UK Creditor Insurance 2010

Introduction

The report provides an in-depth analysis of the UK creditor insurance market in 2009, providing estimates for market size and growth by product line. The report also explores the latest regulatory issues affecting the market and provides the reader with three possible forecasts for GWP growth up to 2014.

Scope

*UK creditor insurance market sizing and forecast under multiple lending and regulatory scenarios.

*In depth analysis of the underlying consumer credit market including the size of the market for personal loans, mortgages, retail and motor finance.

*A discussion of the FSA's work on the creditor market and the current Competition Commission investigation and appeal.

Highlights

The personal loan PPI books of the few distributors in the market are thought to have benefited from higher penetration rates as consumers become focused on the need for this cover in the recession. However, the widespread withdrawal from the market by distributors means that market-level penetration is well below previous figures.

Pinnacle offers a range of creditor insurance products that protect repayments on mortgages, loans, credit cards and overdrafts. It also provides creditor insurance, which protects the repayments on hire purchase, contract hire and leasing agreements.

The POS ban recommended by the CC will be the most significant depressing factor on creditor insurance GWP going forward. Datamonitor envisages a market where the ban goes into effect in 2011, which will have particular implications for the personal loan PPI and motor finance PPI markets.

Reasons to Purchase

*Benchmark your creditor insurance premium income against your competitors.

*Plan your future strategy using Datamonitor's forecast of the future growth of the creditor insurance market.

*Keep up to date with the latest regulatory developments taking place in the market.


