Bill Lumley examines the mortgage payment protection insurance sector four months after tough new rules were implemented and finds that little has really happened yet – but that is all about to change.

It is now four months since mortgage payment protection insurance (MPPI) began to play by the new rules set by the ABI/CML baseline standard, time enough for comparisons to be drawn by the products that have settled in the market.

While there is little evidence yet of major growth in this market, there are several key reasons why growth on an unprecedented scale is just around the corner.

Most significantly the Government has identified an annual cost saving of £0.5 billion it could make each year to its social security bill by hiving off the cost of mortgage repayments for the unemployed to insurance companies. These companies in turn are more than happy to reciprocate as they stand to make an estimated two-thirds profit out of the premiums.

55% target
Of ten million mortgage-payers in the UK, only 20% currently have mortgage protection insurance. The goal set by the Government, the ABI and the Council of Mortgage Lenders (CLM) is to increase this to 55% over the next three years. It has been estimated that this increase equates to roughly £840 million.

The statement of practice appears to be straightforward and ensures no bias against the consumer. It requires the seller to ensure each of the following:
- Is the policy suitable for the customer?
- Does the customer understand what he or she is buying?
- Sellers must declare their status to prospective policyholders.
- Does the customer know what to do if he or she has a complaint?
- If lenders are independent intermediaries they must be compliant with the ABI code, while if they are insurance company agents, compliance is the responsibility of the relevant insurer.

In addition, all policies must now pay out after 60 days, compared to the past when some policies have had excess periods of up to 120 days.

All well and good. Yet while many see a code of practice which will legitimise and encourage the sale of MPPI policies as being a golden egg for the intermediary sector, there are plenty who view the statement of practice with cynicism for giving a green light to the lenders themselves to charge what many view as an absurdly greedy 50% commission.

A comparison of the nature and cost of these products offered by brokers and bancassurers throws light on some very positive prospects for the broker market. But it is little comfort that the combined government-industry working group decided that while the lender will inform the borrower that a fee is due on the sale of an MPPI policy, the amount of that fee remains confidential.

Simon Burgess, whose company Goodfellows offers the most competitive product in the survey, says of the new baseline standard: "It's utterly disgraceful, a licence for the banks and building societies to continue to rip off their customers. They've even got blessing from the Government to carry on." Burgess says the best way of getting this message across to the mortgage-paying population is through wide publicity of a government policy he describes as "shameful".

Bancassurers' products pose a series of dangers to the consumer, he says. He warns: "ASU policies sold by banks and building societies are very expensive compared with those sold by brokers and IFAs." And he lists the pitfalls the consumer can meet through the purchase of MPPI from a mortgage provider:

Their products are non-portable, which means that policyholders cannot move them if they should choose to change their mortgage provider.

Bancassurers rarely provide cover for expenses over and above the mortgage payment and endowment.

For many occupations, such as bank workers, unemployment cover will not be provided by bancassurers.

Self-employed and contract workers receive very limited cover and in some cases have to be declared bankrupt before cover becomes operative.

High-risk occupations will not be offered disability cover.

Lifestyle questionnaires exclude gay men.

There is a lack of flexibility because bancassurers only offer their own product.

Better deals from intermediaries

The survey quite clearly illustrates how true it is that MPPI buyers certainly get a better deal from the intermediary than from the lender – largely because they are abiding by the recommendation by the ABI and Government that their commission should be no more than 20%. But the fact is that the lenders have been given carte blanche to milk the public for 50%.

The table (right) illustrates how the guidelines have reshaped the market, with bancassurers charging substantially more for their MPPI products even though they are charging no agent commission. The BIBA product produces the most competitive rates for both accident-only and unemployment-only cover.

