20 things

Payment protection insurance

8 April 2006

• The Office of Fair Trading (OFT) has started its review into the payment protection insurance (PPI) market, following a super-complaint from Citizens Advice.
• PPI is applied to a number of credit products including mortgages, loans and credit cards. It protects a borrower’s ability to keep up the payments on the loan in case of accident, sickness or unemployment.
• It is estimated between 6.5 to 7.5 million PPI policies are taken out each year generating premium income estimated in 2003 at £5.4billion.
• On 13 September 2005, Citizens Advice submitted a super-complaint to the OFT about PPI. It was based upon the Citizens Advice report ‘Protection racket: CAB evidence on the cost and effectiveness of payment protection insurance’. Citizens Advice stated that the evidence presented in its report suggested that the features of the PPI market seriously harmed the interests of consumers.
• An indication of high profitability is provided by claims ratios. PPI claims ratios (claims as a percentage of premiums paid by consumers) are estimated to be 15-20 per cent, which is low compared to other general insurance (GI) products: for example, claims ratios for motor insurance were 74 per cent and household insurance 55.2 per cent in 2003.
• The original super-complaint raised issues about mis-selling and mis-information by PPI providers.
• It also showed the wide variation of pricing within the sector and revealed PPI claims were low compared to other general insurance (GI) products such as motor and household.
• The super-complaint highlighted three main concerns about PPI cover, with claims that the product was excessively priced.
• Citizens Advice also raised concerns that consumers were pressurised into buying the products by unfair sales tactics.
• The final concern centred on the fact it could leave consumers facing additional charges or serious debt enforcement action as a result of the slow administration of PPI claims.
• The OFT study will look into the relationship between PPI suppliers and how this affects the sector, along with how the product is sold to consumers.
• Consumer awareness and understanding of exclusions, consumer’s experience of making claims and the impact exclusions have upon consumer’s ability to shop around will also be examined as part of the OFT study into PPI.
• The OFT has revealed it will send out a survey to lenders, intermediaries and insurers to judge the PPI market, in addition to a survey judging consumer opinion.
• The OFT has stated the main possible outcomes include providing the market with a clean bill of health, publishing information to help consumers, encouraging firms to take action, and the possible initiation of a consumer code of practice.
• The organisation has also stated it could make recommendations to the government or sector regulators, and investigate and impose enforcement action against companies suspected of breaching consumer or competition law.
• The market study gives OFT the opportunity – which it did not have during the super-complaint – to look more carefully at the outcomes of the FSA’s thematic work on PPI and the Competition Commission work on store card PPI. The study will look at the scope for a coordinated strategy by the OFT and FSA for regulating PPI and related credit products.
• Shane Craig, managing director at Paymentcare, welcomed the OFT study into PPI. “Every mortgage adviser in the land knows that the real issue lies with the banks and loan providers that are constantly bombarding consumers with low APR deals to encourage more borrowing – but why do none of these lenders shout about the rates they charge for their PPI cover? Given the fact that mortgages account for 83 per cent of consumer borrowing and MPPI accounts for only 17 per cent of consumer spend on PPI overall, this proves that there’s a huge disparity in PPI sales aligned with personal loans and credit cards.”
• The results of the study are expected at the end of 2006.
• The original OFT response to the super-complaint was given on 8 December 2005.
• The study was also made in response to the ‘Sale of payment protection insurance - results of thematic work’ FSA study conducted in November 2005, and a Competition Commission Store cards market investigation.