Report Highlights
The personal loan PPI books of the few distributors in the market are thought to have benefited from higher penetration rates as consumers become focused on the need for this cover in the recession. However, the widespread withdrawal from the m
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Overview 1
Catalyst 1
Summary 1
Executive Summary 2
The creditor insurance market is estimated to have declined due to lower lending and fewer products in the market 2
The creditor market is estimated to have been worth £1.7 billion in 2009 2
The largest credit markets in the UK suffered the largest declines, driving the decline in PPI GWP 2
Penetration rates for many creditor insurance products are thought to have benefited from the recession 2
Personal loan GWP is no longer the largest source of income for the creditor market 2
The recession has directly impacted the creditor insurance market's profitability 3
Gross claims costs have risen as claimants increase and are expected to remain elevated 3
Claims frequency has increased across all lines of business driving up costs 3
Claims severity has increased, driving up costs for insurers as well 4
The potential market for PPI products remains considerable 4
The widespread use of key credit products, even during the credit crunch, creates a substantial potential market 4
The recession has heightened feelings of financial insecurity among UK consumers giving the industry an opportunity to engage consumers 5
The ban on single-premium products reduced PPI sales in 2009 and the POS ban will further depress GWP 6
The FSA has called for the withdrawal of all single-premium insurance products sold alongside personal loans 6
The CC originally planned to ban sales of PPI at the POS of a credit product 6
Barclays successfully appealed against the point-of-sale ban on creditor insurance sales leaving the market uncertain of what will come next 7
Gross lending increases will drive creditor GWP growth over the long term 7
The main factor limiting GWP growth going forward under the neutral scenario will be the POS ban 7
Datamonitor expects that the UK consumer credit market will be relatively flat in 2010 though mortgages will recover 7
The neutral scenario forecasts that the creditor insurance market will reach a value of £2.6 billion in 2014 7
Table of Contents 9
Table of figures 10
Table of tables 10
Market Context 11
Introduction 11
PPI protects a consumer's ability to repay debts in the event of an accident, sickness or unemployment 11
The creditor insurance market is estimated to have declined to £1.7 billion in 2009 11
Dramatic declines in lending, distributors pulling products and negative publicity have caused the market to contract 11
Credit card PPI GWP accounted for the largest amount of creditor income in 2009 13
Penetration rates for creditor insurance products are thought to have benefited from the recession 14
Consumer lending in 2008 and 2009 was down from previous highs and norms 14
Gross advances from almost all credit lines contracted due to the credit crisis and recession 14
The largest credit markets in the UK suffered the largest declines 14
Overdrafts increased greatly, as other credit sources were denied to consumers 15
Balances outstanding saw a less dramatic decline in volume as consumers struggled to pay down loans 16
Personal loans saw the largest fall in balances outstanding 16
Credit card balances grew as consumers struggled to pay their bills 16
The recession is taking its toll on the profitability of the creditor insurance market 18
Gross claims costs have risen as claimants increase 18
Claims frequency has increased across all lines of business 19
The average length of a claim has increased, driving up costs for insurers 19
Macroeconomic indicators have been negative, pushing the market into losses 20
The UK economy has suffered one of the longest recessions of the post-war period 20
Quarterly GDP growth has only been positive since the fourth quarter of 2009 20
The Bank of England base rate is now at an all-time low 21
Unemployment is up, driving up claims volumes and the average length of a claim 22
Bankruptcy orders and IVAs have grown but show initial signs of stabilizing 24
Penetration rates for the product, which are depressed, have benefited from the recession 25
The PPI Market by Product 27
Introduction 27
Credit card PPI has become the largest element of the UK creditor insurance market 27
Credit card PPI GWP declined to £753m in 2009 27
Gross advances for credit cards declined in 2009 27
Card numbers fell dramatically in 2009 as issuers reduced their exposure to risk 28
Average balances outstanding grew dramatically in 2009, suggesting that consumers are having difficulty paying back their debts 29
Personal loans PPI has dropped off due to new restrictions and lower lending volumes 30
Once the largest line for creditor insurers, personal loan PPI has all but disappeared from the market 30
Gross advances have declined, as lenders have suffered funding difficulties 31
The MPPI market is depressed, but holding up better than most other PPI lines 31
MPPI GWP reduced to £600m in 2009 as new mortgage lending slowed and penetration rates fell 31
Mortgage lending has contracted considerably and looks to remain subdued 32
Lower mortgage activity has meant fewer sales opportunities for MPPI distributors as well 33
In the first half of 2008, MPPI penetration for new business rose 34
House repossessions increased dramatically in 2008 and 2009, highlighting the difficulties faced by insurers and consumers 37
Claims frequency began rising in the first half of 2008 38
Motor finance PPI has been hit by the collapse in car sales 39
Motor finance PPI has declined, as lending volumes and penetration remained low 39
Car sales fell considerably in 2008 and 2009 40
Motor finance has suffered along with the rest of the credit markets 41
Motor finance for new vehicles is increasingly dominated by PCPs 42
Hire purchase remains the top way to structure a used car sale 43
Retail finance PPI bucked the trend in 2009 with marginally higher GWP 44
Retail finance PPI grew marginally in 2009, although its long-term decline is expected to resume 44
Retail finance gross advances declined, reflecting the general contraction of UK lending 45
Balances outstanding for retail credit have increased, reflecting consumers' problematic finances 46
Overdraft PPI is estimated to have declined as lending has contracted 48
