;

Do You Need Your Mortgage Protection Insurance?

Mortgage borrowers who accept mortgage payment protection insurance from their lender could be handing over hundreds of pounds a year too much, for commission-inflated policies which are unlikely ever to pay out.

That is the warning from some independent brokers in the wake of the legal challenge by New York attorney-general Eliot Spitzer to the US’s biggest insurance brokers over their commission earnings from insurers.

Spitzer claims that Marsh & MacLennan, the world’s biggest broker, and other big US players earn much of their profits from reward payments made by insurers for steering business their way, regardless of cost or suitability for the consumer.

The big UK banks, meanwhile, are steering borrowers to their own mortgage protection insurance policies – provided by wholly-owned or tied insurers – because they are profitable, according to Simon Burgess, a former Lloyd’s of London underwriter who runs a group of low-cost insurance including Burgesses.

“It is absolutely comparable,” Burgess said. “The banks are using a captive mortgage protection insurance company to achieve what is happening in the States. Loan protection insurance is a £5bn industry in the UK, and the key question is what percentage of premiums is paid out in claims. Some banks out less than 5% of the premiums, the rest is profit.”

Burgess said his groups mortgage protection insurance policies paid out 65% in claims, with 20% taken in commission and 15% left for insurer profit, and that to siphon off more than 50% was “quite simply profiteering”.

He added: “Research has shown that only 55% of all mortgage borrowers need mortgage protection insurance. Banks and building societies have sales targets of about 80% of customers. Most organisations are driven by commission, not by the needs and demands of the customer.”

A survey two years ago commissioned by the department of trade and industry found that only 4% of those who held mortgage protection insurance policies had tried to claim against them in the previous year, with a quarter of those unsuccessful.

Vincent Cable, the Lib Dems’ shadow chancellor, has called on the Office of Fair Trading to investigate the mortgage protection insurance market for what he calls “a serious consumer scam”, but has so far been rebuffed.

Although the Financial Services Authority is taking over regulation of the mortgage broking industry in January, brokers will not have to disclose how much commission they are earning from mortgage protection insurance policies sold alongside the mortgage. The Consumers Association has urged that it should be disclosed, telling the FSA that “commission can influence the product that is sold, or even whether it is sold at all”.

The Financial Ombudsman Service receives 1000 complaints a year about the alleged mis-selling of mortgage protection insurance policies, usually because buyers claim they were not told about the strict conditions for paying out, including “excess” periods (waiting times) of up to two months, exclusions for the self-employed, and hospital-test proof of sickness.

The Mortgage Advisers’ Association this year carried out a consumer survey of the top 10 mortgage lenders by phoning them to ask for a mortgage quote. Often, the price included the bank’s own mortgage protection insurance policy, but in only one case out of five were callers given even broad information on what the policies would actually cover.

The FSA has said it does not believe disclosure of commissions is necessary, because the price of a policy is transparent, and consumers can shop around.

A trip to the online supermarket quickly reveals the scale of the profit being made by the banks, and the savings to be made by the borrower. A monthly benefit of £500, for a 12-month period, with an excess period of 60 days, will cost you £27.25 a month at Royal Bank of Scotland, £28.90 at Northern Rock, and £30 at mutual Britannia, but only £10.65 from specialist mortgageprotect, which uses Pinnacle Insurance.

For the same protection with a 30-day excess the cost is £29.75 at Alliance and Leicester and £30.28 at Abbey (28 days), £24.95 from both Nationwide and Bradford & Bingley, and just £12.50 from mortgageprotect. Burgesses and Biba have mortgage protection insurance policies at only £19.75 a month which pay out immediately, and have extra benefit features.

Many homeowners, however, are covered by their employer for sick leave, or are unlikely to stay out of work for long if they should lose their job. Burgess said: “Many borrowers would be better off keeping the money and using it to reduce their mortgage debt.”