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."

News
people And here is why...
Arts and Entertainment
Amazon has added a cautionary warning to Tom and Jerry cartoons on its streaming service
tv
Voices
voicesBy the man who has
Sport
Arsene Wenger tried to sign Eden Hazard
footballAfter 18 years with Arsenal, here are 18 things he has still never done as the Gunners' manager
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
Life and Style
The new Windows 10 Start Menu
tech
Arts and Entertainment
Kristen Stewart and Robert Pattinson star in The Twilight Saga but will not be starring in the new Facebook mini-movies
tvKristen Stewart and Stephenie Meyer will choose female directrs
Arts and Entertainment
Hilary North's 'How My Life Has Changed', 2001
books(and not a Buzzfeed article in sight)
News
William Hague
people... when he called Hague the county's greatest
News
More than 90 years of car history are coming to an end with the abolition of the paper car-tax disc
newsThis and other facts you never knew about the paper circle - completely obsolete today
Arts and Entertainment
There has been a boom in ticket sales for female comics, according to an industry survey
comedyFirst national survey reveals Britain’s comedic tastes
Arts and Entertainment
Twerking girls: Miley Cyrus's video for 'Wrecking Ball'
arts + ents
Arts and Entertainment
Ed Sheeran performs at his Amazon Front Row event on Tuesday 30 September
musicHe spotted PM at private gig
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

    Trainee Recruitment Consultant - Birmingham - Real Staffing

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

    Trust Accountant - Kent

    NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

    Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

    £18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

    Law Costs

    Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

    Day In a Page

    Ebola outbreak: The children orphaned by the virus – then rejected by surviving relatives over fear of infection

    The children orphaned by Ebola...

    ... then rejected by surviving relatives over fear of infection
    Pride: Are censors pandering to homophobia?

    Are censors pandering to homophobia?

    US film censors have ruled 'Pride' unfit for under-16s, though it contains no sex or violence
    The magic of roundabouts

    Lords of the rings

    Just who are the Roundabout Appreciation Society?
    Why do we like making lists?

    Notes to self: Why do we like making lists?

    Well it was good enough for Ancient Egyptians and Picasso...
    Hong Kong protests: A good time to open a new restaurant?

    A good time to open a new restaurant in Hong Kong?

    As pro-democracy demonstrators hold firm, chef Rowley Leigh, who's in the city to open a new restaurant, says you couldn't hope to meet a nicer bunch
    Paris Fashion Week: Karl Lagerfeld leads a feminist riot on 'Boulevard Chanel'

    Paris Fashion Week

    Lagerfeld leads a feminist riot on 'Boulevard Chanel'
    Bruce Chatwin's Wales: One of the finest one-day walks in Britain

    Simon Calder discovers Bruce Chatwin's Wales

    One of the finest one-day walks you could hope for - in Britain
    10 best children's nightwear

    10 best children's nightwear

    Make sure the kids stay cosy on cooler autumn nights in this selection of pjs, onesies and nighties
    Manchester City vs Roma: Five things we learnt from City’s draw at the Etihad

    Manchester City vs Roma

    Five things we learnt from City’s Champions League draw at the Etihad
    Martin Hardy: Mike Ashley must act now and end the Alan Pardew reign

    Trouble on the Tyne

    Ashley must act now and end Pardew's reign at Newcastle, says Martin Hardy
    Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

    Isis an hour away from Baghdad -

    and with no sign of Iraq army being able to make a successful counter-attack
    Turner Prize 2014 is frustratingly timid

    Turner Prize 2014 is frustratingly timid

    The exhibition nods to rich and potentially brilliant ideas, but steps back
    Last chance to see: Half the world’s animals have disappeared over the last 40 years

    Last chance to see...

    The Earth’s animal wildlife population has halved in 40 years
    So here's why teenagers are always grumpy - and it's not what you think

    Truth behind teens' grumpiness

    Early school hours mess with their biological clocks
    Why can no one stop hackers putting celebrities' private photos online?

    Hacked photos: the third wave

    Why can no one stop hackers putting celebrities' private photos online?