News Review: General Insurance
Payment protection: evolution or revolution?
by Kevin Paterson, sales and marketing director, Assurant Intermediary
We now have clarity regarding the payment protection
insurance
(PPi) market following the competition commission’s final decisions in october. as expected, it ruled to introduce a package of remedies based around a point-of-sale ban for all forms of PPi, with the exception of retail PPi. there is no doubt that
changes are needed in the way PPi is designed and sold. i think the conclusions reached by the commission are going to fuel an evolution not only in the way this type of insurance is sold but also in its very structure. there will, of course, be
those who no longer see the feasibility of PPi as a profitable product and who will pull out of the market. in my opinion, after the waters have receded, it will be those providers who have the innovation to adapt their proposition to suit the new landscape that will survive and thrive. i would not be surprised
if we see a fundamental shift away from traditional PPi and a move toward stand- alone short-term income protection that adopts a modular approach to claims triggers, covering a percentage of salary rather than a particular debt. the new breed of cover also provides an appropriate
solution for consumers who don’t have a mortgage but who still want to protect their financial outgoings – and in the current economic climate, it makes sense to do just that. Long term income protection has often been lauded as the preferred alternative to PPi, but it is more costly. it also requires a bolt-on to include some form of unemployment cover as this type of policy is traditionally designed to cover long-term illness. Perhaps some form of short-term aSu cover that complements longer-term income protection could provide an affordable and practical solution. using an aSu policy could also provide valuable short- term cover for expensive regular commitments. this safety net would also allow a client to extend the deferred period on their longer-term policy and so bring the cost down. While some ambiguity remains over the sales process, particularly in the case of mPPi, i truly believe the ‘new order’ offers a world of opportunity to intermediaries. and your clients really need your advice and help now more than ever. With the major ramifications resulting from the Spending review, unemployment could be a very real prospect for people in areas that would traditionally have been viewed as stable. in this environment consumers need more, not less, protection.
12 mortgage introducer DECEMBER 2010
Repo insurance anyone? In a bid to minimise the number of repossessions, the Council of Mortgage Lend- ers recently called upon the government to encourage homeowners to voluntarily sell their property to avoid court action. While there is some sense
to the notion, I’m not sure this could work. If the borrower has equity
in their property then there is a case to encourage them to at least think about the pos- sibility of selling if they get into financial trouble, and perhaps bank their equity and rent for a time. However, as sensible as this may sound, the reality is often very different. If a borrower is faced with
repossession, chances are he or she has suffered a life-changing event such as marital break-up or being made redundant. Their ability to meet future rental pay- ments is likely to be some- what impaired. Equally, landlords take references and if the borrower’s previous lender discloses any arrears then the landlord may decide not to take the risk, espe- cially as there seems to be a good supply of tenants at the moment. In addition, recent figures from Hometrack show that houses are taking 9.3 weeks on average to sell, so the time to consider selling is at the beginning of a trauma rather than waiting until all other options are gone. The CML went on to ask
the government to consider a new insurance-based scheme to provide a safety net for the most vulnerable in society. It
suggested this new type of policy could be jointly funded by borrowers, lenders and the government. Again, I’m not sure this could work. First, as a fundamentally insurance- based product linked to debt repayment, it should get swept up in the Competition Commission recommenda- tions. That means a borrower would have to take this policy out themselves and it certainly wouldn’t be able to be sold anywhere near the point of sale. Secondly, targeting this
product to the most vulner- able in society is a curious concept. It’s unlikely that people in this position would be able to afford to purchase a property, let alone get mort- gage funding. So despite any aspiration to home owner- ship, the effectiveness of such a policy would be question- able even if you could get an insurer to cover it. There is perhaps an
opportunity to design an insurance-backed product that completely circumvents the borrower and simply pro- vides the lender with a way of insuring their mortgage book below a certain level of de- faults. This would enable the lender to meet their consumer protection obligations as far as the regulator is concerned whilst protecting their balance sheet against bad debt. However, the worst of all
worlds is to bury your head in the sand and hope the government will sort it out. Your clients need to be aware of and understand these options.
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