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Tackling barriers: The Protection Gap

Tackling barriers: The Protection Gap

AMI Senior Policy Adviser Stacy Penn discusses the protection gap in the mortgage industry, in this article written for Moneyfacts

Within industry we regularly talk about the ‘protection gap’, which is viewed as the amount of people in the UK without protection insurance that may benefit from cover. Over the years the amount of people that have protection insurance remained static. Recent AMI research conducted in July 2023, which captured the views of 3,000 UK adults and 436 mortgage advisers, found 32% of UK adults have life insurance, 11% critical illness and 7% income protection. Similarly, the most recent FCA Financial Lives figures (2022) show that only 29% of UK adults have life insurance, 13% critical illness and 6% income protection. If we compare to 2020 FCA data, we see there has not been a significant shift in the figures: 30%, 13% and 5% respectively. Despite the best efforts of many to make protection a key component of mortgages and wider financial planning, where are we going wrong?

The ‘pandemic effect’ has been cited as having a positive impact on consumer interest in protection. For many it put into sharp focus the precarious nature of our health and wealth and highlighted the realities of what could happen without an adequate financial safety net. Whilst this effect continues to linger, the mortgage market encountered its own challenges in 2023. Last year we witnessed mortgage product and pricing volatility, reduced disposable income for some consumers due to a rising cost in living and increasing interest rates. For mortgage intermediaries that lacked a clear protection proposition and embedded processes, this unfortunately may have resulted in protection taking a back seat.  

With the economic outlook for 2024 appearing rosier, it is positive to see demand for advice is set to continue to grow – the Intermediary Mortgage Lenders Association (IMLA) expects mortgage intermediaries’ share of lending to keep rising to 89% in 2024 and over 90% in 2025. However, it would be naïve to believe this year will be plain sailing. Whilst we started 2024 with some lenders reducing rates, there are still a significant number of customers rolling off two and five year fixes starting with a two or below. As a result, some may be facing into rates double what they are accustomed to. As a result, mortgage intermediaries are set for another busy year as they continue to demonstrate the value of good quality advice and help customers navigate their options.

Therefore, without a defined protection proposition and set processes to ensure a consistent approach, mortgage intermediaries – and ultimately consumers – will forego protection opportunities this year. Recent AMI Viewpoint research found that for those with protection, a house purchase was the main trigger. Moreover, around 1 in 4 consumers (28%) that didn’t ask or get asked about protection insurance when getting a mortgage said they would have been interested in a conversation. This underlines the important role of mortgage intermediaries in this space, especially in a post-Consumer Duty world.

AMI Viewpoint research found 40% of mortgage intermediaries have seen an increase in protection conversations following introduction of the FCA’s Consumer Duty at the end of July. Anecdotally, from AMI’s conversations with firms, it seems those that have approached Consumer Duty with a business improvement and customer centric mindset, rather than viewing as another regulatory requirement, are beginning to see improved protection conversion rates. It will be interesting to re-visit this topic as part of this year’s Viewpoint and explore whether there is a link between the new regulation and protection sales within the mortgage market.

To tackle the protection gap, we must take a fresh perspective and look at the cause: in AMI’s view, a perception mismatch. Differences in perception surfaced in multiple areas of the Viewpoint study. For example, 65% of consumers would prefer to buy protection online in some way yet 34% of mortgage intermediaries have no online protection presence. Shockingly 47% of mortgage intermediaries do not have a protection section on their website and in a digital age, this puts mortgage intermediaries at an immediate disadvantage. A firm’s website is often the start of the consumer journey but if it fails to mention protection or does so in a way that lacks impact and gravitas, it could subconsciously fuel the view held by 47% of consumers that mortgage intermediaries only suggest protection to increase their commission. It is clear this should be an area of high priority for mortgage intermediaries during 2024, as well as providers who should consider how they can support distributor partners with relevant content.

In recent years we have seen a steady increase in the number of advisers utilising social media to spread awareness of protection and the role of advice. This is encouraging, however social media usage amongst mortgage intermediaries is low with only 13% of intermediaries creating protection related content via these channels.

Firms need to be cognisant of the regulatory requirements when creating content, particularly where deemed a financial promotion, but in AMI’s view this should not be regarded a barrier to adoption. The FCA is planning to release guidance on social media shortly; a much needed and welcomed move as previous regulatory guidance has aged quickly following developments in technology and shifts in how we use and consume different social media platforms.

When used responsibly, social media can help unlock the empathy part of the protection puzzle. It can allow advisers to share stories and demonstrate the role they play, helping to elevate protection from an abstract concept to a solution with clear, demonstrable value.

Perhaps the most surprising aspect of AMI’s research was the difference in generational views and attitudes. One barrier to protection take-up could be a misconception that younger consumers are disinterested in the topic. However, AMI’s findings paint a different picture: 78% of Gen Z and 76% of Millennials think it is important to have protection compared to 66% of Gen X and 58% of Boomers.

Looking more closely at what may be driving this behaviour, a Millennial customer aged 40 has, in the space of 15 years, encountered a global recession, a pandemic and a rising cost in living which saw consumer inflation peaking at a 40 year high. This may have created instability in job prospects, health and income. Whilst the current economic situation is showing signs of improving, these high-profile events have demonstrated to a whole swathe of consumers the risk of the unknown. This may have influenced consumer perceptions of the importance of protection, given these products can help provide peace of mind and a sense of control amidst wider uncertainty in other areas of our lives.

Younger consumers with home owning aspirations are also likely to be acutely aware of the hurdles to overcome when purchasing their first property, such as saving for a deposit and loan-to-income constraints. According to research from campaign group Generation Rent published in July 2023, the average time taken to save for a house deposit sits at 9.6 years compared to 6.8 years in 2012.

Protection should be viewed as a tool to safeguard against financial damage or delay, such as ensuring if a person fell ill they wouldn’t have to dip into house deposit savings, sacrifice their existing lifestyle or extend goal timelines. In fact, ‘peace of mind’ was cited by 51% of consumers that hold protection as the main reason they have cover. This is messaging that is likely to resonate with consumers yet is often underutilised by the industry in consumer communications and marketing messages.

Supporting the narrative that younger consumers are more interested in protection than we first thought, AMI research also found these consumers are more likely than older consumers to initiate the protection conversation with a mortgage adviser. 32% of Gen Z adults say they asked their mortgage broker/adviser about protection insurance compared to just 7% of Gen X. If mortgage intermediaries are not providing an environment where protection conversations are sparked and developed, younger consumers may seek advice elsewhere (this could include via routes that may give the illusion of advice, such as finfluencers) or turn to ‘DIY’ online methods that overlook the interconnectedness and usability of different protection products.

Only time will tell if 2024 is the year we finally start to close the protection gap. It is crucial this is a collective effort from all those involved in the industry. Responsibility should not fall solely on advisers’ shoulders; providers also need to challenge themselves, adapt and not simply maintain the status quo.

As Albert Einstein once said, the definition of insanity is doing the same thing over and over and expecting different results. As the numbers of consumers that have protection show, we are yet to see different results. It is therefore imperative we use the likes of AMI Viewpoint research to change our mindset and approach if we are to grow the market and ensure more individuals and families are protected.


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