Insurers squeeze job loss victims

With unemployment forecast to hit three million next year, the cost of taking out redundancy cover soars

Workers who took out insurance against losing their job in the recession have been told they will get lower pay-outs in a trend that could affect millions of people.

One of the most respected insurers, the Post Office, has raised premiums and cut cover for mortgage protection customers who took out policies during the boom when they were less likely to be sacked.

Other companies are also cutting their exposure to the downturn by taking advantage of a contractual clause which allows them to alter terms at 30 days' notice.

The changes, which follow a 17 per cent average rise in mortgage cover last year, are a fresh blow to the tattered reputation of payment protection insurance (PPI), which has been dogged by rampant mis-selling and excessive rates.

Campaigners fear the increased cost of cover will lead to some people jettisoning policies as job losses mount at their fastest rate for 17 years. Unemployment passed the 2 million mark in February and the CBI and the British Chamber of Commerce predict 3 million people will be out of work next year.

Which?, the consumer group, accused the insurance industry of "moving the goalposts" for policies meant to protect employees against job loss and illness.

In letters sent out this month, the Post Office informed holders that it was changing the terms of its Lifestyle Protection insurance, one of the best PPI policies when it was launched in June 2006. From next month, the maximum monthly cover will fall from £2,500 to £1,500 and the first payment will arrive not 30 days after redundancy, but 90 days. The £4.50 flat premium per £100 covered will be replaced by a premium, depending on circumstances, of up to £6.50 – adding hundreds of pounds a year to some policies.

The Post Office – whose policies are underwritten by AXA – would not say how many people were affected by the rise of up 40 per cent but it is believed to run into tens of thousands.

The country's biggest underwriter, Norwich Union, has reduced its cover for unemployment-only policies and is also thought to have put up its prices. A spokeswoman for Norwich Union was unable to say last night whether rates had gone up or down.

Marketing worker Alison Morrison, who lives in Kensal Rise, north London, was given 30 days' notice by Cardiff Pinnacle of a 40 per cent rise in premiums – unless she reduced her cover by a third from £1,500 to £1,000 a month, which she did.

Insurers have stopped selling new redundancy policies and toughened existing ones because of the increased risk of people claiming. According to the Association of British Insurers, the number of claims for redundancy cover more than doubled between November 2007 and November last year, from 8,772 to 19,105.

An ABI spokesman Erfan Hussain said: "The cost of unemployment cover reflects the wider health of the economy and the current downturn has of course led to much higher levels of unemployment. When the economy returns to a healthier position, the situation will be reversed as risk falls."

The Post Office blamed the tough economic climate for its "adjustments". In a statement, it said: "We stress that customers who are currently claiming are not affected by these changes and that we have introduced a number of options and choices to ensure that we can continue to offer this product, rather than withdrawing it as many other providers have chosen to do."

Which? accused insurers behind the £4bn-a-year PPI of behaving unfairly. "It's typical. They have been selling this insurance mercilessly for years and now people really do need it they cut benefits and increase premium payments," said principal researcher Teresa Fritz. "We wonder if it's a way of cutting the risk on their books by getting people to cancel."

She added: "It shows up how awful these particular products are. They have this 30-day rule which allows them to change their premiums and benefits. So you take out a policy in good faith, pay a premium all the time but they can actually move the goalposts any time they want to, which to my mind is not fair and isn't what insurance is about. It's despicable."

She dismissed the industry's defence that it was adjusting to the economy. "What they seem to be saying is that we have costed our products at a certain time and we will change them when we want. But that's not the impression that's given to customers. If you buy something to protect you for a mortgage for 25 years then, unless there are very special circumstances to take into account then the premium covers you for bad times as well as good times."

Which? recommends income protection policies whose premiums are guaranteed to stay the same but which cover illness, not usually redundancy.

Twelve million people have PPI policies to cover their mortgages, loans or credit cards.

In January, the Competition Commission confirmed the market needed major change, finding that of £3.5bn insurance sold by the 12 largest sellers, £1.4bn was "excess profit". Only 14 per cent of PPI premiums were returned to policyholders against 54 per cent for home insurance and 78 per cent for car insurance.

The Competition Commission is banning lenders from selling policies alongside credit and adding single premium PPI to loans, making customers pay interest on capital and insurance.

Part of the problem stems from the heavy incentives for lenders selling PPI – insurers pay commission of between 40 and 80 per cent.

When people come to claim they often find that they are ineligible because they are self-employed or have a pre-existing medical condition.

The Financial Ombudsman Service has been deluged with complaints about PPI. More than 850 complaints are arriving every week, compared with 500 a week last year.

The vast majority of cases have been upheld. The Financial Services Authority has fined 13 companies – including Alliance & Leicester, Egg, and Capital One Bank – for mis-selling PPI. The mis-selling affected more than 400,000 customers.