Selling accident, sickness and unemployment policies to borrowers has become quite a profitable activity for lenders and advisers. However the variety of benefits, terms and conditions has been confusing, to say the least.
In July 1999, the Council of Mortgage Lenders and ABI launched a new baseline specification for mortgage payment protection insurance which, unfortunately, has to count as one of the biggest missed opportunities for our industry over the last decade. The initiative resulted in little more than tinkering with the old ASU product. My dictionary's definition of tinkering is: “Making unskilled or experimental efforts at repair.”
The ABI and CML should have looked at the risks inherent with borrowing against income and developed a standard that met the genuine need of customers. I do not want to criticise either body individually because they have both been forces for good. However, when they combined to solve this particular problem, the results were pretty poor. I cannot help thinking this was because important members of both organisations shared a financial interest in the continuance of ASU sales and the realities of these commercial ties were too powerful to overcome.
I think it is fair to say I am not the only one who is disappointed with the results of the review. Customers do not like the results, either. As proof, I offer the CML and ABI's own statistics covering sales from the second half of 1998 to the first half of 2003. These show that 3,139,100 borrowers took out new ASU cover but the number of policies in force over the same period rose by only 986,000. The statisticians could have an absolute field day with these numbers because some customers will have moved, repaid their mortgages and so on – but two-thirds of them?
The conclusion I draw is that a large number of people are persuaded to buy these policies but most get rid of them quickly. My belief is that these policies were not designed with the customer in mind. Let us look at some of the MPPI baseline requirements.
Baseline 6 – a benefit period of 12 months. Providers can offer longer terms, subject to individual claims, but in practice 12 months is the standard.
While this may be reasonable for unemployment, how can it be appropriate for accidents and sickness, which can result in being off work for much longer periods? This has to be a mismatch of need and cover. When clients take out a policy on a 20-year mortgage and realise the maximum cover is only 12 months, do they dump the policy?
Baseline 11 – minimum period of notice for changes to the contract of 30 days for cover changes, premium rate changes, withdrawal/cancellation or if a substitute scheme is offered or 90 days if no substitute scheme is offered.
This allows insurers to price the product for sale, then unilaterally change the cover and/or the price or cancel the arrangement, giving as little as 30 days notice to the client. Unfair? In the legal sense, probably not. However I applaud some of the principles sitting behind this underdelivery – to ensure that the self-employed are not excluded and to define what constitutes medical evidence. But surely we should accept that it is time to go back to the drawing board and apply some fresh thinking in search of a product that is truly valued by customers and, therefore, valuable to the retail outlets that fund these trade associations and the advisers selling the products?
As a footnote, with impending statutory regulation, I really hope that everyone who is advising their customers to buy these products are pointing out all the terms and conditions. If complaints are made to the ombudsman in the future, it is going to interested to see that the main features of the contract, including the exclusions, were pointed out to customers during the sale.
Richard Verdin is sales & marketing director of Direct Life & Pensions.