The payment protection insurance market has a captive audience, one that has been subject to inflated prices when sold to by lenders. Simon Burgess says the time is ripe for brokers to take their share
The recent announcement that the Citizens Advice Bureau has lodged a 'super-complaint' with the Office of Fair Trading, requesting an investigation into the sales of payment protection insurance, should come as no surprise to those who, over the years, have been frustrated by lenders that mis-sell these products. According to the CAB, too many consumers have been unable to claim on the policies they have been sold or are paying too much for their cover.
High-street lenders are quick to make the most of their position as mortgage and loan providers by selling PPI as an add-on. Often the insurance is bundled in as part of the mortgage and consumers are misled into taking out policies without checking costs and exclusions.
Government guidance to homeowners states: "If you have a mortgage, or are about to take one out, you should think seriously about how you would meet your mortgage repayments if you lost your income, say through unemployment or ill health." Bearing this in mind, and coupled with research showing that four out of five homeowners cite meeting mortgage payments as their biggest financial worry if they were to lose their jobs, it is easy to see why this cover is so easy to sell.
Volume sales targets
Independent research recently undertaken by the London School of Economics shows that only 55% of the working population would benefit from mortgage payment protection insurance. In contrast, mortgage lenders have sales targets of 85%, leaving around a third of people they target with no use for this product.
Those who are deemed to have a use for this type of cover are often disappointed when it comes to the point of claiming. So, did the product sold really suit the consumer and were the exclusions in the cover pointed out? The sales targets indicate that volume is the top priority, rather than suitability.
When my own company surveyed a range of lenders, it found that not one bothered to check whether the applicants had pre-existing medical conditions that might invalidate their cover. This is irresponsible and could easily lull the applicant into a false sense of security.
As well as failing to get to know their customers, mortgage lenders are charging extortionate prices - it is not uncommon for them to take in excess of 80% of a client's premium in commission and overrider payments.
The average cost per £100 of monthly cover from the UK's top 10 lenders is £5.78 a month but cover can be bought at less than £4 per £100 from a multitude of independent financial adviser and broker websites.
Around 20 million people are paying an average of £400 per annum for their PPI policies, merely topping up an overflowing commission pot. This market brings in around £8bn in premiums, of which £6bn goes to the lenders.
Approximately 82% of all payment protection policies are sold by lenders, with loan brokers accounting for 15% and insurance brokers selling only 3%.
It is easy to understand why lenders and their products have such a poor reputation and are under scrutiny from the OFT - they follow a one-size-fits-all approach and reap the profits.
Brokers should take the opportunity to tap into this public discontent and take their long-overdue share of this market, and change perceptions while promoting choice. Brokers are better placed than most to sell this product, bringing the skills and talent, targeting the right people in the right way and getting to know them by understanding and identifying their needs. Most importantly, brokers provide personal service.
There are swathes of disillusioned customers currently questioning whether the mortgage and loan protection policies they hold are right for them, and many more who are considering purchasing one of these products. Brokers should make the most of the opportunities presented to them.
For those who perceive these products as too involved or difficult to sell - think again. Specialist intermediaries provide low-cost, online accident, sickness and unemployment insurance schemes for introducer/affiliate brokers via the internet. These products avoid the pitfalls of the volume-biased mortgage lender policies and can be easily added to a broker's product portfolio.
Specialist intermediary products have clear benefits; for example, they usually offer back-to-day-one cover, while lenders' policies tend not to pay out until after a 60-day excess period. Specialists do not load premiums on the basis of age, gender or occupation, which is a bonus for the self-employed, who are often the most likely to need this type of cover.
The potential for cross-selling in this market is huge - who in their right mind would turn their back on this potentially important revenue stream?
It is encouraging that the OFT is in consultation with the British Insurance Brokers' Association, and that its findings are due in December. In the meantime, brokers should expand their portfolios and counter-attack competitors that are encroaching on their core business areas. Insurance is about the delivery of a promise - the lenders have let consumers down, so brokers should restore confidence in this sector and market these products correctly.
- Simon Burgess is managing director of specialist payment protection insurance broker Burgesses.
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