THERE has been so much written in the past few months about payment protection insurance it has all become a little confusing. Most of what has been written has been very negative, indeed dangerously negative – witch-hunt proportions even in some quarters. A mortgage magazine even ran a campaign to have single premium accident, sickness, unemployment banned.
Amid all the chest beating and promotion, some clarity is unfortunately needed. Without relevant PPI being offered to customers, there is an even greater risk of one of the fundamental objectives of the FSA not being met – and that is protecting consumer interests.
The PPI witch-hunt has also lumped mortgage payment protection protection and single premium ASU. These products are, of course, all very different. Most of the Office of Fair Trading's concerns re- volved around the potential mis-selling of PPI related to consumer and revolving credit sales, not mortgages.
In November 2005, the FSA published a report detailing its findings about the sale of PPI. This was backed up with mystery shopping of various firms involved in the sale of PPI – that goes beyond mortgages to other companies that offer revolving lines of credit, store accounts and unsecured loans. It was much clearer than the mortgage industry alone and, given the mortgage industry has been regulated by the FSA for some time now, it has taken a disproportionate amount of flak.
It does strike me as odd that people who have very limited experience in the mortgage market – and more specifically experience in the sub-prime mortgage market – have been pontificating about the so-called evils of single premium ASU.
The mortgage industry as a whole needs to assess the risks and benefits – yes, benefits – of single premium ASU with calm heads, because things have moved on.
Fact one. Sub-prime clients cancel their monthly ASU policies. Some major insurers have even withdrawn the product from sale because the persistency levels are so low. That is what sub-prime clients do. It is the same reason they cancel their life policies. That does not mean we should stop writing life business because we would be leaving customers and their families exposed.
There is a fundamental issue here. Why sell a client a monthly policy when he has a demonstrated history of not being able to meet his monthly commitments?
And guess what? Fact two: sub-prime clients will cancel their monthly ASU policy at the time when they need it the most. The potential ramifications for the IFA / mortgage broker are dire should be able to demonstrate that he offered his client the option of either monthly or single premium ASU and it has already gone pear shaped for his client.
Some brokers detail the costs and benefits of ASU in the suitability letter and document in that letter if the client has chosen not to take it up. Some go even further. For clients who cancel their policies downstream, some brokers send a disclaimer including they know what they are cancelling and detail the ramifications of having no cover.
It is cheaper to do that than risk the potential of attracting a lawsuit, and still still drawing bad press to our business and brand.
There is no doubt that single premium ASU policies have come in for some major flak because of their poor flexibility and TCF unfriendliness.
Agreed and rightly so. One of the key issues at play here is the seemingly large commission payments made for single premium ASU.
Let us look at that issue in another context. What if a motor insurer offered a three-year product and guaranteed not to change price over the term with no inflationary creep? What if you got a further discount for paying that policy upfront as a lump sum? Of course, the selling broker would have paid his share of the total premium.
Single premium ASU is not really that different; it is just that a lot of commentators have got all bent out of shape about the commission payment and not the cover itself.
This problem has been further magnified by lots of people throwing their twopence into the ring when, to be frank, objectivity is needed and recognition of what has changed. There is a place for single premium ASU, but not as we used to know it.
What if the mortgage industry had a single premium ASU product that had the following features:
– provided no quibble pro-rata refunds if it was canceled;
– where the premium was established using a risk matrix factoring in age and employment type – similar to the way life premiums are calculated;
– where you can sell the accident, sickness and unemployment components independently of one another based on the customers' individual circumstances;
– a product where you can factor in the client's own savings and existing employer protection policies to reduce the cost of the policy in line with risk;
– where you can defer the benefit payments by up to six months and be paid retrospectively in a lump sum;
– where you can change the policy mid-term, in other words the amount of cover can be increased or declined or names on the policy can be changed without penalty; and
– where the true cost including capitalized interest of the single premium ASU is disclosed pre purchase – to comply with treating customer fairly and Insurance Code of Business 5 rules. Indeed, all the product limitations, pre-existing conditions and exclusions are disclosed pre-purchase.
What if this product existed and its makers had worked closely with selected players in the mortgage industry to ensure all regulatory requirements were met and exceeded?
Well, I hate to say it but that the product that one broker has sold – and the intermediary has their FSA visits and, as with others, single premium ASU and its sale processes were heavily scrutinised. No problems. Perhaps some of the single premium ASU providers may wish to read the above product features just one more time.
Let us look at another angle. Surely lenders, particularly sub-prime lenders, have a duty of care to ensure that their clients needs are protected.
The stated objective of many in the mortgage industry is to ensure that their sub-prime clients are "credit cleaned".
So without any cover, they miss a mortgage payment or two or three and they are stuck with sub-prime rates for another year or two. All of a sudden that single premium ASU premium is not looking so expensive.
Things can and do go wrong, and it is our job as qualified professionals to ensure our clients' needs are protected.
The Association of Mortgage Intermediaries has now responded to the FSA's request to address its concerns about PPI and I am sure that will be the start of some more sanity in the discussions surrounding its sale.
Single premium ASU is not about preying on desperate clients. One broker has developed a process that is FSA and TCF compliant and sells products that are appropriate to individual needs.
There is no doubt that the adverse publicity surrounding PPI sales has eroded not only consumer confidence but the confidence of IFAs and mortgage brokers to sell insurance cover that few could argue against.
Most of all, it is important to note that the industry has responded and moved on. Some people need to move with it.