In good shape
NICHE MORTGAGES - 1ST DECEMBER 2007
payment protection insurance is the right product in the wrong hands, according to Simon Burgess, managing director, British Insurance.
Following publication of the Competition Commission’s Emerging Thinking document on payment protection insurance, I’m delighted to find that the integrity of the insurance industry and intermediaries remains intact. We’ve been given a clean bill of health.
For years I’ve maintained that the product itself is sound (apart from single premium cover) and when sold properly will provide a safety net and peace of mind for those who are unable to continue with their loan and credit repayments.
This is the basis for all insurance products and payment protection insurance is no different. It’s the distribution and pricing that’s flawed, not the underwriting.
The report, supporting documents and British Market Research Bureau survey feedback offers no new radical insights. However, it is the most comprehensive investigation into the market so far, despite delaying tactics from some parties who have been unable to retrieve information from their databases or provide data in the format required.
Although there are no great surprises on the areas it identifies as requiring further investigation, the report does throw out some interesting questions, such as do distributors’ payment protection insurance profits prop up losses made at credit product level?
Given the current credit crunch, let’s hope the commission’s suspicions are suppressed – otherwise the ramifications will be huge.
There are also uncomfortable reading moments with feedback from consumers who are unaware they can shop around for cover and are annoyed about having been fleeced.
The commission concludes there are no barriers to entry or expansion. It also confirms underwriters have access to a wide potential sales base and notes distributors receive a large proportion of premium in comparison with underwriters (a small trade off for insurers to gain access to an extensive consumer base).
It considers whether underwriters reject claims so they can have a greater share of the profit pot, but concedes that, as so little goes back to them, this is not the case (the number of high claims rejections are obviously down to mis-selling).
The commission recognises that underwriters make a reasonable return to payment protection insurance (I shudder at the distributors’ profits) and concludes there’s little evidence that features in the underwriting market prevent, restrict or distort competition. As a result, no further inquiries will be made.
In theory, the payment protection insurance market is open to anyone and while incumbent underwriters may have an advantage when it comes to the tender process, there’s nothing to stop new firms entering.
However, the report does ask whether payment protection insurance is necessary or if alternatives such as permanent health insurance, critical illness, personal accident and life cover suffice? Further investigations are underway but, in the meantime, I suggest that payment protection insurance does add value – when correctly sold.
With banks and building societies enjoying an 80% market share, there are concerns over the monopoly of the likes of Lloyds TSB, Barclays, RBS, HSBC, HBOS, Northern Rock and Abbey and the impact of vertical integration (which is behind 60% of sales).
As a result, the commission suggests “a significant degree of countervailing buyer power is being exercised by distributors”.
Within the retail market, the investigation found commission levels were higher than other general insurance products – between 50-80% for personal loan payment protection insurance and 40-65% for mortgage payment protection insurance. It questions why?
The commission believes that the cost of payment protection insurance, in some instances, is higher than the interest paid on loans, there’s limited competition at retail level and it is not convinced, as many would suggest, that credit provision and payment protection insurance sales are the same market.
Advertised credit APR does not include payment protection insurance costs and pre-purchase information is poor. Distributors are quick to counter that information is available, but consumer feedback confirms that loan applicants do not actively seek it.
Consumers are, it appears, under the impression that purchasing payment protection insurance is a condition of obtaining credit and the overwhelming message is that payment protection insurance is sold and not bought.
The commission confirms intermediaries have a key role in payment protection insurance provision, allowing consumers to source independent products from the lenders. I believe the commission would like to see all payment protection insurance distribution structured this way (as we all would) – giving customers a choice in what product they purchase alongside their credit.
It touches upon how networks can secure competitive commission rates and service levels and recognises that a “significant volume” of mortgage payment protection insurance is sold by intermediaries (32% of mortgage payment protection insurance sales in the second half of 2006, according to the CML).
Feedback from Northern Rock reveals 75% of mortgage applications are via intermediaries, yet less than 10% of customers take out its mortgage payment protection insurance cover with the mortgage. Compared to 50% of customers who purchase mortgage payment protection insurance when obtaining a mortgage in branch.
I believe the right product are in the wrong hands and this view, will in time, be borne out by further commission research.
In true governmental style, there appear to be discrepancies over the market size. Mintel in 2006 estimated it to be worth £5.35 billion, but commission data puts it at £4.4 billion. Whatever the size, the profits are obscene and selling tactics are scandalous.
All of issues raised by consumers – such a lack of pre-purchase information, confusion over jargon and uncertainty over policy cover – can be addressed by independent payment protection insurance providers.
One area where independent providers will find it difficult to influence is claims payouts. In 2006, Defaqto concluded that “Payment protection insurance is not homogenous…payments are not made in the same way by each provider.”
Given that the commission states that “each payment protection insurance distributor has a monopoly over its own credit customer” and has undertaken to research further into why there are such huge price variations on similar policies and whether payment protection insurance gains do reduce bad debts, I suspect the phrase buyer beware becomes lender beware.
BMRB feedback says “consumers view payment protection insurance as separate to the loan, but see it as tied to the product…it’s presented as one single purchase.”
One consumer, upon learning they didn’t have to purchase the lender’s payment protection insurance cover and it wouldn’t affect the loan application replied: “I feel a bit stupid now…especially when I’ve shopped around for other sorts of insurance, I don’t know why I didn’t think.”
What a poor indictment for this sector – consumers are beginning to think it’s their fault.
I look forward to the commission’s proposed remedies (due in the second half of 2008) and final report (in November/December 2008).
As an aside, in February 2007 I had cause to respond to criticism from Thomas Reeh, chief executive of blackandwhite.co.uk, who accused me of being out to get mortgage brokers. This couldn’t be further from the truth!
However, it’s interesting to note that other organisations, such as the police and Financial Services Authority, swept into his offices in November, looking for past case documents. I do hope this isn’t misconstrued as being out to get him.
I also hope for his sake, nothing is discovered that will damage the reputation of mortgage intermediaries as they’ve been commended by the commission for the level of choice they provide and long may this continue.
