Sue Anderson is head of member and
external affairs at the Council of Mortgage Lenders (CML)
It’s a tricky time for mortgage payment protection insurance (MPPI). With both the Financial Services Authority (FSA) and the Office of Fair Trading (OFT) undertaking reviews of the payment protection insurance (PPI) market in general, MPPI is finding itself taking flak primarily aimed at other insurances within the PPI stable. What is this likely to mean for the MPPI market? And, more importantly, will consumers who would benefit from having MPPI become more suspicious of it, and suffer as a consequence?
Laying some myths to rest
First, let me lay to rest some common myths that still seem to exist about the Council of Mortgage Lenders (CML) and lenders’ attitude to MPPI. Contrary to popular belief, we are not promoting MPPI as a suitable solution for everyone, nor do we any longer have a specific target figure for take-up. Our real interest is in minimising repossessions, through all the mechanisms that are available – forbearance, flexible product design, borrowers’ resources, and a whole range of potentially appropriate insurances such as life, income protection, and MPPI.
The accusation that is persistently levelled against lenders in relation to MPPI is that sales are motivated by profit rather than by the consumer interest. This much over-stated line is peddled most frequently by specialist brokers and providers of standalone cover, who have a commercial interest in ensuring that they, rather than lenders, achieve the sale (and the commission that accompanies it).
That isn’t to say that price and profit are not legitimate targets for scrutiny. They are, and it is clear there is still significant variation in price and cover within the MPPI market. A larger, more liquid and competitive market would benefit the consumer in this respect. Even so, MPPI compares favourably with unsecured PPI, as there are already standalone providers of MPPI and it is possible to buy the cover separately from the mortgage. Typically, this isn’t the case for other types of PPI.
Differentiation
The OFT inquiry currently under way has recently produced an interim report which echoes these views. It finds that overall median commission rates equate to around 60 per cent of the first year’s premium income for the whole PPI market, but were lower for MPPI at 35 per cent. And claims ratios in 2005 – that is, the value of claims paid out represented as a proportion of annual premiums – were very low across the PPI market as a whole at 17 per cent (compared with competitive, high-performing sectors such as motor insurance at 74 per cent). Median MPPI claims ratios are about 35 per cent. So, generally speaking MPPI clearly fares better in terms of the OFT inquiry than PPI generally. But there is a question mark over just how clearly the OFT will differentiate
It is probably unrealistic to expect the PPI market ever to reach the kind of claims ratio visible in the motor sector, for example. Not only is the motor market much larger and more liquid, it is also compulsory rather than optional for the policyholder. There is little self-selection involved (the only real options relating to whether to choose comprehensive cover or just third party, fire and theft). And, given the numbers of cars on the road, there is a wealth of claims data available to firms on which to base their risk assessment and pricing. All of this makes the motor market completely unlike the PPI market as it is now, or ever will be.
Add to this the fact that economic conditions are unlikely to create claims fluctuations in the motor market to anything like the same degree that they would in the PPI market, and it is easier to see reasons why pricing and claims experience should be very different than reasons why they should be similar. Unfavourable comparisons between the PPI and motor sectors are clearly deeply misleading if taken at face value.
Ammunition
But, these arguments aside, what is quite clear is that there is plenty of ammunition available for those who want to take a swipe at MPPI. The reason this matters is ultimately because of the effect it may have on consumers. If consumers become more suspicious of MPPI, then some of those who would have taken it in a more positive environment will choose not to do so. If they take other alternative steps to offset the risks that MPPI would have covered, then fine (though possibly more expensive). But if not, they are more vulnerable to suffering payment difficulties if they experience accident, sickness or periods of unemployment.
Mortgage intermediaries will all have their own views about the merits or otherwise of MPPI as a concept, and of the relative merits of different policies, as well as of the cost of cover, commission rates and profitability of the product. That’s fine. But in an environment where MPPI is being tarred with an unduly negative brush by its association with the current investigations into the wider PPI market, it’s more important than ever to think creatively about what strategies are most appropriate to help consumers reduce the risks posed by unforeseen events. Ultimately, avoiding the human misery of arrears and possessions is what it should be about – much more than the sterile arguments about the risk and profitability of the MPPI product.
