Home Truths
POST MAGAZINE - 1ST APRIL 2004
Lenders still dominate in the provision of mortgage payment protection insurance but Hugo Cranmore ask whether inertia is to blame.
The Government’s target under the Sustainable Home Ownership initiative is to eventually protect 55% of all mortgage payers against the risks of accident, illness and unemployment through the sale of payment protection policies – the current figure stands at around 38%.
In 1998, the vast majority of mortgage payment protection insurance was sold by lenders with 7% via intermediaries and a mere 1% direct by specialist mortgage payment protection insurance providers, as opposed to lenders selling direct to the public. By 2003, the intermediary market share has risen to 16% with direct sales accounting for 6%: however, the lenders still dominate and the is likely to continue because Mortgage payment protection insurance is sold as a secondary product when taking out a mortgage, which remains the major point of sale.
Yet, mortgage payment protection insurance sales via lenders have been criticised for the bigger price tag these policies carry. Simon Hood, chief executive of broker Select & Protect, cites research carried out by the University of York that confirms banks and building societies as the main sellers of mortgage payment protection but points out that the premium share going to pay claims is only around 45% with the rest absorbed by expenses, commission and profit.
Regulatory Changes
This is reminiscent of a similar situation in household insurance at a time when high commission were normal lenders. This, however, diminished following intervention by the Office of Fair, plus vigorous advertising campaigns – largely spearheaded by direct insurer Direct Line. And Mr Hood feels that regulatory changes may affect mortgage payment protection insurance in the same way. “Commission disclosure is not immediately compulsory under the Financial Services Authority rules, but I believe it will come later. Once that happens, the pressure on these large commissions will begin to mount,” he states.
Will customer inertia maintain sales levels via lenders? Steve Devine, director for corporate communications at Pinnacle Insurance, points out that it certainly has so far. “People have relationships with lenders on other products and still get security from dealing with well-established brands. Mortgage payment protection insurance is a secondary product and it is convenient to obtain it from the lender with the mortgage.”
John Blundell, managing director of St Andrews Group, part of HBOS General Insurance, does not agree inertia keeps lenders’ sales high. “When a borrower chooses a lender for their mortgage they do so based on a number of factors including rate, service and brand reputation. The choice to buy mortgage payment protection insurance from the lender is also linked to these factors.”
Where does that leave the intermediary channel? Mr Hood says financial advisers and mortgage brokers do not sell much mortgage payment protection insurance because they generally believe it does not offer good value for money. “They tend to sell more sophisticated products like critical illness, but ideally such a product should sit alongside basic mortgage payment protection insurance,” he says.
Face-to-face clarity
St Andrews Group provides mortgage payment protection insurance to a wide range of mortgage lenders, including high-street names and mortgage specialists. Mr Blundell says face-to-face sales continue to prove the most popular distribution channel. “The main reason for this is that the appropriateness of the products can be fully assessed – the product can be explained and the customer can ask questions during and after the sales process. When taking out a mortgage, there are a number of key decisions that need to be made and these can be best handled in a face-to –face interview to help provide clarity and understanding.”
When it comes to direct sales, market commentators do not believe they will threaten the dominance of lenders – despite managing to secure an increased proportion of total sales since 1998. Kenny Leitch, director of partnerships at Norwich Union, chairman of the Association of British Insurers’ creditor committee, and chairman of the SHO steering group, says: “We sell some mortgage payment protection through NU Direct, but our major source is via the big lenders. Mortgage payment protection insurance is a secondary product. People do not suddenly wake up realising they must have some cover – it’s all carried out during a non-insurance related transaction.”
So what might distribution channels look like in the future, especially after the significant impact of statutory regulation? “The larger organisations are better placed to deal with it so the big lenders will continue as the dominant channel, both in the medium and long-term,” says Mr Leitch. “ Direct sales will not take over but will increase through natural causes relative to where they are now.”
Mr Blundell feels that as financial markets continue to develop and offer new product alternatives, many borrowers will still buy mortgage payment protection insurance as the time of arranging a mortgage, although internet sales will increase as access and confidence in this channel increases. “Many lenders already have online loan and mortgage processes. Sales of their repayment insurance will be regarded as direct sales, although purchased from the lender. Overall, the market has to cater for a range of customers, whether sales are via lenders or a direct channel. The important thing is that customers buy the protection they need, especially where they are stretching their income.”
Pinnacle, like many other mortgage payment protection insurers, operates in all distribution channels, including direct, but direct remains small compared to the other two. Mr Devine says that each channel has been performing well, though believes the future will see fewer, yet larger players. “Direct dealing will grow, but it will not just be the relatively few players we see now. The market is still immature and to some extent unproven.” He believes direct sales could ultimately dominate as customers seek the best buy: “But the pace of growth depends on regulation and market changes. Consumer education and awareness is key – there is still a long way to go before the public starts shopping around for mortgage payment protection.”
