Be more single premium-minded

With the protection sector under the watchdog\'s microscope, brokers should consider the benefits of offering certain clients the option of single premium PPI, says Robert Owen

With the whole protection insurance sector under the microscope, news that the regulator has issues with mortgage payment protection policies will surprise few people in the market.

The Financial Services Authority has highlighted the risk to consumers caused by “poor disclosure of product and price details” and the possibility that clients may not be able to claim against their policies.

The regulator’s ire has been raised as a result of some mystery shopping exercises that have identified “poor selling practices and a lack of proper compliance controls”. As a result of these, some customers may have PPI policies they cannot claim on or that only provide partial cover.

Concern has also been expressed about the high PPI penetration rates at some companies visited. This may be a reflection of over-selling, but alternatively it could be a sign of a well trained company clearly understanding the needs of its customers and explaining the importance of being covered for loss of job or reduced income as a result of illness and other hardships.

My concern would also be focussed on those companies with low penetration rates.

Protection specialist Paymentshield suggests only 23% of the borrower population has PPI cover. This is a worryingly low figure.

The option of single premium PPI is specifically mentioned by the FSA in terms of ensuring adequate price disclosure and the effect of cancelling the policy early. But this should not detract from the benefits of the policy on offer.

Following regulation, anyone selling general insurance products – which of course includes PPI – needs to ensure that the product sold meets a customer’s requirements. And the broker must treat the customer fairly – and that means providing best advice.

By neglecting to supply or direct a client to the most suitable product in the market, it could be decided that a broker is breaching the FSA’s Treating Customers Fairly guidelines which could have financial implications for their business at a later date.

The question is, does single premium PPI have a role to play for a broker dealing with a mortgage applicant embarking on a potentially serious financial commitment?

The answer to this is quite simply yes, because it may be the most suitable product for that client at that time.

Concerns still remain about the pricing of this product and there is no doubt that the cost of some single premium cover is too high. Also, the length of cover term may not be appropriate to suit the client’s stated requirements.

But if you offer a competitively priced product over a three-year period, it immediately becomes a viable alternative to a monthly renewable plan. But there is another factor to be taken into consideration besides price, and that is certainty of cover.

By certainty of cover I’m referring to unforeseen market developments. What would happen if we had a period of rising unemployment? How many tinkerings would there be on the cost of cover?

Borrowers who select, or are recommended, a single premium policy for an agreed fixed term enjoy the certainty of cover and price in the same way fixed rate mortgages provide borrowers with certainty.

Single premium policy can also go some way toward easing the cash flow problem that besets many borrowers. For some people, particularly young couples, cash flow is a major problem and making regular monthly premiums could be beyond their budgets.

The advantage of the single premium protection policy over the renewable monthly premium is that clients have the benefit of spreading the cost of the cover over a longer period of time.

Of course, single premium policies may not always meet the demands and needs of a customer and there are recognised drawbacks.

One of the drawbacks is that they are flat rated for premiums. Everybody pays the same for the same amount of cover. But this is changing with the advent of age-banded products, meaning that younger people no longer have to subsidise older clients.

Brokers are realising they can offer clients competitive monthly premium products, both in terms of price and cover and also levels of service. This is to be welcomed and product providers deserve praise for becoming more innovative and offering a more tailored service.

But brokers still need to be furnished with a complete range of solutions to meet the varying demands and needs of their clients.

Single premium PPI involving the lender might meet the specific needs of particular clients and therefore every intermediary should ensure it is part of their toolkit. Simon Burgess, managing director, British Insurance Figures from the Association of British Insurers show that the number of protection policies being written has fallen, with a 21% decrease in the number of new policies taken out between 2003 and 2004.

Grab a share of the MPPI market

This year the unemployment figures have edged upwards and there has been a corresponding increase in the numbers of court orders being issued for home repossessions.

The government has greatly reduced the help available to the unemployed when it comes to their mortgage repayments.

This is a fantastic opportunity for intermediaries to add value to their clients by offering peace of mind in arranging mortgage payment protection insurance.

The MPPI market is vast – worth an estimated 5bn – and intermediaries are taking only a small slice of it at the moment.

Unlike lenders, advisers have the opportunity – and indeed are required to under regulation – to trawl the market for the best deals for consumers. They can source products that are often much cheaper and more suitable than any option offered by lenders. While lenders typically offer a single premium products, advisers can offer their clients a choice of regular monthly repayment products that are invariably cheaper.

Since regulation, mortgage intermediaries can advise on general insurance.

But those who chose not to enter the muddy general insurance waters can outsource the whole process of product research to a specialist broker who will bear the regulatory burden, but provide a commission to the introducing intermediary.