Loan insurance: a battle in the public interest

Dec 11, 2017, par Covea

The 1st of January 2018 should be a historical day for holders of a property loan and for homebuyers seeking to take out a loan. However, the banking lobby could block this economic and social progress.

Over recent years, the legislation has evolved in a positive direction for holders of loan insurance or payment protection insurance. Whereas previously banks systematically imposed subscription to their own payment protection insurance when granting a property loan, the Lagarde Act (2010) and the Hamon Act (2014) gave consumers the choice. They can now, in certain conditions, take out insurance other than that proposed by the lender. But this change concerned solely the loans contracted after the date of these reforms.

A new measure adopted unanimously by the French Parliament in February 2017 is designed to take this reform to its conclusion. It introduces, with effect from 1 January next, an annual right to termination not only for future contracts but also for those already in effect, which concerns close to six million households.

We can easily understand the fears voiced by the banks, which monopolise 88% of the market and which have contested this measure before the Constitutional Council. The banks justify their position by pointing to a risk of ‘demutualisation’: they argue that only the ‘group’ insurance offered by banks allows ‘vulnerable’ borrowers to obtain a loan. These last are seemingly to some extent subsidised by young and healthy borrowers, who pay a higher subscription than warranted by their situation and who would quite logically prefer individual insurance offering better cover at lower cost. However, this ignores the fact that people who are ill are generally sent on to take out individual insurance, which covers 40% of aggravated risks even though its market share is of only 12%. This also ignores the fact that most loan applicants with a medical history are turned down by bank insurers, whose mutualisation works in only one direction. The considerable surpluses generated by high prices with margins of 50% do not therefore benefit the most vulnerable borrowers, instead they benefit mainly the income statements of banking institutions.

If this measure is supported by the Wise Men of the Constitutional Council, consumers can only rejoice at the increased competition introduced into an oligopolistic market that is divided up mainly between nine insurers, which are all bank subsidiaries, i.e. €6 billion of subscriptions a year. The increase in purchasing power that would be returned to each borrower by ending this oligopoly could amount to as much as €600 a year.

Annual termination is also a major step forward for borrowers with health problems. A ‘risky’ profile results in a higher cost of insurance, i.e. a more expensive loan. The reform being contested by the banks would enable these people to reduce the cost of their insurance as soon as their health improves by changing insurer and by benefiting from a genuine right to oblivion with regard to their medical history.

The decision is now in the hands of the Constitutional Council. The choice is simple: preserve a rent-seeking situation or encourage competition and freedom of choice for borrowers to the greater benefit of the general public.