The Price, Quality and Distribution of Mortgage Payment Protection Insurance: A Hedonic Pricing Approach
Bangor Business School Working Paper No. 11/011
26 Pages Posted: 16 Jan 2012
Date Written: November 1, 2011
Mortgage payment protection insurance (hereafter MPPI) provides varying combinations of accident, sickness and unemployment insurance and is used to protect the mortgage payments of policyholders in the event of a fall in income. Recently the provision of this service in the UK has been heavily criticized for providing poor value for money and for being associated with unhelpful sales techniques especially when sold jointly with a mortgage. Consequently in 2009 the Competition Commission ruled that MPPI should not be sold jointly with lending. In this study we examine whether this prohibition was justified and specifically does the form of distribution, either jointly with the mortgage or independently influence the premium levels. This research question is examined using a hedonic pricing approach with details and premiums of 281 MPPI policies. We conclude that the premiums of policies sold independently are lower than those policies distributed jointly for a given set of benefits and conditions. These findings support to the prohibition of the joint sale of the MPPI with mortgages.
Keywords: mortgage payment protection insurance, mortgage credit insurance, insurance premium setting, joint pricing, banks, other depository institutions, micro finance institutions, mortgages
JEL Classification: G21
Suggested Citation: Suggested Citation