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COMMENT
The Office of Fair Trading (OFT) has announced that it will carry out a market study into payment protection insurance (PPI), beginning in early 2006. The OFT took this step in response to a super-complaint from Citizens Advice, which argued that these policies were massively overpriced and widely mis-sold. As someone who worked for leading PPI providers over an eleven-year period, I know this to be true! For the record, payment protection insurance is optional cover which borrowers buy to protect the repayments on credit and store cards, car and personal loans, mortgages and other credit agreements. If you are unable to work because of accident, sickness or unemployment, PPI covers your monthly repayments, usually for up to a year. Also, PPI cover for cards and loans will pay off your debt if you die. As an industry ex-insider, I can confirm that there are five main problems with PPI: 1. It's incredibly, unbelievably, amazingly overpriced. The OFT reckons that only 15-20p of every £1 of premiums collected is later paid out in claims, compared to 74p for motor insurance. In fact, I've managed schemes with claims ratios of under 10% (so less than 10p in the pound is paid to claimants), which is daylight robbery! 2. PPI policies are widely mis-sold. Although the industry uses innocent-sounding terms such as "assumptive selling", providers use high-pressure (and even underhand) sales techniques to sucker borrowers into buying PPI. For example, some threaten not to grant a loan to an applicant unless s/he buys PPI. What's more, when policyholders decide to cancel their policies further down the line, many lenders wrongly deny that any refund of premium is due, which is disgraceful! Thanks to "confusion marketing" and widespread public ignorance of PPI, these lenders and insurers are getting away with murder. 3. PPI policies are riddled with small print. Although there is a minimum standard of cover for mortgage PPI (known as the "MPPI Baseline"), the terms and conditions of non-mortgage PPI policies vary enormously. Generally, contracts are weighted very heavily in favour of the provider, which means that a large proportion of claims are rejected due to buried exclusion clauses, technicalities or other small-print nasties. What's more, even getting basic information about the extent of a policy's cover can be a major challenge in itself! 4. There's a severe lack of choice. Essentially, lenders control the PPI market, because they have access to millions of "captive" borrowers. Therefore, when it comes to pricing and policy benefits, lenders call the shots. That's not to say that PPI insurers are squeaky clean; quite the opposite, in fact! A small band (almost a cartel) of specialist insurers competes aggressively for business from lenders, creating long-term agreements to the detriment of consumers. Even worse, many lenders have created their own (usually offshore) captive insurers, in order to make even bigger profits from self-insuring. 5. It's tough to shop around for PPI. Although there are a number of providers of stand-alone PPI policies, they compete for mere scraps from the lenders' table. Furthermore, the odds are stacked against them, because they don't have the size and scale to compete with the banking giants, who employ huge teams of salespeople to push their own policies. Although PPI is a blatant rip-off, the OFT estimates that there are around twenty million policies in force, with between 6½ million and 7½ million new policies bought each year. In 2003, PPI premiums totalled £5.4 billion, which means that lenders (and to a much smaller extent, insurers) are currently pocketing at least £4½ billion a year in risk-free profits from PPI. Ouch! With 25 million homes in the UK, most households have a PPI policy of some kind. Thus, PPI is shaping up to be the next big financial scandal, following in the footsteps of widespread mis-selling of mortgage endowments and personal pensions. Let's hope that the OFT's investigation into payment protection insurance doesn't turn out to be a half-hearted response or whitewash. Otherwise, each British household stands to lose an average of £180 a year to greedy lenders and insurers! Finally, here are three in-depth articles that criticise PPI for cards, loans and mortgages. Enjoy! More: Stop! Don't buy or renew a policy without first visiting our Insurance centre!
