OFT proposes to refer the PPI market to the Competition Commission

148/06    19 October 2006

The OFT has today signalled its intention to refer the UK payment protection insurance (PPI) market to the Competition Commission and has published its analysis of the market for consultation prior to a decision early next year.

Download Payment protection insurance report (pdf 312 kb)

Announcing the decision, OFT Chief Executive John Fingleton said:

'Following the work we have undertaken it is clear that many consumers are failed by PPI - insurance which gives them a poor deal and often less protection than they think. There is limited evidence the industry is taking steps to improve the situation, but we believe they will not make major improvements to competition in the market. Given our evidence and the scale of this market, our provisional view is that it would be appropriate for the Competition Commission to investigate further.'

The market study, which was launched in April 2006, examines how well competition in the PPI market delivers choice and value to consumers. In carrying out the study the OFT took account of views expressed by the PPI industry, relevant trade associations and consumer organisations.

The purpose of PPI is to protect a borrower's ability to keep up payments on a loan in case of accident, sickness or unemployment. Around seven million policies are taken out each year, and the sector is estimated to be worth around £5.5bn. We acknowledge that PPI can provide worthwhile cover for some consumers. However, evidence suggests that how consumers purchase their PPI, their understanding of the product and the quality of information available to them hinders competition. For example:

• consumers do not shop around for the best deal on PPI
• the complex nature of PPI makes comparison between different policies difficult, and
• consumers in some cases assumed, were told or given the impression that taking out the PPI would help the application for credit.

Whilst there may be competitive pressure operating at the upstream end of the market, OFT saw no evidence that this pressure is feeding down to consumers:

• the point of sale advantage experienced by distributors means that there is little competitive pressure at the key point at which the consumer buys the insurance
• stand alone providers, who might otherwise be thought to offer a competitive pressure, have difficulty accessing consumers and face substantial start-up and marketing costs to attract custom.

The evidence also shows that PPI has low claims ratios when compared to other insurance products and, with no evidence to suggest costs are high, it seems reasonable to assume that distributor profitability is sizeable. Evidence on commission rates, which look to be high compared with other general insurance products, reinforces this conclusion. The fact that considerable price variations do not appear to reflect differences in cover offered is a further indication that the market is affected by adverse features.

In carrying out the market study the OFT liaised closely with the Financial Services Authority (FSA) to ensure a joined up approach to the sector. A number of different issues are currently being addressed by the FSA – visit the FSA website.

The consultation will last for six weeks and closes on 30 November 2006.

NOTES

1. On 13 September 2005 Citizens Advice (CitA) submitted a super-complaint to the OFT about PPI. It was based upon the CitA report 'Protection racket: CAB evidence on the cost and effectiveness of payment protection insurance'. CitA stated that the evidence presented in its report suggested that the features of the PPI market seriously harmed the interests of consumers. Three main areas of concern were highlighted:

• consumers pay excessive prices for PPI
• the protection consumers buy is partial, with evidence of  high pressure and unfair sales tactics
• the administration of PPI claims can be slow and unfair, and can leave consumers facing additional charges or serious debt enforcement action.

2. The OFT response to the super-complaint was given on 8 December 2005 (see press release 226/05).

3. 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 products: for example, claims ratios for motor insurance were 74 per cent and household insurance 55.2 per cent in 2003.