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Protection
In January, the Association of British Insurers respond to a situation and effectively make an
revealed that unemployment claims on MPPI assumption on the run. This can of course
were up 118% on the year. result in significant hikes in premiums as They have little
The most recent government figures we’re experiencing now – but it can also lead
regarding the number of people unemployed to price reductions as was the experience in
represents the largest quarterly increases in the 1990s when rates were actually reduced at choice right now
the unemployment level and rate since 1981. one point given the low volume of claims.
The claimant count has not been higher since This cumbersome approach is clearly not
August 1997. The level of redundancies for the ideal but it is mainly a result of the one-size- but to increase
three months to March 2009 is the highest fits-all product that has traditionally been sold
figure since comparable records began in since MPPI was first introduced to the UK
1995. back in the 1970s, and a downside of trying to prices...in order
As a result of what is happening in the create a simple offering.
wider economy, the total number of claims
that we’ve experienced at Assurant Claims to meet future
Intermediary has increased by 166% over the It also impacts the way that claims are dealt
past year. Unemployment claims accounted with. We’re currently seeing insurers reviewing
for around half of all claims at the beginning and in many cases tightening their terms and claims
of 2008 and now account for almost 90%. No conditions. Some have reduced or capped the
doubt, others are experiencing similar maximum monthly benefit available while As Assurant Intermediary, we believe that
volumes. others have extended the claims waiting payment protection products have got to be
But it’s not just the high level of period. It’s also becoming the norm for more closely aligned with the way that other
unemployment that is impacting pricing, insurers to apply more rigorous testing at the personal insurances are rated. The right risk
terms and conditions and availability right point of claim. For example, policy definitions has to be priced in the right way. In my
now. Nearly every factor ASU insurers take of ‘reasonable’ or ‘prior’ knowledge of opinion, we have to move towards
into account when rating their products has impending unemployment are being strictly underwriting the product at the point of sale
changed considerably over the past twelve to adhered to. At the turn of the millennium, it and creating annually renewable policies. Such
18 months. They have little choice right now was likely that most insurers would have a move should mitigate the risk of future
but to increase prices as they have to maintain accepted a claim for redundancy without too significant price fluctuations. Yes, prices will
an adequate insurance pool in order to meet much digging. Now the reverse is true. go up – but they will not be applied with a
future claims. Insurers are demanding far more evidence broad brush. Low risks will pay the right price
that the claimant had no reasonable prior according to their individual exposure,
Underwriting knowledge of their redundancy, and there are whereas the high risks will experience a higher
Where have the actuaries and all their even companies out there now supplying them increase. This is no different to what happens
modelling tools been and what have they been with data as to firms in the ‘danger’ zone. in the motor and home insurance markets and
up to, I hear you cry. To understand how Consumer bodies have long argued that an annually renewable policy provides the
we’ve reached the current state of play, I think the claims failure ratio for payment protection consumer with the opportunity to shop
we need to understand how the product itself insurance is horrendous. I’m not saying that around as they already do for motor, home
has been traditionally underwritten. insurers are turning down valid claims – the and travel cover.
At its very essence, an MPPI policy is a fact that some 80% of all claims are settled is I also believe that a move in this direction
temporary or short-term contract. The rate is by no means trivial – but shouldn’t the would lead to a far higher percentage of
determined by the claims experience of the industry be working towards ensuring that claims being paid. If the risk is underwritten
insurer at that particular time as opposed to figure moves closer to 100%? The way that the at the point of sale, then the risk of a high
long-term income protection or permanent product has traditionally been underwritten decline rate on claims is vastly reduced. The
health insurance which has to take a view over and packaged has perhaps made it more policy is tailored to the individual’s risk
a far greater period of time and so is priced vulnerable to a high level of declined claims or profile and therefore it is unlikely that there
accordingly. consumers not really understanding what they would be a situation against which the
Perhaps it is worth drawing a parallel can claim against. Firms have historically consumer couldn’t claim.
between guaranteed and reviewable life term made a play on the fact that it is underwritten Current government initiatives to prevent
assurance. Guaranteed cover provides the at the point of claim, but this is now working homeowners losing the roof above their heads
consumer with certainty of budget – the price against them and has created a vicious are clearly not working. Arguably they were
never goes up and never goes down – whereas backlash from regulators and consumers alike. never designed to offer any real support,
a reviewable policy is pitched at a lower rate rather generate a few positive political
but this is not guaranteed. The insurer So what direction is MPPI headlines. While there may be some green
reserves the right to increase the price taking? shoots of recovery, the shadow of
depending on the claims experience at the Despite the challenges that insurers are unemployment raising the threat of
time. facing in managing the current situation, there repossession will loom over many consumers
are signs of innovation and some are re- for some time to come. When the shadows lift,
Peaks and troughs entering certain sectors of the market again. consumers still face the ever present risk of
Clearly actuaries have to plot what they think However, my concern is that little is being accident and sickness. Insurers and
will happen over the course of time based on done to actually address the way the product distributors have to provide consumers with a
historical fact for both types of policies, but is priced which will only leave it vulnerable to tool to protect their home that is both
they are far more vulnerable to peaks and future peaks and troughs depending on affordable and does what it says on the tin.
troughs in the short-term. They have to market conditions. There simply isn’t a viable alternative.
July/August 2009 Mortgage Introducer www.mortgageintroducer.com
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