Who does PPI really protect?

When you take out a loan, it makes sense to prepare for the worst. Jeremy Gates asks whether the protection offered is always a good deal.

COMPENSATION claims running into millions of pounds are set to follow the damning Competition Commission report on the insurance cover that can make personal loans more expensive than borrowers often realise.

Although Payment Protection Insurance (PPI) – intended to protect repayments when borrowers are hit by accident sickness and unemployment – is also sold with store and credit cards and mortgages, the provisional 218-page provisional report from the Competition Commission (CC) focuses on its impact on personal loans.

Many households facing sharply rising costs will arrange £10,000 personal loans over five years in the next few months – and pay over the odds for PPI because they aren’t paying attention.

PPI could lift their monthly repayments from £200 to £250 if they accept a policy from the lender, instead of buying cheaper cover through an independent broker. Many PPI policyholders don’t even realise they have bought it.

The CC report accuses High Street banks of making £39 excess profit on every £100 of business in the personal loans sector, and warns that consumers may be overcharged at least £100 each when they take PPI in their loan package.

Consumer group Which? has campaigned against PPI for a decade and estimates as many as 2m PPI policies were mis-sold with personal loans in the last five years, often because buyers would have been unable to claim due to pre-existing health conditions or details in the small print. Stress and back pains, for instance, are not covered in all PPI policies.

Many buying PPI with a 10-year loan might be unaware that PPI policies may only be effective for five years. In addition, they might not realise that the single premium for the policy, added to the loan, is incurring interest charges for years into the repayment period.

PPI is certainly a money spinner for big lenders – only 14% of PPI premium income goes back to policyholders making successful claims, as opposed to 54% for home insurance and 78% for motor insurance.

The Competition Commission claims the 12 largest PPI providers enjoy a return on their equity of 490%.

It says borrowers are in a captive market – worth £5.5bn a year – dominated in 2006 by Lloyds TSB, Barclays, HBOS, Royal Bank of Scotland and HSBC.

The banks, for their part, claim loan rates would rise if their PPI income was slashed.

Nationwide BS stopped selling PPI on personal loans and credit cards last August, and now only sells it with mortgages.

Spokeswoman Sue Knight says the blanket attack on PPI overlooks the fact that different products offer protection on mortgages, unsecured loans and credit card repayments – and that customer behaviour is different in each sector.

Nationwide now refers customers to the FSA website for advice on protecting their finances against accident, sickness and unemployment.

Big lenders, along with the Association of British Insurers (ABI), maintain that PPI is a useful defence against financial crises, if it’s bought at the right price.

The Post Office launched Lifestyle Protection in June, 2006, to enable consumers to choose which debts or regular outgoings they wish to protect against accident, sickness, unemployment and death for £4.50 per £100 of monthly cover.

Its head of protection products, Duncan Caesar-Gordon, says: “It is clear many customers still have very little understanding of PPI, and some do not even realise they have this insurance in force.

“Others, who have been at the hands of aggressive sales tactics, often feel they have no choice but to take an expensive policy tied to a loan or credit card if they want their application to be accepted – especially as credit becomes harder to come by.”

Simon Burgess, of independent broker British Insurance, says his PPI policy costs half the price of The Post Office – for cover which scores higher in the ratings by Defaqto, an independent assessor of financial products.

He urges early official action: “The Competition Commission should flex its muscles much more than it has done,” he says.

“It should do this by imposing a permanent price reduction or by taking PPI away from lenders who have proved they can’t be trusted.

“I believe the only option is to remove PPI from their portfolio.

“This will not only give consumers access to products that are competitive, provide value for money and are properly sold, it will address horrendous mis-selling issues which come to light every day.”

Shane Craig, at Paymentcare, another standalone PPI provider, says: “The big lenders maintain there are advantages in offering PPI at point of sale. If so, it has to be much cheaper.”

Craig says that borrowers opting for standalone PPI policies need to check their cover matches that offered by loan providers; for instance, some standalone policies don’t include life insurance, or cover against terminal or critical illness.

Some borrowers don’t need any cover on their lives because they’re covered by existing policies.
Paymentcare’s standard policy, costing £3.95 per £100 covered, pays out on loss of income sustained by accident, sickness and involuntary unemployment.

Craig fears PPI has been a scandal for far too long: “While investigations have dragged on over more than two years, there has always been a genuine option for borrowers keen to safeguard their finances – stand-alone monthly paid PPI policies.”

A 2006 Paymentcare survey found customers saved an average £2,739.77 with a stand-alone policy, instead of taking a PPI product from their lender.

“It’s a terrific saving for a little research online,” Craig says.

“There are really only a few providers to check out.”

Craig feels “a fair and balanced way forward” would be to force lenders to make a disclaimer to borrowers, explaining they can buy cheaper PPI cover elsewhere.

At Which?, personal finance campaigner Phil Jones believes consumers with seriously stretched finances shouldn’t only worry about insurance cover protecting loan repayments.

He thinks income protection that takes note of the fact that consumers need help with various monthly bills if they hit hard times would be a better option.

When an official crackdown comes, possibly in 2009, it will probably oblige lenders to detail the costs of PPI, any exclusions in their policies, and how prices of their products compare with standalone providers.

Source: : http://www.ldpbusiness.co.uk/liverpool-news/liverpool-business-news/