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Advice on mortgage protection has been criticised and will come under scrutiny by the FSA, so brokers must ensure they have access to the best products

At the end of an evening, a word association game can be both entertaining and enlightening – especially if the wine has been flowing freely. Generally the game is a source of great hilarity and nothing more than a mere diversion, but when applied to the more important aspects of our lives the results can be more sobering.

Everyone has their own ideas about insurance and, certainly, it does not generally make for one of the most entertaining after dinner conversation topics, but what responses would it throw up in a game of word association?

Clearly, any insurance broker or provider would hope words like value, security, and service came to the fore but is that really likely? If we look at the protection sector of the market, the first word to spring to mind is as likely to be 'racket' as anything.

Citizens Advice recently highlighted the problem and in a statement in September, said: "Citizens Advice is making a super-complaint to the Office of Fair Trading, calling on it to launch an investigation into the payment protection insurance (PPI) business, which has an estimated 20 million policies in force and produces annual revenue in excess of £5bn. Based on evidence from 270 Citizens Advice bureaux around the country, it seems that in many cases it is more about providing an additional source of profit for the financial industry than about protecting consumers. Problems occur in nearly all sectors of the consumer credit market – from non-status mortgage lenders and hire purchase companies to major high street banks and credit card companies."

As shown in the tables, consumers are paying thousands of pounds unnecessarily to gain the protection they need.

Alongside the loan protection market, there has also been some unwelcome publicity for critical illness providers after the Financial Services Authority (FSA) released criticism in a market briefing, also in September. Looking into the promotional activities of some 25 critical illness providers, the FSA said products had been mis-represented, and that claims relating to the insurance and its price had been overstated. 'Could do better' was very much the gist of the briefing, and in its conclusions the FSA stated: "If we see persistent non-compliance from a specific firm, we will consider other regulatory tools – including a visit to look at the firm's systems and controls surrounding their financial promotions or referral to Enforcement for further investigation." Clearly the FSA is under no illusions as to how serious the matter is.

For brokers looking to sell protection policies there are a number of problems to face. The first of these is the deteriorating perception that consumers have of this market, and the only way for brokers to combat this is by showing it at its very best whenever they get the chance. The problem is that this requires an in-depth knowledge of both the products and providers and the time to be able to match the needs of the client with what is available in the market.

All too often this does not happen and, for brokers arranging protection insurances on the back of a mortgage, there are a number of reasons why. In the first instance there is the knowledge factor. Many brokers will have a good knowledge of the protection market but, in some cases, those who do not sell it in any volume are not well placed to do the best for their client.

There is also the time factor. Having gone through everything required to assess and then apply for the appropriate mortgage, going through a similar process to cover off the possible protection needs is going to be a struggle for both the client and the broker. If this is done, then many brokers – and especially those working through mortgage networks with associated protection panels – are unlikely to have access to the best products in the market. Too often many of the large networks put the onus on overriding payments when it comes to putting their panels together, and too little attention is paid to the end product. As such, the best products are simply not available to many of the brokers selling protection to their clients.

For those inflating the margins there may be large-scale profits in the short term, but those looking to do long-term business will have to cut the fat from their prices and deliver value. Many larger, predatory players have already highlighted the protection market as one where they can make some real headway.

Tesco, for example, made somewhere in the region of £100m in commission from the sale of life insurance last year and is now believed to be looking at the critical illness market. If a company like Tesco arrives with a basic level critical illness policy, which is easy to understand and simple to take out, then the more traditional providers will soon find themselves struggling for volume.

If one looks at the price differential between products currently available in the critical illness market then it is clear to see why the likes of Tesco are considering making an entrance. Looking at the table (Premium rates), the difference between the cheapest and most expensive policy is £12.13 a month. This mounts up to £145.13 a year. In turn this is a difference of £3639 over the 25 years of the policy should the pricing remain the same.

It is not just in the critical illness market where there are huge price discrepancies, as the figures for the loan protection insurance and mortgage payment protection insurance policies show. By moving away from the mainstream providers and looking elsewhere thousands of consumers will be saving thousands of pounds.

Elsewhere in the mortgage market competition has meant prices have been fiercely competitive for many years and consumers have had access to some great deals. In buying some of the protection policies that are so often sold alongside their mortgage the same has not been the case for consumers.
Under the auspices of the FSA, brokers must provide the best for their clients and in too many cases this is simply not happening. As the figures show, it is not just a few pence here or there – and in an environment where treating customers fairly is so important there will be no place for such poor advice.
While various parts of the protection market have come under some heavy fire, there are still many products doing an excellent job to protect consumers against illness, accident and unemployment and provide them with the security they need. This should be built upon rather than destroyed with both providers and brokers looking to give the very best of value, product and service. The market is unquestionably there but unless we look to meet its needs at a price that is competitive, then new players will provide what others are failing to.

key points
Citizens Advice is making a super-complaint on payment protection insurance to the OFT.
Brokers working through mortgage networks may not have access to the best products.
A £12.13 difference in premiums per month mounts up to £145.13 a year and £3639 over 25 years

Source: Mortgage Solutions Magazine

 

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