News Review: General Insurance
Warning as arrears rates could soon be up 50%
by Gary Little, head of key accounts, Assurant Intermediary
The Bank of England’s de- cision to hold interest rates at their record low of 0.5% may have been welcomed by many existing and would-be homeowners but I hope it doesn’t lull them in to a false sense of security. Further quantitative eas-
ing may help ease the mort- gage market and encourage more lenders to introduce further 95% LTV deals, at- tracting sorely needed first- time buyers. However, the fact that the BoE also decided to pump another £50bn into the economy to boost market confidence and stimulate de- mand and growth is demon- stration enough that UK Plc is still pretty chilly.
Benefit culture Unemployment figures re- leased by the Office of Na- tional Statistics in February showed that the number of people out of work is at its highest in 16 years. The fact that 1.6m are claiming job- seekers allowance suggests that many
are struggling
to use their own savings to support themselves and are turning to the state.
There is a paucity of recent data on what the current av- erage savings level is amongst Britons but recent research by price comparison web- site
moneysupermarket.com suggested that 30% said their finances were so stretched that an increase of less than
£100 in their monthly living costs would mean that they could no longer make ends meet.
Rock and a hard place When times are tough, con- sumers undoubtedly cut their cloth and some could be tempted to cut out what they perceive as unnecessary expense on insurance pro- tection. The latest reposses- sion figures released by the Council of Mortgage Lend- ers could encourage some that good arrears manage- ment by lenders is helping the vast majority of borrow- ers who face difficulties stay in their homes and get back on track. The total number of properties taken into posses- sion by first-charge mortgage lenders in 2011 was 36,200 – the lowest annual total since 2007.
Jobs crisis Worsening unemployment and continuing pressures on the cost of living is likely to take its toll on many house- holds, however, and if the BoE does nudge interest rates up by even 0.25% that could be enough to tip some over the edge.
And there is another threat on the horizon. A re- port in the Financial Times at the beginning of the year claimed a clause in the draft European mortgage direc- tive could push up the costs and the risk of repossessions in the UK, if passed into law. The directive proposes that all loans in the EU must be declared in default if they are 90 days in arrears, overruling UK rules that allow borrow- ers up to 180 days.
16 mOrTgagE iNTrOdUcEr MARCH 2012
More defaults The definition change would increase the likelihood of mortgages defaulting as lenders would have less time to show forbearance and ac- cording to the BoE financial stability report released last December, around 1% of all UK mortgages are in forbear- ance compared to 1.2% in ar- rears. It said that arrears rates would be almost 50% higher without such leniency from lenders.
Raising the subject of the risk of arrears and reposses- sion is clearly not an easy task – but it is a ‘must have’ conversation for interme- diaries to have with their homeowner clients. Bottom line,
protection insurance
needs to be sold. There are many websites and compari- son sites that have tried to sell short-term income pro- tection and the like, but pen- etration has not increased. Why? In my view it’s quite simple. The vast majority of consumers don’t really un- derstand what they need to cover, how much they need to cover, and what options are available to them. That’s why intermediaries are,
I
believe, best placed to help consumers get the protection they need.
Finding the right product However, they need products that are fit for purpose. A number of proposi- tions were brought to mar- ket last year that turned the traditional approach to un- derwriting mortgage and short-term income protec- tion on its head. Rather than underwriting the policy at the point of claim this new
breed of accident, sickness and unemployment protec- tion prices the policy accord- ing to the risk profile of each individual customer when they buy it. And as the policy is effectively built around the policyholder at the point of sale, barring the consumer unintentionally provid- ing inaccurate information, there is no reason why any valid claim should be turned down.
Bigger bite of the cherry While I can’t speak for the experience of other provid- ers, we’ve certainly experi- enced an increasing appetite amongst intermediaries for these new protection prod- ucts. I think this is not only down to the strength of the proposition, but also due to the fact that the products re- ally lend themselves to being sold alongside a six, nine or 12 month deferred perma- nent health insurance con- tract. Given the fact that our experience shows that the average duration of a claim in 2010 was just over six months, short-term income protection products make real sense.
Tailoring products
Although the premium in the case of point of sale is tailored to each individual customer rather than offer- ing a one-price-fits-all ap- proach, affordability of cover is a real issue for many. For- tunately, there are some good value unemployment–only policies available that can provide consumers with the peace of mind they crave at a price they can more readily afford.
www.mortgageintroducer.com
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