No ifs or buts for this 'excuse for an insurance product'

Insurers make £5bn a year selling it, but reject thousands of claims. Now the watchdog has PPI in its sights

As words go, "interim" and "report" don't sound as if they're capable of striking fear into any hearts. But they should serve as a warning for the banks and other lenders who sell payment protection insurance (PPI), which promises "peace of mind" for borrowers by guaranteeing their debt repayments in the event of sickness, accidents or unemployment.

Midway through a giant investigation into the way that PPI is sold on personal loans, credit cards and mortgages, the Office of Fair Trading (OFT) has now surfaced to update the industry on its findings and request that companies come forward for a "feedback" day on 24 August.

The regulator says it will use the opportunity to update those companies that sell PPI on its progress - and set out the likely direction of its next steps.

However, if its recently published interim report is anything to go by, the lucrative £5bn cover industry, which has been described by Citizens Advice as a "protection racket", could face major changes in favour of consumers.

If the OFT comes to the decision that PPI is unfair to customers, it can refer the industry to the Competition Commission. This body has been given the power to make sure markets work properly and openly and, in its hands, the industry could be forced to change the way its staff sell the cover, introduce greater transparency, and even suffer price controls.

Bad practice

Although the OFT makes it clear that its halfway report "is in no way intended to pre-empt such a decision" to hand over to the commission, it indicates that it has already discovered signs of bad practice.

"Our research suggests that, broadly, there may be some evidence of unsecured loans with very low annual percentage rates [APRs] being loaded with expensive PPI policies," the report says. "The outcome of this practice is that those consumers who don't take out PPI are effectively being subsidised by those who do. Not only is this an issue of fairness ... it is an issue of transparency."

In spite of the brouhaha surrounding this type of insurance, Nationwide building society has decided to raise the premiums on its LoanCare PPI cover. The monthly cost of repaying a loan of £5,000 over three years at a rate of 6.7 per cent will now be £18.41 - up from £15.06 per month.

A spokeswoman for the building society says it "regularly reviews the price of its products", and adds that it wants to "balance the needs of the business with offering competitive products to our customers".

While Nationwide is still competitively priced according to comparative tables, its move highlights one of the major issues raised in the OFT report - the difficulty consumers have in comparing different PPI policies. The diverse conditions attached to the cover and huge variance in price are made worse by a lack of transparency in the sales process.

According to the report's research, "it was not uncommon to see marketing literature without any information about the cost of PPI". Consumers may also not be alerted to exclusions in the policies; for example, some insurers don't allow claims from policyholders who have lost income due to stress or a bad back - the two most common causes for being off, or out of, work.

"Information [on websites] about exclusions tends to be more hidden and on occasions... misleading," says the OFT.

This view is shared by Andrew Hagger from the financial analyst Moneyfacts. "It is difficult for consumers to compare cover as it isn't sold as a separate policy [by nearly all lenders] and there are varying levels of cover on offer with complicated qualifying criteria," he says. "With so many PPI claims being unsuccessful it highlights the fact that many policies are sold without sufficient explanation about what is and what isn't covered."

Huge profits

Concerns about large profits earned on the back of low "claims ratios" in the PPI industry have exercised the OFT. It defines this ratio as the number of claims paid out by the lender, expressed as a percentage of the premiums paid by consumers.

Last year the OFT found that claims ratios for PPI on mortgages taken out by borrowers stood at 35 per cent. The ratio for unsecured personal loans was 18 per cent, while for retail credit, car finance and credit cards it was just 11 per cent.

Compared with other types of insurance, these percentages are low, the OFT report shows. While the overall PPI claims ratio is 17 per cent, the ratio for motor insurance is 74 per cent, and for home insurance 55 per cent. "This could suggest that gross profits are high in the UK PPI sector and implies customers are receiving poor value," the report says.

Horror story

Other major concerns highlighted in the OFT's report included nearly nine out of 10 unsecured loan providers that were contacted automatically including PPI in the quote for a loan. The problem is that borrowers can easily be led to believe they must have PPI in order for a loan to be approved. But this is not the case, and can inflate the overall cost.

Significantly, the OFT report said that, in the case of 37 out of 40 credit providers, the overall APR for the cost of credit was more than double that advertised when PPI was included.

And there are concerns that sales are being skewed by high commission rates. "This is unacceptable in any market that purports to treat its customers fairly," says Simon Burgess from the standalone PPI provider British Insurance.

"Commission rates are being used by firms to inflate their profits and carry other poorly performing products, and do not represent any sort of good value for the end consumer."

The consumer body Which? says the OFT's study "reads like a horror story". "It shows the industry is systematically dysfunctional," says its spokes-man, Pula Houghton.

"For years, we have said PPI is a poor excuse for an insurance product. Policies are complex, lack transparency and offer poor value for consumers - while being a good source of profits for the industry."

Ripped off

For now, anybody considering PPI must check first of all that they actually do need it, that they qualify - the self-employed and contract workers can often be excluded - and that they're not being ripped off.

While nearly half of borrowers shop around for credit products, only one in 10 shop around for PPI, the OFT report says.

"Consumers should not be pressurised into buying their cover from their loan provider," says Tracy North from Uswitch, the price comparison service. "But the banks are offering competitive APRs and then recouping money through PPI."

If consumers want PPI, it is still generally cheaper to get standalone cover offered by the likes of broker British Insurance and - a recent arrival in this market - the Post Office.

"Read the small print and check the policy you are buying is suitable for you," says Ms North.

Make sure you are not doubling up on insurance you already have in place. Short periods of illness may be covered by your employer's sick leave policy, and you may have other safeguards such as critical illness cover or income protection.