Overdraft PPI, while a small line, has held up during the recession with only slight declines 48
As a common form of credit, overdraft lending has decreased only slightly in the recession 48
Customer Focus 49
Introduction 49
The MPPI market is mainly distributed through banks 49
Unconnected PPI providers are rare and are not major distributors of any forms of PPI 50
Most unconnected PPI providers offer income protection or MPPI only 50
British Insurance is one of the most high-profile PPI providers 50
Paymentcare is one of the few players still offering loan PPI 50
iprotect was one of the few new entrants to the PPI market in recent years 51
Most distributors did not advertise their PPI products, and relied on the POS advantage 51
Despite the market's significant size, few insurers advertise PPI providers 51
Press and direct mail were the only means that insurers used to advertise their products 52
The potential market for PPI products is considerable in the UK 54
The widespread use of key credit products, even during the credit crunch, creates a substantial potential market 54
Consumer finances have taken a turn for the worse, opening up opportunities 55
The recession has heightened feelings of financial insecurity among UK consumers 56
Financial concerns are likely to persist 57
Regulation 59
Introduction 59
The ban on single-premium products has had significant repercussions for PPI sales 59
The FSA has called for the withdrawal of all single-premium insurance products sold alongside personal loans 59
All major distributors have complied, many having done so before the FSA's announcement 59
Misselling continues to be a target of FSA enforcement and regulations 59
Insurance disputes reported to the FOS have increased dramatically largely due to PPI disputes 59
The FSCS has seen a significant increase in PPI compensation claims 60
Distributors are continuing to suffer fines as a result of misselling 60
As of September 2009, the FSA had handed down 22 PPI-related fines 60
In October 2009, Swinton received a significant fine for failings in its sales of PPI 60
The FSA has rolled out new PPI complaints measures to safeguard consumers 61
The creditor insurance industry could face costs of up to £3 billion for the new FSA complaints procedures 61
The FSA has announced that it is reviewing its reforms to the PPI market, prolonging market uncertainty 61
The Competition Commission has decided to make significant changes to the market 62
The CC originally planned to ban sales of PPI at the POS of a credit product 62
Single-premium policies will also be prohibited 62
Banks will see personal loan PPI commission revenue drop sharply in 2009 64
Barclays' challenge has put Competition Commission plans for a POS ban in doubt 66
Barclays successfully appealed against the point-of-sale ban on creditor insurance sales 66
The CC has launched a short PPI remittal project 66
Competitive Dynamics 68
Introduction 68
Market conditions are unattractive for many, making new entrants or expansions rare 68
IGI is considering a bid to enter the market 68
First Assist secured a contract to provide MPPI and income protection products to Tenet Lime 68
Select and Protect launched into the MPPI market in July 2009 with new options 68
FirstAssist became Home & Protect's MPPI provider in February 2010 68
FirstAssist won a contact from Advent Solutions 69
Cassidy Davis has rebranded as 'Jubilee' 69
The top creditor insurance groups account for more of the shrinking market 69
Consolidation in the banking market has created a new market leader 69
The Lloyds Banking Group also has a number of affinity partnerships in the PPI field 69
Aviva continues to reduce its exposure to the market 70
RBS Insurance saw its creditor book contract in line with the market 70
Pinnacle continues as a major player in the market 70
Genworth Financial maintains a stable of creditor products for a variety of markets 70
Sterling, a niche market player, cites falling lending volume for a decline in GWP 71
The bulk of Legal & General's creditor insurance presence is the result of its mortgage business and IFA links 71
Gross loss ratios for the top underwriters rose in 2008, as the recession has driven up costs 73
Only Genworth and Metlife managed to lower their gross loss ratios in 2008 73
All other large creditor insurers experienced an increase in their creditor gross loss ratios 73
Future Decoded 75
Introduction 75
Gross lending is expected to increase, driving creditor GWP growth over the long term 75
The main factor limiting GWP growth going forward under the neutral scenario will be the POS ban 75
Datamonitor expects that the UK consumer credit market will be relatively flat in 2010 75
The wider economic situation provides both hope and concern for the mortgage market in 2010 and beyond 77
The neutral scenario forecasts that the creditor insurance market will reach a value of £2.6 billion in 2014 79
If the POS ban is reversed the market will grow rapidly in the early years of the forecast 81
With lenders able to offer regular premium products at the POS, PPI penetration will increase substantially 81
GWP will grow rapidly in 2011 as distributors bring regular premium products to market without the depressing factor of the POS ban 81
Under the pessimistic credit conditions, the market would grow little in the forecast period 83
The pessimistic forecast demonstrates the importance of a recovery in the credit markets 83
The pessimistic scenario will see subdued consumer credit growth over the next couple of years 83
The pessimistic scenario envisages gross mortgage lending rising to just £230 billion in 2014 84
APPENDIX 88
Definitions 88
Bank of England base rate 88
Balances outstanding 88
CAGR 88
Consumer credit 88
Gross advances 88
Motor finance products available at the POS 88
Hire purchase agreements 88
Personal contract plans 89
Leasing 89
Overdraft 89
Personal loans arranged at the POS 89
Remortgaging 89
Retail finance products available at the POS 89
Installment credit 89
Mail order credit 90
Store cards 90
Premium income measures 90
Earned premiums 90
Gross premium 90
Net premium 90
Written premiums 91
Methodology 91
Market size 91
Competitive dynamics 91
Consumer Credit Forecasting Model 91
Choice of economic variables 91
Model outputs 92
Bespoke scenario-based forecasting 92
Financial Services Consumer Insight Survey 2009 (FSCI) 92
Further reading 92
Ask the analyst 93
Datamonitor consulting 93
Disclaimer 94
List of Tables
Table 1: UK creditor insurance GWP, 2005-09e (£m) 12
