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OFT launches study of payment protection insurance

66/06    3 April 2006

The OFT has today launched a market study to look in depth at the payment protection insurance (PPI) sector. The study follows a super-complaint from Citizens Advice (CitA) to which OFT responded on 8 December 2005 (see note 1).

PPI is applied to a number of credit products including mortgages, loans and credit cards and protects a borrower's ability to keep up the payments on the loan in case of accident, sickness or unemployment, usually for 12 months or sometimes longer.  Around 6.5 to 7.5 million policies are taken out each year generating premium income estimated in 2003 at £5.4billion.

The OFT response to the super-complaint identified a number of issues which pointed to the sector not working well for consumers and which indicated the need for a more detailed examination. These issues were:

• consumers face difficulties in getting information they need about alternative suppliers and the information available is often too technical to be understood easily
• there are high costs or other barriers to entry for stand-alone PPI providers
• there is a wide degree of variation in pricing in the sector
• gross profit margins appear high – PPI claims ratios are low compared to other general insurance products (see note 3).

The market study will examine these issues in more detail and will also look at:

• the relationship between the various players who supply PPI (lenders, insurers, intermediaries) and how this affects the sector
• how the product is sold to consumers and what influences their choices
• consumers' experiences of making claims
• the impact exclusions have upon consumers' ability to shop around
• consumer awareness and understanding of exclusions.

The market study gives OFT the opportunity – which it did not have during the super-complaint - to look more carefully at the outcomes of the Financial Services Authority (FSA) thematic work on PPI (see note 4), and the Competition Commission work on store card PPI (see note 5) and assess the impact of their work on the sector. Both have played a key role in influencing the direction of the OFT's work, and the OFT will continue to work closely with the FSA in this area. The study will look at the scope for a coordinated strategy by the OFT and FSA for regulating PPI and related credit products.

The OFT will consult widely with the industry - a business survey will be sent out shortly to lenders, insurers and intermediaries.  A detailed survey of consumers will also be carried out. 

The OFT expects to publish its report by the end of 2006.

NOTES

1. On 13 September 2005 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.  Four 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.

4. Download The sale of payment protection insurance – results of thematic work from the Financial Services Authority website.

5. See the store cards credit services home page on the Competition Commission website.

6. The main possible outcomes of an OFT market study are:

• giving the market a clean bill of health
• publishing information to help consumers
• encouraging firms to take voluntary action
• encouraging a consumer code of practice
• making recommendations to the Government or sector regulators
• investigation and enforcement action against companies  suspected of breaching consumer law or competition law
• a market investigation reference to the Competition Commission

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