Fixing the protection gap in the UK

mind the gap

I recently presented to the All Party Parliamentary Group on Insurance and Financial Services to discuss the future of lending at a time when consumers have lost confidence in income protection programs.

There are three main issues: where income protection has gone; the problem of the ‘protection gap' and how we can bridge this by providing innovative and transparent protection products.

A survey of over 2000 households across every region of Britain was conducted in preparation for this meeting and the key findings present a worrying picture.

The role of insurance as a safeguard for income loss has been seriously undermined with the payment protecton insurance mis-selling scandals - one in three used it to protect their loans and this has now collapsed to almost 1%.

Borrowers do not have confidence new products will deliver what they want and lenders are reluctant to be associated with a toxic brand.

There is widespread concern over job security - two out of every three people are concerned they may become unemployed.

Over 60% have indicated they are anxious regarding their financial affairs and almost 20% would be in financial difficulty within a month if they lost their job.

Yet over 80% of borrowers have no form of protection to safeguard their loans and it is this protection gap that the industry needs to address.

Protection products are viewed by borrowers as additional cost at a time when their spare income is being squeezed: 44% say they are cutting back on heating despite the bitter winter and more than half the population - 59% - are cutting down on food to save money.

Over one in three respondents admit they would not borrow - a direct hit on the prospects of growth in the UK.

So how can we respond to this? There is a new way of lending which we believe will help in restoring consumer's confidence.

Waiver products were originally developed in the 1930s during the Great Depression. Essentially the lender would offer a debt waiver facility to their customers, which would be written into the loan agreement.

The lender would purchase an insurance policy to transfer this risk off their balance sheet - this is an agreement between two businesses. It will shift the onus on the lender to indemnify their loan rather than the customer insuring their ability to pay.

Above all it is simple. The Financial Services Authority/Office of Fair Trading guidance has been released on protection products and endorsed the development of a suite of lending products which ensure that the cover offered meets the needs of that target market and avoids creating barriers to comparing, exiting or switching cover.

However, we are still waiting for the lending industry to come forward with concrete commitments.

The 'protection gap' is very real and its implications are profound for individuals and the economy.

Paul Walsh is chief executive of CUNA Mutual Europe

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