Of all the meaty issues the payment protection insurance (PPI) industry has had to get to grips with during the past two years, the Sustainable Home Ownership (SHO) initiative has certainly been among the most important. SHO can save consumers from financial ruin and the industry has been working with the Council of Mortgage Lenders (CML) and government backing to get that message across publicly.
A key element of the initiative was the launch of minimum standards for mortgage payment protection insurance (MPPI) policies, and this month marks the second anniversary of their inclusion in new policies. By August, companies should also have upgraded all their existing MPPI policies to take the new standards into account.
Among other things, the standards insist that payouts be made within 60 days and allow contract workers and the self-employed to claim for unemployment in certain circumstances (see box). Such provisions have encouraged more consumers to take out MPPI. Now 33% of new home owners buy cover, compared with only 25% before the SHO initiative began. That's very heartening progress.
But the aim is not just to increase take-up. The broader aim of the SHO initiative is to make people think more carefully about how they would pay their mortgage bills if unemployment or sickness struck, and to avoid a rerun of the record repossession rates we saw in the early 1990s.
Maybe there are some – very lucky – home-owners who don't need to worry. They might have a high-earning partner, plenty of savings, or generous friends and family willing to lend them money. But most people are not in that fortunate position. Within a month or two, savings would disappear. If we weren't able to get back to work quickly, our debts would mount and the threat of repossession loom.
Lack of awareness
The need to continue raising awareness of these very real risks was highlighted by consumer research sponsored by the Association of British Insurer's (ABI) creditor insurance committee earlier this year. The results revealed a very worrying lack of awareness of the need for financial planning for “emergency” situations like illness and unemployment.
One in five people believed that, if they were unable to work, they could rely on the government for financial assistance. But for many, this would not be a realistic option. State benefits to support mortgage repayments are means-tested. Even if you are eligible, you may have to wait for up to nine months for your first benefit payment.
About one third of those without PPI said they would rely on savings and investments to pay regular bills if they couldn't work. This seems a relatively risky strategy, given the low level of savings in the UK (an average £750 per household).
Of course, when economic times are relatively good, it's hard to encourage people to think about financial hardship. But if the SHO initiative is to be successful, that is exactly what we have to do. There are rumblings of recession around the corner. If we want to avoid a hike in repossession levels, we must do the groundwork now.
What does this mean in practice? It means making sure every new mortgage borrower has a chance to find out about MPPI and decide if it's suitable for them. If they decide not to take out the cover, they really need to understand the risks they are running. As well as providing information about the risks and cover provided, the initiative also means we have to improve the image this type of cover has – making it a more attractive prospect for consumers.
So what can the PPI industry do to improve products even further, and address some of the criticisms which are regularly thrown at it?
It can certainly better explain how MPPI offers value for money. If you compare the cost of premiums with the potential benefits on offer, that value is very clear to see.
Small print and exclusions are another bugbear. The market can avoid criticism on this front by making clear policy wordings a priority and ensuring conditions and exclusions are made explicit, both at the point of sale and in the policy documentation.
Where selling practices are concerned, ABI's creditor insurance committee has worked closely with the General Insurance Standards Council (GISC) to ensure the GISC's broad principles can be applied to PPI.
The market accepts all this. Products and practices are improving, as is competitiveness in the market: stand-alone products are now available, and you can buy your cover well after the start date of your mortgage – that would have been almost unheard of five years ago. And then there's the internet. It not only increases distribution options, but also may act as a spur to innovative product development.
The future looks good for MPPI – and for the home-owners it protects. The SHO initiative has given the industry the chance to go out there and sell the benefits of MPPI. But it's also been an opportunity to take a long, hard look at the
products. We mustn't stop working to make MPPI even better for the future.
The new mortgage payment protection insurance standards:
Under the minimum standards laid out by the SHO initiative, mortgage payment protection policies must now: