Theory and Estimation of the Mortgage Payment Protection Insurance Decision

Gwilym Pryce

Scottish Journal of Political Economy, 2002, vol. 49, issue 2, 216-234

Abstract: This paper examines the decision to take out mortgage payment protection insurance (MPPI) in the UK. The paper explains how MPPI has increased in importance over the last decade due to the government stating that Income Support for Mortgage Interest (ISMI) has crowded–out MPPI. A theoretical model of the mortgage protection insurance decision is developed which takes account of the welfare system. The model is estimated using logit analysis on 1995 Glasgow and Bristol data. Elasticities of the probability of take–up with respect to a variety of arguments are calculated, including the level of ISMI. The estimated elasticity with respect to ISMI is found to be very low, which suggests that the crowding–out motivation for the restructuring of Income Support for Mortgage Interest in October 1995 had little support in the data available at the time of the policy decision, and explains the continued low take–up rates since the 1995 restructuring.

Date: 2002
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