Closing the Protection Gap
(Paul J Walsh article from COVER magazine edition 23/08/2012)
In today’s market, insurers need to explore other options to protect consumers. Paul Walsh, CEO of CUNA Mutual, examines the options for the industry.
Media reports about the squeeze on every societal group due to stagnating incomes, rising redundancies and spiralling living costs are almost a daily occurrence.
The average take-home income has declined by 3.1 per cent between 2010 and 2011 and is expected to drop again for 2011-12.[1] The average family’s debt is also up 48 per cent (Jan 2011 – Jan 2012). Coupled with the decline in consumers protecting their loans in the wake of the PPI miselling scandal, consumers are now less and less protected against unexpected events and life changes, which may cause a loss of their income.[2]
This protection gap has widened significantly meaning that large numbers of consumers are in danger of losing their home, cars and lifestyle.
Recent research from CUNA Mutual has found that 77 per cent of people do not have any protection in place to protect against unexpected life events.[3] This level is way down on the number unprotected in the days before the scandal surrounding Mortgage Payment Protection Insurance (MPPI) when the vast majority of new mortgages came with cover attached.
More shockingly, when asked whether they would be able to pay an unexpected bill of £2,000, one in three university graduates would be unable to come up with the funds. This amount is the equivalent to a hospital expense or a major car repair and has been identified as a key figure when investigating financial fragility amongst the general population. The fact that a third of the professional workforce cannot access this sum of money is shocking when you consider how quickly unpaid sums the size mortgage payments can accumulate.
Personal finance pages are full of stories with reports of people who cannot make their mortgage repayments and the poverty to which they can be reduced. What has become clear from these human-interest stories is that the people who are affected by this are not just on low incomes. They include those with high levels of education and are from professional backgrounds. Due to the high volume of these stories the reality of the poverty consumers are facing daily is sometimes lost.
It is generally accepted that not everyone needs protection cover, but more need it than have it. One of the issues that lenders are up against is convincing consumers that they need cover. Protecting mortgage payments makes sense to consumers in the event of loss of income as it is seen as a major monthly expenditure. However following the miss-selling scandal the product is now considered toxic and no lender wants to sell it.
Consumer mistrust has played a significant role in causing people not to invest in protection products. The MPPI scandal continues and claims companies have helped to cultivate the myth that all insurers and lenders miss-sold Payment Protection Insurance (PPI). Couple this with the squeeze on consumers’ incomes and protection is not viewed as a necessary expense.
Following the rebrand of protection products as income protection, insurers are struggling, as consumers do not relate to the term income as a personal asset that needs to be protected. Various brands have struggled with this and tried out new terms such as Legal & General’s Lifestyle Cover, to try and engage consumers with the product, but with very little success.
CUNA Mutual, one of the world’s largest credit and income protection insurers of affordable cover, identified this lack of resonance through focus groups. People don’t think they have an income, they have wages or salaries. In order to familiarise consumers with the concept of protecting themselves, CUNA Mutual partnered with a number of credit unions around the UK in offering a free “wages protection” offer for three months.
This allowed credit union members experience protection and the peace of mind it can bring before committing to investing in the product. The offer was a resounding success and members in their thousands availed of the free offer. The credit unions also benefitted, as they were able to offer their members an added extra at no cost to themselves.
A little imagination can go a long way in insurance but the glimmers of it are few and far between.
Due to a reticence from certain major players in the market place, this much-needed imagination and innovation has been in short supply. With the new guidelines on sales of protection in force since April 2012, major players have invested in adapting to these new guidelines rather than looking at developing innovative new products that consumers actually need and want.
In a market dominated by consumer demand, it is remarkable that insurers have not realised the need to provide relevant, streamlined products, which reflect consumers’ wants and needs. Other areas of the insurance market have already begun to adapt and are offering policies, which cover in a measured and realistic way. For example, travel insurance providers have removed excess cover such as jewellery cover and can offer a more cost effective product as a result.
Related to consumer demand is simplicity, consumers, more than ever, want to fully understand a product’s benefits before investing in it. Policy documents need not be equivalent in size to a telephone directory. By removing a lot of the jargon traditionally associated with insurance policies, insurers can begin to win consumers’ trust and maintain and renew their custom.
While major players can do all they can to incite consumers to invest in these products, there are other ways to give people the protection they need. By recognising the need for a range of products to cover consumers, everyone can benefit – insurers from generating large quantities of business, lenders by having the risk of arrears and default reduced and, most of all, consumers, who are protected and ensure they can make their repayments.
CUNA Mutual has looked at a number of new ways to protect consumers. A popular method in the US market, which CUNA Mutual has pioneered, is underwriting waiver clauses in loan agreements. This means that borrowers can waive their repayments for a fixed period of time in the event of loss of income.
In the event of illness or redundancy, consumers are generally without income for approximately three to six months. So, a six-month waiver repayment clause would alleviate large money difficulties for consumers who do lose their income, and give them peace of mind whilst they take stock of their financial situation.
Waiver eliminates the insurance element away from the consumer and places it with the lender instead. Insurers can provide a contractual liability insurance policy (CLIP) to insure the lender against the losses they may incur by offering their borrowers such a benefit. This may result in a small increase in the cost of the mortgage for the consumer but over the course of a 25 year mortgage, the cost to the consumer would be negligible and far outweighed by the peace of mind and cushion it brings, or alternatively some lenders are looking to absorb the cost within the loan.
By accepting that protection is a concept, which –currently does not resonate with consumers, CUNA Mutual is making a potentially revolutionary advance within the market to benefit all parties without the pitfalls and regulations of MPPI. We’re giving lenders the comfort to increase lending and borrowers the confidence to borrow.
Cuna Mutual Waiver – The Facts
CUNA Mutual offers a complete waiver solution for lenders. Through taking out CUNA Mutual’s Contractual Liability Insurance Policy (CLIP), lenders will be able to protect themselves against losses incurred by waiving a debt for a set duration.
It will:
-Enables lenders to protect their balance sheet, through a simple policy, against their borrower’s ability to make repayments when some lifestyle event affects their income
-Allow lenders to form better relationships with consumers as they can enter a dialogue with them, at an early stage, in the case of financial difficulty.
-Enhance a lender’s financial results – the level of default is reduced.
-Encourage customers to borrow from a CM Waiver lender, as they will be automatically protected against being unable to make repayments for stipulated scenarios, unemployment or accident for example.
Key Facts
-CM Waiver is tailored to the specific need of the lender and its benefits directly address the factors, which undermine their direct borrowers’ ability to repay loans. CM Waiver is not a generic cover, the cover provided is needed by borrowers, and the type of cover provided is efficiently designed to eliminate unnecessary costs and irrelevant cover.
-As the product can be community rated rather than individually rated the cost is a lot lower to the consumer.
-CM Waiver has controls in place to protect against the possibility of defrauding the lender.
-CUNA Mutual is one of the largest credit and disability insurers globally. It specialises in providing affordable, transparent and compliant programs to its partners in 38 countries, including the UK.