with everything

September 2005

Originally inspired by French Connection’s legendry UK logo, MFG first developed the HIPs for homebuyers concept under a ‘F’n everything’ policy. The idea is very simple: for a monthly or an annual donation (the premium) the homebuyer is provided with a plethora of free (hence F’n everything) insurance policies to cover almost every contingency under the sun.

Obviously buildings insurance would be important, as would some form of mortgage protection, but looking at life’s vulnerabilities panel, it would seem that almost all of life’s many contingencies could impact on our ability to keep up the mortgage payments.

Death is probably the most serious of these but a critical illness, or a major accident (as life’s vulnerabilities panel shows) are not prospects that we like to dwell on. Divorce, of course, could be a tricky issue. Somehow a fidelity guarantee, while sounding good, doesn’t quite fit the picture, yet a split marriage can result in a default and it is not unknown for erring husbands to cancel the monthly mortgage repayments as a way of getting the lender to evict his spouse from the matrimonial home.

We are, of course, making mischief to raise a number of serious issues. As the CML states in it most recent Repossession Risk Review: “In an environment where arrears and possessions are beginning to rise, the degree to which home-owners have a comprehensive safety net in place becomes increasingly important”.

It goes on to look at mortgage payment protection insurance, stating:

“The quality of such products has gone up while the price has gone down. The latest MPPI data shows that the average cost of cover in 2000 was £5.25 per £100, while in 2004 the figure was £4.98. In terms of quality, the MPPI baseline specification has, since 1999, set out minimum standards for MPPI that have been agreed by lenders and insurers. In addition, policies sold that include accident, sickness and unemployment cover, as opposed to a subset of the three, have increased from 77 per cent of the total in 1999 to 87 per cent of the total in 2004.”

Even so there is evidence to suggest that homebuyers are confused by the range of policies available in the mortgage protection sector which in part has been brought about by the separation of life and general insurance providers. At a recent MFG lunch with Professor Janet Ford, Clive Wood, formerly head of housing at HSBC, suggested that life and general insurers could put their acts together and create menu-based, customised protection products (a customer specific policy) instead of coming at the problems from a sector perspective. This just led to product confusion.

Is this reflected in the sales of such products? Worryingly, the CML Repossession Risk Review identifies a fall in the number of homebuyers taking out MPPI. “Since the initiative started the take up of MPPI initially increased, with 731,700 new policies issued in 2004, compared with 503,700 in 1999. But the current figure of 731,700 is a fall from the peak in 2004, when 926,100 MPPI policies were sold. There has been a corresponding fall, from 23.7 per cent in 2003 to 22.8 per cent in 2004, in the proportion of outstanding mortgages covered by an MPPI .”

It also notes the cover is partial. “Joint industry/government commissioned research showed that around 60 per cent of households in 2003 had some form of protection in place (ODPM, 2004). But we know that protection for borrowers is partial; many are covered against some risk, but not others, and many do not have a clear understanding of their exposure to risk.”

Excluding the vulnerable

So a case for a HIP for homebuyers is building up in which MPPI forms an important part in a more holistic approach to the safety net problem. Not withstanding the CML’s assertion that MPPI cover is getting cheaper, in a study by Hollie-Anne Bowie-Cairns and Gwilyn Price of the University of Glasgow (Trends in Mortgage Borrower's Repayment Difficulties, CML Housing Finance, July 2005), the authors cite Professor Janet Ford among others as believing that the cost of premiums might discourage the vulnerable groups of mortgage borrowers.

The researchers continue: “Moreover, those most likely to take out MPPI are unlikely to be those most at risk of facing redundancy (Pryce and Keoghan, 2002). As such, the incidence of arrears may be lower among MPPI policyholders due not to the efficacy of MPPI, but due to the factors that determine the take up of the policy.”

Does this add up to an argument for making protection insurance, or in the context of this article, a HIP for homebuyers, compulsory? At the lunch with Professor Ford, John Parker, chief executive of Stroud and Swindon Building Society, observed that the disappearance of cross-subsidisation in insurance was not helping the situation in terms of the cost of premiums but, on the other hand, most of the available data shows that the professional and managerial classes have the lowest rate of both repayment difficulty and mortgage arrears. Class aside, data cited by Bowie-Cairns and |Pryce also shows that married households tend to have the lowest incident of repayment difficulties - so why should such groups cross-subsidise the less fortunate?

That question is not entirely rhetorical because even in the best of all possible worlds there is apparently a one in three chance of a marriage ending in divorce, and if you believe in statistics produced by the health charities, one in three of is going to die of cancer or something equally disabling anyway. In other words there is no point in being middleclass and smug and thinking you can self-insure or don’t need cover - you may be wealthy and healthy but a redundancy or two could change all that. Besides, though the FSA tends to focus the lender’s attention on the risk aversion of customers, there is the issue of treating lenders fairly. A compulsory HIP for homebuyers would reduce the risk exposure of lenders and lift some of the regulatory burden to boot.

To make the idea of a compulsory HIP more acceptable, the lender could work with a number of insurance providers to bring down the costs and subsidise the product - after all, in New Labour parlance both the lender and borrower are stakeholders in the property and a number of lenders have in the past offered free MPPI and personal accident cover. The HIP could even be used to underwrite mortgages that are going to be sold as part of a portfolio or as part of a bond.

With Basel II on the horizon, this idea might not be so fanciful. As the CML notes in its Repossession Risks Review: “Basel II requires lenders to develop systems that are ever more sensitive to mortgage default and loss through which regulatory capital weighting is applied which reflects that lender’s actual experience. This will put a higher premium on all systems for the control of risks and may influence lenders’ product pricing and market choices. The revised international financial reporting standards introduced at the end of 2004 adds to these pressures because of the treatment of losses. Taken together, lenders will more obviously bear a cost of the consequences of their lending decisions and this will impact on risk appetite and on risk based pricing.”