The price, quality and distribution of mortgage payment protection insurance: A hedonic pricing approach

Ashton, John K.; Hudson, Robert

doi:10.1016/j.bar.2016.07.003

Cited by 4 publications

(4 citation statements)

References 41 publications

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“…In particular, this relationship is caused by the legislative restrictions, for example, in the USA (Jones, 2013; Park, 2017), where mortgage loans that exceed the limit are subject to insurance in the Federal Housing Administration (FHA). In some countries, for example, in the UK, the joint sale of the insurance and the mortgages is limited during 7 days after the loan contract conclusion, but this restriction was criticized (Ashton and Hudson, 2017). In many countries, the liability insurance was installed as a pass-through subsidy targeted to particular classes of bank borrowers (Calomiris and Jaremski, 2016).…”

Section: Introductionmentioning

confidence: 99%

Pricing analysis of interconnected markets of housing, mortgage lending and insurance

Geraskin

2020

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Purpose This paper aims to investigate the problem of searching for the equilibrium in the housing market, the mortgage lending market and the insurance market in the process of selling the residential property. Three classes of markets are established in three modes, which reflect the interdependence of the firms’ interests in these markets through the parameters of their integration. The paper aims to determine the prices in these markets on the basis of the compromises among the conflicting interests of the related firms, and, in addition, to assess the rationality of integration for firms, which are participants in the process of selling the residential property. Design/methodology/approach On the basis of the revenue sharing contracts and the supply chain coordination methods, the optimization models of the housing realtor, the mortgage bank and the insurance company are developed. The models consider the interdependence of the firms’ interests, the monopolistic competition in these markets and the conditions of the firms’ individual rationality in the interaction process. Findings The results of the study are as follows. First, as a consequence of a decrease in the demand curves in monopolistic competition, the housing market, the mortgage market and the insurance market are interconnected, therefore, the optimization models of the firms in these markets are interdependent through the revenue sharing parameters. Second, in these markets the individual firms’ sales optimums are not identical, therefore, the interests of the firms are contradictory. Third, in the realtor-bank-insurer system, the equilibrium satisfies the condition of zero revenue sharing payments between the agents; additionally, the equilibrium prices in these markets are mutually independent. Fourth, in the disequilibrium, the prices in these markets are interrelated, i.e. the price in one market increases with the price in another market, if the payment is directed from the former to the latter, and vice versa. Research limitations/implications The results of the study are applicable in practice, if the markets demonstrate the decreasing demand curves and if the needs of buyers in related markets are interconnected. Practical implications The interaction between the realtor and the mortgage bank enables the realtor to raise its sales and the bank to increase in the number of loans, i.e. it leads to growth of their profits. The interaction between the insurer and the mortgage bank enables the insurer to increase in the number of policies and the bank to reduce the risk of lending, i.e. it leads to an increase in their profits. The identification of the individual firms’ sales optimums enables agents to determine the terms of the contracts of these interactions, which are compromises from the positions of each transaction participants. In addition, the firms’ optimums indicate the predictions of the equilibrium market prices. Originality/value In comparison with the studies in the contract theory framework, first, the mathematical description of the complicated (three-agent) system of interactions is proposed; second, the optimal choice non-linear models are developed, which take into account the non-linear demand functions in the monopolistic competition markets; third, the equilibrium of the agents with contradictory interests is investigated. In the later item, the authors establish that the revenue sharing contracts in the complimentary demands functions systems do not require the payments between the participants. Fourth, the authors prove that, in the equilibrium of these markets, the housing prices, the mortgage interest rates and the insurance rates are mutually independent and equal to the prices in the isolated markets.

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Section: Introductionmentioning

confidence: 99%

Pricing analysis of interconnected markets of housing, mortgage lending and insurance

Geraskin

2020

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“…MPI is a very complex service that combines several different types of insurance and has different characteristics from provider to provider (Ashton & Hudson, 2017).…”

Section: Mortgage Protection Insurance Solution "Baufischutz"mentioning

confidence: 99%

“…For mortgage customers, defaults and foreclosures can cause emotional costs comparable to failed marriages or job loss (Taylor et al, 2007) and significantly increase the incidence of mental illness (Pevalin, 2009). Subsequently, the development of methods to reduce the number of mortgage defaults is economically and socially advantageous (Ashton & Hudson, 2017).…”

Section: Reasoning Behind Mpimentioning

confidence: 99%

“…These discussions take into account the requirements of mortgage protection, the low utilization of this service and consumer protection and competitiveness concerns (Ashton & Hudson, 2017). Also, in the UK, Ranyard and McHugh (2012b) investigated customer decision-making in the payment protection insurance (PPI) market (Note: PPI covers do not include death insurance as is the case in Germany).…”

Section: Literature Examining Mortgage Payment Protection Insurancementioning

confidence: 99%

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Fear appeals and mortgage protection insurance – a quantitative study

Röhl¹

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Managers in charge of sales process designs are constantly in the need to optimise their communication strategy to improve advisory quality and take-up rates. This is especially true for mortgage protection insurance (MPI), where buying insurance means buying an immaterial product that creates a perception of security which protects one of the most important assets in life – one’s home. It is key for a successful advisory to find communication approaches that overcome the psychological barriers of customers. One possible approach is the use of fear appeals, which confront the customer with negative consequences. Despite their widespread use in the public field, and continuous academic interest since the 1950s, the effectiveness of fear appeals remains equivocal. A detailed chronological examination of fear appeal research is presented suggesting that the field of insurance distribution was neglected from research. The effect of specific individual differences (optimism, pessimism, risk-taking) on cognitions, emotions, and behaviour outcomes are identified as gaps in the literature. The primary aim of this thesis was to determine the effectiveness of fear appeals in the context of MPI on behaviour outcomes and on willingness-to-pay to enhance the advisory quality of mortgage salespersons. To achieve this a research framework was developed that utilises the constructs of the Extended Parallel Process Model, conceptualises a fear appeal into three message characteristics (vivid image, message frame, message direction) and integrates individual differences. Using data from a randomised experiment (N = 1,014), the research framework was tested using ANOVAs, t-tests, regression analysis, and PROCESS calculations. The results delivered valuable insights. Firstly, vivid images created fear and uncomfortable feelings but did not influence cognitions or behaviour outcomes. Secondly, cognitive appraisal values indicated that the product information was well suited for business needs. Moreover, perceived susceptibility to a threat, as did optimism and risk-taking, showed a significant positive effect on willingness-to-pay. Lastly, a significantly positive effect was achieved on attitude towards MPI with the integration of the treatment. This project has demonstrated important factors for improving the sales process of MPI salespersons.

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