"This is ultimately about financial resilience, because cover should not simply be viewed as a collection of individual products which are discussed independently of one another."
- Mike Allison - Paradigm Protect
Protection is certainly getting plenty of attention at the moment, not least with the FCA having now published its final Pure Protection Market Study report, but there is one area of risk which I think we need to talk about more.
Mortgage advisers will be very familiar with conversations about what happens if a client dies, becomes seriously ill or is unable to work because of illness or injury, but what happens if that client simply loses their job and the income they rely upon to pay the mortgage disappears?
This is not about suggesting every mortgage borrower should have unemployment cover, because that may not be appropriate, but it is about asking whether the risk of losing a job is being properly considered and whether the client is being given the opportunity to understand the options available to them.
A foreseeable risk?
Consumer Duty has made the concept of avoiding foreseeable harm a familiar one, and I think there is a legitimate question here about how that applies to general insurance and, specifically, unemployment cover.
Imagine a client who completes on a mortgage and subsequently loses their job, perhaps six or 12 months later, with limited savings and no meaningful financial fall-back available to them. If they begin struggling to meet their mortgage payments and then discover there was insurance available which might have provided some support, is it unreasonable to think they might ask why nobody mentioned it?
That does not mean there would automatically be grounds for a complaint, nor does it mean unemployment cover would necessarily have been suitable for that individual, but I do think firms should be asking themselves whether they could demonstrate that the risk was considered, that the appropriate conversation took place and that the client's decision was properly recorded.
The economic environment matters
None of us knows what is going to happen to an individual client's employment, and advisers certainly should not be attempting to predict which businesses or sectors might experience difficulties in the future, but we do know there remains considerable economic uncertainty and, as a result, UK household finances continue to be tested.
For someone committing to a mortgage which might run for 25, 30 or even 40 years, it seems entirely reasonable to discuss what would happen if the income supporting that commitment suddenly stopped.
Looking at the impact of AI, the OBR explicitly models a scenario in which technological displacement raises the UK’s long-run equilibrium unemployment rate from about 4.1% to 5.5%, and the risk of at least short-term unemployment should not be discounted for those at first-time buyer stage.
This is ultimately about financial resilience, because cover should not simply be viewed as a collection of individual products which are discussed independently of one another. It should be about understanding the risks a client faces, the financial resources they already have available and where there might be gaps which could leave them exposed.
Looking again at unemployment cover
This is one of the reasons Paradigm Protect has recently added Walsham Brothers to our panel, providing member firms with access to mortgage payment protection insurance covering accident, sickness and unemployment, including the option of standalone unemployment cover.
Sometimes in debates around whole of market versus multi-tie, or the negative impacts of loaded premiums, the consumer gets forgotten. The reality is advisers need to have access to as many products as possible to deliver a comprehensive service and ‘fair value’ to their clients - one of the core principles of Consumer Duty.
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ASU products were far more readily available before the pandemic, and we believe the market has now reached a point where they can once again form part of a broader conversation about an individual’s ongoing financial resilience alongside more traditional life, critical illness and income protection solutions.
However, adding a provider to a panel is only part of the answer, because firms considering this area need to understand what they are recommending and why.
That means looking closely at eligibility and exclusions, the circumstances in which unemployment claims will be accepted, the period for which benefits can be paid, affordability, product flexibility, the claims proposition and, importantly, whether the customer can readily understand what they are buying.
Advise or refer?
There is then the question of how firms want to approach such business themselves, because not every mortgage advice firm will necessarily want to advise across every available product area.
For those which do, there needs to be appropriate knowledge, training, compliance support and oversight, so advisers understand both the products and the regulatory responsibilities which come with recommending them. For those which do not, I think there is another question worth asking: what happens to the client next?
If a firm has made a conscious business decision not to advise on a particular area, should an appropriate referral process form part of its Consumer Duty approach, rather than the conversation simply ending there?
There is an important distinction between identifying a risk and deciding a particular insurance product is the right answer to it, and having the unemployment conversation certainly does not dictate the eventual recommendation.
However, if we accept that losing an income via losing a job would have a major impact on someone's ability to maintain their mortgage payments, then I think it is increasingly difficult to argue that the risk itself should simply be ignored.
Ultimately, good advice is about understanding what could materially affect a client's financial position and helping them consider how they might deal with it. Future unemployment is one of those risks, and perhaps the question for firms is not whether every client should have unemployment cover, but whether every appropriate client has at least been given the opportunity to have that conversation.