Table 2: Creditor insurance GWP share by product, 2009 (%) 14
Table 3: UK consumer credit gross advances, 2005-09 (£m) 16
Table 4: UK consumer credit balances outstanding, 2005-09 (£m) 17
Table 5: Personal pecuniary loss and creditor insurance profitability ratios, 1989-2008 19
Table 6: UK unemployment, seasonally adjusted claimant count, 2004-09 Q3 24
Table 7: UK credit card PPI GWP, 2005-09e 27
Table 8: Credit card gross advances and balances outstanding, 2005-09e (£m) 28
Table 9: UK personal loan PPI GWP 2005-09e (£m) 31
Table 10: Unsecured personal loans, gross advances, 2005-09 (£m) 31
Table 11: UK MPPI GWP, 2006-09e (£m) 32
Table 12: UK mortgage gross advances by purpose, 2004-09 (£m) 33
Table 13: Penetration of MPPI policies, 2001 H1 to 2008 H1 (%) 36
Table 14: Penetration rate of new MPPI policies, 2001 H1 to 2008 H1 37
Table 15: UK motor finance PPI GWP, 2005-09e (£m) 40
Table 16: UK sales of new and used cars, 2005-08 41
Table 17: New and used car motor finance gross advances, 2005-09 (£m) 42
Table 18: Gross advances by new car finance product, 2005-09 (£m) 43
Table 19: Gross advances by used car finance product, 2005-09 (£m) 44
Table 20: UK retail finance PPI GWP, 2005-09 (£m) 45
Table 21: Retail finance gross advances by product line, 2005-09 (£m) 46
Table 22: Retail finance balances outstanding, 2005-09 (£m) 47
Table 23: Overdraft gross advances, 2004-08 (£m) 48
Table 24: MPPI distribution by channel, 2004 H1 to 2008 H1 50
Table 25: Creditor advertising spend by product, 2007-08 (£) 52
Table 26: Creditor advertising spend by medium, 2007-08 (£) 53
Table 27: UK consumers' common credit product and current account holdings, 2009 55
Table 28: UK creditor insurance competitor GWP and market share, 2007-08e 73
Table 29: Top 10 insurers' non-life creditor gross loss ratios, 2005-08 (%) 74
Table 30: Consumer credit gross advances forecasts under a neutral scenario, 2009-14f 77
Table 31: Forecast gross advances under the Datamonitor view, 2010-14 79
Table 32: Neutral forecast of creditor insurance GWP by product, 2009-14f (£m) 81
Table 33: Optimistic forecast of creditor insurance GWP by product, 2009-14f (£m) 82
Table 34: Consumer credit gross advances (pessimistic scenario), 2009-14f 84
Table 35: Forecast gross advances under the pessimistic view, 2010-14 85
Table 36: Pessimistic forecast of creditor insurance GWP by product, 2009-14f (£m) 87
List of Figures
Figure 1: The single-premium prohibition has resulted in personal loans falling as a proportion of the total creditor insurance market 3
Figure 2: Due to the prevalence of multiple product holdings, credit cards offer the opportunity for the greatest volume 5
Figure 3: Consumers are concerned about their finances, presenting an opportunity for creditor insurers 6
Figure 4: Creditor GWP declines were led by the personal loan market 12
Figure 5: The single-premium prohibition has resulted in personal loans falling as a proportion of the total creditor insurance market 13
Figure 6: The UK credit markets have dramatically contracted in volume 15
Figure 7: Balances outstanding have not seen the same drop as gross advances 17
Figure 8: The creditor insurance market is estimated to have moved into loss-making territory 18
Figure 9: UK GDP growth has only recently moved into positive territory 21
Figure 10: The BoE base rate reached record lows in March 2009 22
Figure 11: While not as high as in previous recessions, the number of unemployed has risen quickly 23
Figure 12: Personal insolvencies remain high, but show signs of stabilizing 25
Figure 13: Issuers are slashing the number of dormant accounts, with a 10% fall in cards in issue 29
Figure 14: Average balances outstanding have increased significantly 30
Figure 15: Second charge MPPI GWP has led the decline in MPPI income 32
Figure 16: Gross lending in the UK mortgage market has declined steeply since 2007 33
Figure 17: Approvals for house purchase fell sharply from mid-2007 to the end of 2008 34
Figure 18: New business MPPI policy penetration increased as the economic picture became more uncertain 35
Figure 19: Repossessions on first-charge mortgages have increased from recent lows in 2003 38
Figure 20: While volume was still down from prior years, frequency already began to increase in 2008 39
Figure 21: Car sales declined again in 2009 after contracting in 2008 40
Figure 22: Motor finance contracted in 2009 in line with the rest of the market 42
Figure 23: PCPs have become the most favored way to obtain a new car in the UK 43
Figure 24: Used car financing is almost entirely done via hire purchase 44
Figure 25: Most retail finance products have continued to decline 46
Figure 26: Retail finance balances have grown, suggesting consumers are paying back less to their lenders 47
Figure 27: Lenders and banks continued to dominate MPPI distribution in 2008 49
Figure 28: Personal loan PPI advertising was lacking in 2009 52
Figure 29: Direct mail has been the most popular form of advertising in the PPI market in recent years 53
Figure 30: Due to the prevalence of multiple product holdings, credit cards offer the opportunity for the greatest volume 54
Figure 31: Large numbers of consumers have seen their finances deteriorate during the recession 56
Figure 32: Consumers are concerned about their finances, presenting an opportunity for creditor insurers 57
Figure 33: A substantial minority of consumers expect their financial position to deteriorate 58
Figure 34: Distributors will have to wait 24 hours to conclude a consumer-initiated PPI policy sale or seven days for a non-consumer initiated sale 62
Figure 35: Current loan protection offering from leading banks 63
Figure 36: The CC's remedies include a POS prohibition and a prohibition on single-premium policies 65
Figure 37: CC timeline for PPI remittal 67
Figure 38: The Lloyds Banking Group has become the market leader 72
Figure 39: Credit markets will recover, although growth will be sluggish 76
Figure 40: Gross lending will reach £285 billion in 2014 in the view of Datamonitor 79
Figure 41: MPPI will be the main driver of growth in the creditor market's value 80
Figure 42: Creditor income will rebound faster without the POS ban 82
Figure 43: The credit markets fail to rebound until 2014 under pessimistic conditions 83
Figure 44: In the pessimistic forecast, gross lending will rise only gradually to £230 billion in 2014 85
Figure 45: Pessimistic conditions will see limited recovery in creditor GWP 86

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