Loan ranger who went online for a better deal

Kyle Gordon, a postman from Braintree, Essex, took out a £5,000 loan with Alliance & Leicester in January this year in order to buy a new car.

When he applied for the loan, the 20-year-old was offered a PPI policy by his provider at a cost of £22 extra each month. This would have added around £1,000 in total over the four-year term of the loan.

Kyle felt this quote was a bit steep and decided to shop around for a better deal. "I came across British Insurance when I was browsing on the internet," he says.

"When I contacted the company, they were able to offer me a policy for just £4.81 a month - totalling £232 over the life of the loan. This really has made a big difference to my monthly outgoings."

PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmReview: A week late, Secret Cinema arrives as interactive screening goes Back to the Future
News
Chancellor George Osborne, along with the Prime Minister, have been 'complacently claiming the economy is now fixed', according to shadow Chancellor Ed Balls
i100... which is awkward, because he is their boss, after all
Travel
travel
Arts and Entertainment
Sydney and Melbourne are locked in a row over giant milk crates
artCultural relations between Sydney and Melbourne soured by row over milk crate art instillation
Arts and Entertainment
Adèle Exarchopoulos and Léa Seydoux play teeneage lovers in the French erotic drama 'Blue Is The Warmest Colour' - The survey found four times as many women admitting to same-sex experiences than 20 years ago
filmBlue Is The Warmest Colour, Bojack Horseman and Hobbit on the way
Arts and Entertainment
Preparations begin for Edinburgh Festival 2014
Edinburgh festivalAll the best shows to see at Edinburgh this year
News
i100
News
Kenny Ireland, pictured in 2010.
peopleBenidorm, actor was just 68
Environment
View from the Llanberis Track to the mountain lake Llyn
Du’r Arddu
environmentA large chunk of Mount Snowdon, in north Wales, is up for sale
Arts and Entertainment
arts + ents
News
Morrissey pictured in 2013
people
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Financial Analyst - Forecasting - Yorkshire

    £300 - £350 per day: Orgtel: Financial Analyst, Forecasting, Halifax, Banking,...

    Business Architect - Bristol - £500 per day

    £500 per day: Orgtel: Business Architect - Banking - Bristol - £500 per day A...

    Regulatory Reporting-MI-Bank-Cardiff-£300/day

    £200 - £500 per day + competitive: Orgtel: I am currently working on a large p...

    Trainee Recruitment Consultant - Birmingham - Real Staffing

    £18000 - £23000 per annum + Commission: SThree: Real Staffing are currently lo...

    Day In a Page

    Dress the Gaza situation up all you like, but the truth hurts

    Robert Fisk on Gaza conflict

    Dress the situation up all you like, but the truth hurts
    Save the tiger: Tiger, tiger burning less brightly as numbers plummet

    Tiger, tiger burning less brightly

    When William Blake wrote his famous poem there were probably more than 100,000 tigers in the wild. These days they probably number around 3,200
    5 News's Andy Bell retraces his grandfather's steps on the First World War battlefields

    In grandfather's footsteps

    5 News's political editor Andy Bell only knows his grandfather from the compelling diary he kept during WWI. But when he returned to the killing fields where Edwin Vaughan suffered so much, his ancestor came to life
    Lifestyle guru Martha Stewart reveals she has flying robot ... to take photos of her farm

    Martha Stewart has flying robot

    The lifestyle guru used the drone to get a bird's eye view her 153-acre farm in Bedford, New York
    Former Labour minister Meg Hillier has demanded 'pootling lanes' for women cyclists

    Do women cyclists need 'pootling lanes'?

    Simon Usborne (who's more of a hurtler) explains why winning the space race is key to happy riding
    A tale of two presidents: George W Bush downs his paintbrush to pen father’s life story

    A tale of two presidents

    George W Bush downs his paintbrush to pen father’s life story
    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover

    The dining car makes a comeback

    Restaurateur Mitch Tonks has given the Great Western Pullman dining car a makeover
    Gallery rage: How are institutions tackling the discomfort of overcrowding this summer?

    Gallery rage

    How are institutions tackling the discomfort of overcrowding this summer?
    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players

    Eye on the prize

    Louis van Gaal has £500,000 video surveillance system installed to monitor Manchester United players
    Women's rugby: Tamara Taylor adds fuel to the ire in quest to land World Cup

    Women's rugby

    Tamara Taylor adds fuel to the ire in quest to land World Cup
    Save the tiger: The day America’s love of backyard tigers led to a horrific bloodbath

    The day America’s love of backyard tigers led to a horrific bloodbath

    With only six per cent of the US population of these amazing big cats held in zoos, the Zanesville incident in 2011 was inevitable
    Samuel Beckett's biographer reveals secrets of the writer's time as a French Resistance spy

    How Samuel Beckett became a French Resistance spy

    As this year's Samuel Beckett festival opens in Enniskillen, James Knowlson, recalls how the Irish writer risked his life for liberty and narrowly escaped capture by the Gestapo
    We will remember them: relatives still honour those who fought in the Great War

    We will remember them

    Relatives still honour those who fought in the Great War
    Star Wars Episode VII is being shot on film - and now Kodak is launching a last-ditch bid to keep celluloid alive

    Kodak's last-ditch bid to keep celluloid alive

    Director J J Abrams and a few digital refuseniks shoot movies on film. Simon Usborne wonders what the fuss is about
    Once stilted and melodramatic, Hollywood is giving acting in video games a makeover

    Acting in video games gets a makeover

    David Crookes meets two of the genre's most popular voices