Philip Watson, director of John Charcol, is a UK authority on MPPI. He says: "Mortgage buyers ought to shop around to people other than lenders who use this kind of product to increase their profit, charging rates of as much as six per cent for ASU. Often what is sold in these cases is not the product that many of their clients actually want. Many people for instance have accident and sickness already provided to them by their employer, whereas a broker can arrange unemployment cover only. Typical rates of £3.50 a hundred are affordable, so the product is more likely both to be recommended and, more importantly, kept going by the borrower," says Watson.

As a market we have seen, with the growth of the direct writers, people becoming more sensible generally about shopping around and not settling with the lenders. They are more inclined now to look at the total package, adding up the long-term cost of the add-ons. However, the public is perilously unaware that they need to provide their own safety net.

Watson adds: "The Government and the CML would like to see the proportion (of MPPI policyholders) rise to 55% of mortgage owners, and people are working towards that, but most people still don't realise that the State won't provide them with funds to maintain their mortgage repayments in the event of long-term illness or disability or in the event of unemployment. Some 80% of people would get no State help at all in such an event, yet there are a lot of people who think if they lose job they will be supported by the State.

"I see this as the next growth area for brokers. The person taking out this policy will keep it going for six to seven years; brokerage is in the region of 15-20% – you can charge a higher rate and take more commission which is what building societies are doing. In the current market the way to sell it is to cross-sell. There is not a great deal of competition for people to shop around in the broker sector. The market is dealt with by small group of companies such as ourselves who make it available to brokers. It's an easy add-on when selling other products."

Valuable new market
Mike Williams, BIBA chief executive, says: "The introduction of the new baseline product and its wide support by insurers, lenders and the DSS/DETR, provides brokers with an unparalleled opportunity to break into a valuable new market which, until now, has been the exclusive province of the banks and building societies. The brokers can provide policies which are better in price, cover, accessibility and service than the lenders, and can dovetail the cover with clients' other arrangements to avoid duplication and unnecessary additional cost. Brokers do not need any specialist expertise, but should simply capitalise on the understanding of and relationship with the client to offer this type of protection to the benefit of all concerned"

Ted York, Berkeley Alexander's managing partner, says: "Last year 90 families a day had their homes repossessed. Despite this there has been historic resistance among brokers and IFAs to sell MPPI because of the plethora of products on the market containing differing terms and conditions normally to the detriment of the consumer.

"However, the baseline standard will ameliorate these problems. Premiums are also now more affordable, and benefits both free of tax and discounted in the calculation of income support.

"Furthermore we have taken advice from leading counsel that suggests that brokers who sell mortgages, household and related insurances have a duty of care towards clients to ensure they can meet mortgage payments if they become disabled or unemployed. The sale of a good MPPI will satisfy this duty and prevent litigation from clients who do lose their homes and provide a cross-selling opportunity."

Mortgage payment protection insurance – the lenders v the brokers
  Provider: Product Qualifying period for unemployment cover (days) Excess period for claims (days) Agent Commission Accident, sickness and unemployment Accident only Unemployment only
Lenders' Products Abbey National Payment Care Nil 28.00 Nil 6.04 3.26 4.31
Barclays Mortgage Care Nil 30.00 Nil 5.95 N/A 4.60
Halifax Mortgage Repayment Insurance Nil 30.00 Nil 5.25 N/A N/A
Nationwide Payment -guard 60.00 30.00 Nil 4.99 2.58 3.39
Woolwich Payment Protection 60.00 60.00 Nil 5.75 N/A N/A
Brokers' Products Goodfellows Security-First* Nil 30.00 Nil 4.40 2.80 2.80
Berkeley Alexander Safety First 30.00 30.00 25.00 4.95 2.95 2.95
John Charcol Mortgage Protection Plan 90.00 30.00 20.00 5.00 3.00 3.00
Bennet Gould Coverwise 30.00 30.00 20.00 5.19 N/A N/A
BIBA Accident, sickness and unemployment 90.00 30.00 20.00 5.18 2.60 2.65
* Provides three months free cover at the inception of the policy to all mortgage borrowers