Insurance threats and opportunities
MORTGAGE STRATEGY - 27TH AUGUST 2007
A recent report shows that declining client appetite for loans is shrinking the creditor insurance sector, but a tougher interest rate environment could benefit mortgage payment protection insurance sales, says Simon Burgess
A recent report from research firm Mintel highlights some of the threats facing the creditor insurance sector. And although a number of the findings make for sobering reading, the good news is that there are also many positives to draw from it, especially for brokers.
The thrust of the report concerns three major threats that the market must deal with if it's to remain successful in the years to come. These are negative publicity, regulatory scrutiny and consumers' reluctance to take on more debt.
Mintel says these factors have conspired to shrink the value of the creditor insurance market from £5.5bn in 2005 to an estimated £5.35bn last year - a fall of about 2.7%.
While many in the industry may not be too concerned by these figures, they go against the grain of trends dating back to 2001. Back then the market was worth £3.2bn and grew steadily each year until peaking in 2005.
So the worry is that we are now over the crest of the wave. Unless we address some of the problems we face, 2006's figures won't represent a blip in the creditor insurance sector's long-term growth, but rather the beginning of a prolonged decline.
Let's look at the threats the report raises.
"So far, it is weakening lending figures that have had the greatest impact, with the regulators yet to decide what course of action to take," it states.
"Most consumers apparently pay scant attention to the press coverage of the Office of Fair Trading's report into the market, the Financial Services Authority's decision to fine a number of providers, and numerous editorials bemoaning the allegedly poor value offered by the market."
Perhaps it's disappointing that consumers haven't taken heed of the ongoing advice offered by the media to find better value insurance products, but it's encouraging to see clients have an underlying faith in the sector, despite the problems it faces. Many consumers continue to see insurance products as bona fide purchases.
Indeed, as the Competition Commission shares its view of the market and changes are introduced in the coming months, it's not unreasonable to believe that these changes will improve the market and generate good news for a change.
Such coverage would be welcome and if anything would spur more consumers into considering protection policies alongside the credit they're taking out.
If negative publicity and regulatory scrutiny have not had as big an impact on consumer habits as was previously thought, which Mintel suggests, when improvements are made they should deliver increased interest from borrowers and encouraging results.
The biggest problem Mintel highlights is the diminishing appetite shown by consumers to take on debt. Clearly this is an issue, but more so for credit card and personal loan protection insurance providers than for the mortgage payment protection market.
Figures from the Bank of England show that the rate of growth in consumer credit has fallen steadily this year, dropping from 5.7% in March to 5.2% in June. Given rising interest rates this is likely to drop further, which means it will be increasingly difficult for loan and credit card protection insurance providers to recapture the glory years seen in the first half of the decade.
This will have an impact on the overall size of the creditor insurance market, given that such insurance counts for 59% of its total, according to Mintel. But the same is not necessarily true for the mortgage payment protection insurance sector, which accounts for 21% of the overall figure.
Average mortgage sizes continue to grow so the amount of mortgage payment protection insurance cover needed by borrowers has increased. This should help offset the insurance sector's falling penetration levels.
As the report points out, of the four key market segments, mortgage payment protection insurance is the only one to have recorded even marginal increases in new premiums.
The trick for brokers will be to add to the trend that's already been seen - a growing number of consumers turning to them for mortgage payment protection insurance products.
In the first half of 2003, just under 16% of mortgage payment protection insurance policies were sold through brokers, but by the second half of 2006 this figure had jumped to over 26%.
It should also be possible to turn around the overall market's falling penetration figures as improvements are made and positive coverage of them begins to feed through to consumers. This would offer brokers a bigger slice of an expanding cake.
An increasing number of borrowers are also becoming concerned about how they might meet their financial commitments in a tougher interest rate environment.
And as the FSA seeks to ensure borrowers get comprehensive advice on how they can protect themselves, this should also drive further interest in mortgage payment protection insurance.
The growing number of arrears and repossessions that the mortgage market has seen this year makes the argument for mortgage payment protection insurance even more compelling. As the report states, higher levels of arrears and repossessions will concentrate the minds of borrowers, potentially convincing them that protecting their mortgage payments is worth the extra costs.
Whether growing demand from borrowers for safety and certainty manifests as interest in longer term mortgage products remains to be seen. But a switch away from the short-term fixed rate deals that currently dominate the market shouldn't lessen clients' appetite for mortgage payment protection insurance, as accident, sickness and unemployment cover remains relevant no matter how long mortgages are fixed for.
