The Office of Fair Trading has issued a damning report on the Payment Protection Insurance market, following an investigation triggered by a complaint from the Citizens Advice last September.
The report highlights numerous problems including poor product value, inflated profits, a lack of transparency in the sales process and problems for consumers trying to compare and contrast the policies available across the market.
The research discovered large profits being made on the back of low claims ratios in PPI. The OFT defined the claims ratio as claims paid as a percentage of earned premiums. In 2005 it found that claims ratios for first charge mortgage PPI was 35%, falling to 18% for unsecured personal loans, and 11% for retail credit, motor finance and credit card PPI. The claims ratio for secured loan PPI was 10%.
The report stated: This could suggest that gross profits are high in the UK PPI sector, and implies customers are receiving poor value.
Simon Burgess, managing director of Britishinsurance.com, says: I have been campaigning for a long time now to highlight the huge profits that many providers are making from PPI at the expense of unsuspecting clients. I am delighted that the OFT has released these findings publicly and hope that it will put real pressure on the market to work harder for its clients, rather than taking advantage of them.
The report also found that average commissions, paid as a percent of net earned premiums by underwriters to downstream intermediaries, were over 60%.
Burgess adds: Commission rates are being used by firms to inflate their profits, carry other poorly performing products and do not represent any sort of good value for the end consumer.
The report went on to highlight problems in comparing products for consumers given the differing levels of cover available and the huge variance in price across the market. It said the use of different terminology to describe the same product feature was also confusing.
The OFT is to hold a feedback session on its report on 24 August and thereafter will detail any further action it proposes to take.
Burgess says: It looks likely that at the very least many firms in this sector will be strongly encouraged to improve their offering. Whether this leads to the introduction of a code of practice remains to be seen, but I could well see things being reported to the Competition Commission and strong recommendations being made to the regulator.
“Given the current state of the market none of the above would be a bad thing and the sooner some positive action is taken the better.