When ASU strikes

The cold wind of realism blowing through the Nationwide League as a result of the recent failure of ITV Digital, means many professional footballers will find themselves joining the dole queue in the coming months. Meanwhile, Beckham and Owen will increase their earning power.

Back in the insurance world, one in five AXA staff face an uncertain future following the company's recent restructuring announcement, as do another 70 at Capita, and 130 more at Groupama. Others are sure to follow as firms continue to become leaner and meaner, and look to use technology to carry out more and more functions.

Against this backdrop then, why should the take-up of accident, sickness and unemployment policies (ASU) remain at around 35% for new mortgages?

Is it because many customers adopt the `it won't happen to me' or `the state will provide' attitude, so familiar in other areas of financial planning, such as pension provision? In today's uncertain world, there few who could comfortably hide behind the first statement. For those that do, let us explode the myth behind the second.

Means test
Anyone who has lost a job can apply for income support for mortgage interest (ISMI). If the mortgage was taken out after October 1995, there is a nine-month waiting period, and for those with large mortgages, only the first £100,000 is covered. The application is then means-tested, any partner's income is taken into account, as are savings in excess of £8,000. The Department for Work and Pensions (DWP) reckon 70% of applicants will fail, and for those that do succeed, capital repayments, including endowment premiums, are not covered. The news is slightly better for those with mortgages in force before October 1995, but the message is clear, the state will not provide.

So why is the uptake of policies at the point of sale so low? It is likely to be a combination of the attitudes referred to above, reinforced by concerns over exclusions, or the feeling that the lender is just trying to squeeze more out of the sale.

The government has a target of 55% of mortgages being protected by insurance by 2004, and, of the current 2.3 million policies in force, intermediaries were responsible for just 24% of sales.

The good news for brokers looking for a new income stream is that sale of ASU policies is not restricted to the point of sale of the mortgage. Also, like other insurance products offered by lenders, the cost of buying through an intermediary is often cheaper. The typical cost of an ASU product through a high street lender can be £5 to £7 per month per £100 of cover, whereas in the intermediary market it can be £4, giving intermediaries a competitive edge.

Adequate cover
Personal lines intermediaries, or those with a financial services arm, are well placed to market ASU policies to their clients. The broker who knows and understands his client will be able to tailor the cover to his client's need.

Unemployment cover can be omitted for those ineligible, such as the self-employed. Again, for clients who have adequate accident and sickness cover through other arrangements, the unemployment element can be offered on a stand-alone basis.

It is the type of cover that is sold, rather than bought. Again, high street brokers that have regular face-to-face encounters with customers are well placed to promote the product.

In order to be eligible for unemployment cover, proposers typically have to have been in their current job for a minimum of six months, with no known threat of redundancy. Within reason, cover can be bought for an amount in excess of the monthly mortgage outgoing, to cover other regular household bills, or increases in mortgage interest rates.

Most insurers look to impose a limit of between £1,500 and £2,000 on the insured amount, with a normal maximum benefit period of 12 months. And most policies have a one-month waiting period, but others will pay from day one.

So why do most brokers hold back from offering ASU cover? In many cases it will be simply because of unfamiliarity with the product. However, it is not difficult for brokers to research and become knowledgeable on the subject, which will also help differentiate the broker from his competitors.

Or it could be the perception that there is no market for the product. In that context, one should remember the story of the two shoe salesmen who found themselves on a desert island. The first rang home and reported the visit was an absolute disaster, as no one on the island wore shoes. The second rang his office, barely able to contain his excitement. Great news, he said, everyone here needs shoes.