Cover all bases

Products such as accident sickness and unemployment cover and mortgage payment protection insurance have become the bad boys of the insurance industry, in many cases with good reason. This is unfortunate because they can have a meaningful place in a client’s protection arsenal.

Mortgage brokers can bring real meaning to ASU but can also, by not selling it, be part of the problem of unsatisfactory mortgage protection.

For a relatively simple product, ASU attracts more criticism over its distribution, costs and the cover it offers than almost any other. Given the peace of mind it should give this is a concern. The good news is that the worst sales practices could soon be history. The Financial Services Authority is reviewing the way payment protection policies are sold, which should make the culprits who sell it without proper review of its suitability ditch their tick-box approach to selling. From the mortgage broker’s point of view, with their responsibility under regulation to ensure a client’s protection needs are met, this should mean clients are no longer left at the mercy of lenders selling highly priced, poor cover products.

The worrying thing about ASU and MPPI is the disparity in cost and cover depending on who sells the products. Simon Burgess, managing director of Burgesses, is one of the main critics of overpriced, poor value ASU. He estimates that an average mortgage covered by the ASU product he distributes in conjunction with the British Insurance Brokers’ Association costs 14.70 a month compared with an average of 35.22 from the top 10 lenders. He says these lenders’ products are designed not to pay out with the lenders taking 80% of the premium in commission.

“They are offering policies that have excesses of up to 60 days, designed to put clients into mortgage arrears. Independent providers such as ourselves offer day one cover,” says Burgess. “Also, some lenders’ ASU products are not portable so people with pre-existing medical conditions are tied into outrageous mortgage deals because they can’t transfer.”

Burgess says his company uses 60% of its premiums to pay claims – 30m last year – whereas with banks and building societies, less than 10% is paid out. He says consumers are paying the price of apathy and don’t understand what cover they have got or the minutiae of the policies. While ASU may be bad if you buy it from a lender, from the right source it can represent good value.

The rot can stop with mortgage brokers, says Burgess. “Mortgage brokers often allow clients to go direct to Plenders. There are 5bn worth of commissions to be had from ASU and mortgage brokers are allowing banks to take that. And, of course, the banks are cross-selling other stuff to the clients. It is a massive opportunity brokers are losing.

“But there are also loads of switched on IFAs and brokers making tens of thousands of pounds every month by selling protection as an add on,” Burgess says.

“There is no risk because they are fulfilling a duty of care to clients while making vast profits.”

There are four main danger signs on ASU and MPPI to look out for. The first is the length of time the policy pays out for, in most cases just one year, although there are some on the market that will pay out for two years.

Then there is the security of the policy. Kevin Carr, senior technical consultant at LifeSearch, says terms and conditions including the premium and the availability of the product are usually subject to no more than 30 days’ notice. The insurer can change everything and even pull cover.

The third danger sign is automatic exclusions, that can include stress and back injuries which account for two-thirds of income protection claims.

The fourth pitfall is the occupation class. With any insurance product linked to ability to work there needs to be a definable measure of work. Carr has yet to see an ASU policy that has an own occupation definition. Clients have to be unable to do any work.

Another bugbear of ASU critics is single premium ASU. Interest will be charged on anything added to the mortgage and uncertainty looms after the term has expired.

If ASU typically lasts for five years, what happens in year six? Is there the opportunity to buy ongoing monthly cover or does the client take out another annual policy, and what happens after that expires?

Finally, the self-employed must read the small print carefully to check the measure of earnings the insurer uses. Back to day one cover is essential and the definition of work in terms of hours worked also must be checked.

The obvious solution to these concerns is income protection, which unfortunately is dogged by lack of understanding, perception of complexity and prohibitively expensive premiums. But this need not be the case.

“The main issue is the lack of availability of income protection,” says Carr. “It is a far superior product and it won’t generally cost more money.”

Monthly premiums can be lowered by selecting longer deferred periods and lower monthly benefits. And it is always the better solution if there is some form of employer-provided scheme that will provide cover while the employee is sick initially.

But not everyone can get income protection. They may not be able to afford it or may have a risky occupation. The latter can make premiums too expensive. Income protection is priced to the individual so can be expensive. This is where MPPI has an advantage, says Carr, in that one price fits all. Because of this it tends to be that the young and healthy in normal jobs overpay and the people who are older, smoke and aren’t such good risks underpay.

“MPPI is not unsustainable, it is not the devil and it has a place,” Carr says. “This is where it is sold in addition to income protection. That’s what good mortgage brokers do, sell MPPI for the first year with 12 months’ deferred income protection to kick in if the client is still off work.”

The signs are good for the future of the market, with mortgage brokers taking control of the protection needs of their clients. Regulation means brokers have a responsibility to ensure the protection needs of their clients are met and this means brokers assessing the full range of options including not just ASU but critical illness, income protection and medical care cover.

“ASU or MPPI are only part of the solution,” says Chris Cummings, director of the Association of Mortgage Intermediaries. “While some clients want a short-term solution, some want a long-term one.

“The past 12 months have been characterised by a growing realisation that intermediaries are not just regulated for mortgage advice but for general insurance – and if you are not doing a full ‘needs and demands’ discovery process, what are you doing?

“You are not serving clients needs, you are leaving yourself open to Ombudsman issues and could be putting your professional indemnity insurance at risk.”

Brokers are taking the opportunity to sell protection. A total of 91% of intermediaries offer MPPI as part of the mortgage arrangement, 4% introduce it but 5% still do not offer it according to recent AMI research. In 93% of cases the option is advised upon.

While for 90% of brokers FSA regulation has not changed their approach to MPPI, 4% have withdrawn from the market and 2% have also withdrawn single premium MPPI. In addition, 3% of brokers have entered the MPPI market and 1% have introduced single premium MPPI. As for the impact on clients, in 81% of cases there has been no difference, but 8% report higher take-up and 10% a reduction in take-up.

The number of brokers writing more critical illness and income protection business is slightly ahead of those writing less, with 39% and 37% writing more CI and IP respectively and 35% writing less of both.

There are two good reasons why mortgage brokers should still be advising MPPI in the right circumstances.

“While a few years ago it was possible to build a good business just doing mortgages, these days intermediaries have to think about the related insurance,” says Cummings.

He concludes by saying that brokers have to start thinking about customers’ needs in a regulated market as they will run into problems if they do not.