The following article is an opinion piece from Chris Biles, Head of Specialist Consumer Products at Canopius, a global specialty (re)insurer with operations at Lloyd’s (Syndicate 4444) and across the UK, Netherlands, Switzerland, Bermuda, US and Singapore.
With too much capital chasing too little premium, some insurers have been targeting the ‘protection gap’: the opportunity-filled space where consumers face clear and profitably insurable risks, but do not tend to buy cover. Almost every gap identified is soon crowded with brokers, agents, and advisors attempting to build awareness and drive penetration.
One broad protection gap remains almost entirely ignored. It is the gap between families’ ability to pay their bills when the breadwinners’ incomes cease, and the number of those families who insure against this risk.
In June L&G found that the average UK employee has enough cash in reserve to maintain their lifestyle for just 32 days after a final pay packet. More than a quarter have only enough for a week. Shelter, the charity for the homeless, found that one in three English working families could afford no more than one monthly housing bill without an income. Government figures show 43% of working-age adults have no savings at all. Meanwhile, the Bank of England frequently warns that UK household debt is mounting.
Payment Protection Insurance, known to everyone as PPI, can be an excellent product to help manage that exposure. It covers the risk efficiently and inexpensively. Unfortunately, due to dreadful past mis-selling on an enormous scale, the term “PPI” frightens all but the most steadfast consumers, insurers and brokers.
This need not be so. PPI is a solid, long-established insurance product and the need for it is clear. PPI could help reduce the protection gap to everyone’s benefit, and even avert wide-scale consumer defaults in the wake of an economic slump. It is time for PPI to come in from the cold.
PPI provides a valuable safety net against loss of income through unemployment, accident, or sickness. A decade ago UK PPI was as big as the household market, until mis-selling in the UK led to a massive backlash and a tarnished reputation. For many, it remains unmentionable.
But this coin has another side. Current PPI products are performing well, both for consumers and insurers. Expensive single premium policies were banned by the PPI Market Investigation Order back in 2011. This obliged providers to separate the sale of the PPI product from the sale of other finance and, furthermore, to write to all existing insured customers on an annual basis to remind them of their cover in place and to review whether it still meets their needs. A considerable percentage of longstanding customers, especially those with mortgage-payment protection insurance, have opted to keep their policies. Commissions have been reduced to sensible levels, a change that has brought the price down, and a high percentage of claims are being paid. In our own portfolio, the declinature rate is less than 5% of claims submitted.
For carriers, loss ratios are satisfactory. Average claim frequencies and durations vary considerably with the economic climate, but that is simply an underwriting challenge. PPI is good business, yet very few lenders and brokers actively sell it. Many have pulled out, and most that still support the line are reluctant to take on new customers.
Everyone’s interests would be served by rehabilitating PPI. To achieve this, lenders, intermediaries, and other retail insurance distributors should re-engage customers with the product, and explain how it provides invaluable breathing space when incomes dry up, especially for people with modest savings. For many customers, PPI can be as essential as life cover, but consumers are unlikely to pursue such cover unprompted. Awareness is critical.
Engagement, especially by trusted individuals such as IFAs and building society staff, will be key to shrinking the income protection insurance gap. Agents must, of course, be clear about the regulations governing PPI sales, and explain that the selling, not the product, led to the problems. A wide and growing variety of products is available, and there are companies, including Canopius, who are constantly innovating to make PPI better fit the target customer need. One recent example that has generated considerable interest is a new product designed to cover an insured’s direct debits.
While the primary need for PPI is usually to cover a customer’s mortgage or rent repayments, it can also be designed to cover any ongoing financial commitment, from gym subscriptions to utility bills to store cards. The important common requirements are that the product is tailored for the target market, sold (or provided as free by the retailer) in a professional and transparent manner and provides good value.
The PPI name is badly tarnished, but its troubles should be in the past. The payment protection gap presents a superb opportunity for innovative insurers and their distribution partners to provide a quality insurance product that is genuinely useful to the borrowing public, and to wider society as well. It is time to rebuild and recapture the PPI market.
This article was first published by insurancebusinessmag.com
Posted on 21st July2017.