Payment protection insurance

Payment protection insurance, (also known as PPI, credit protection insurance, loan repayment insurance, not to be confused with income protection or credit card cover) is an insurance product that is often designed to cover a debt that is currently outstanding (only income payment protection, or the Competition Commission preferred term "short term IP" is not specific to a debt but covers any income). This debt is typically in the form of a loan or an overdraft, and is most widely sold by banks and other credit providers as an add-on to the loan or overdraft product. It typically covers the borrower against an accident, sickness, unemployment or death, circumstances that may prevent them from earning a salary/wage by which they can service the debt.

PPI usually covers minimum loan (or overdraft) payments for a finite period (typically 12 months). After this point the borrower must find other means to repay the debt, though the period covered by insurance is typically long enough for most people to start working again and earn enough to service their debt. PPI is different from other types of insurance such as home insurance, in that it can be quite difficult to determine if it is right for a person or not. Careful assessment of what would happen if a person became unemployed would need to be considered, as payments in lieu of notice (for example) may render a claim ineligible despite the insured person being genuinely unemployed. In this case, the approach taken by PPI insurers is consistent with that taken by the Benefits Agency in respect of unemployment benefits.

Controversy

In all types of insurance some claims are accepted and some are rejected, however in the case of PPI the number of rejected claims is high compared to other types of insurance. A primary reason for this is that the insurance is underwritten at the sales stage and is taken out by customers without careful assessment as to whether it is right for their circumstances and without careful attention to the policy eligibility conditions. Individuals who seek out and purchase a policy without advice have little recourse if and when a policy does not benefit them. However most PPI policies are not sought out by consumers and in some cases consumers are not aware that they even have the insurance.^[1]

As PPI is designed to cover repayments on loans and credit cards, most loans and credit card companies sell the product at the same time as they sell the credit product. By May 2008 20 million PPI policies existed in the UK with a further increase of 7 million policies a year being purchased thereafter^{[citation needed]}. On average this would mean that at least 72% of the UK's adult population would have one PPI policy. Surveys show that 40% of policyholders were totally unaware that they had a policy^{[citation needed]}.

PPI has been widely mis-sold, with this mis-selling being carried out by not only the banks or providers but also by third party brokers. One major high street bank sold almost £400m of PPI with their financial products making an astonishing 80% profit.^[2] The sale of such policies was typically encouraged by large commissions,^[3] as the insurance would commonly make the bank/provider more money than the interest on the original loan such that many mainstream personal loan providers may make no profit on the loans themselves; all or almost all profit is derived from PPI commission and profit shares. Certain companies developed sales scripts which guided salespeople say only that the loan was “protected” without mentioning the insurance or its cost. When challenged by the customer, they sometimes incorrectly stated that this insurance improves the borrower's chances of getting the loan or that it was mandatory.^[4] A consumer in a financial difficulty is unlikely to further question the policy and risk the loan's being refused.

Several high-profile companies have now been fined by the Financial Services Authority for the widespread mis-selling of Payment Protection Insurance. Claims against mis-sold PPI have been slowly increasing and may approach the levels seen during 2006-07 period, when thousands of bank customers were making claims regarding unfair bank charges. In their 2009/2010 annual report, the FOS stated that 30% of new cases referred to payment protection insurance. A customer who purchases a PPI policy may initiate a claim for mis-sold PPI by complaining to the bank, lender or broker who sold the policy,

On the 20th April, 2011, the UK courts ruled in favour of consumers.^[5]

Slightly before that, on the 6th of April, the Competition Commission released their ^[6] designed to prevent misselling in the future. Key rules in the order, designed to enable the customer to shop around and make an informed decision, include: provision of adequate information when selling payment protection and providing a personal quote; obligation to provide an annual review; prohibition of selling payment protection at the same time the credit agreement is entered into. Most rules come into force in October 2011 with some following in April 2012.

Calculations

The price paid for payment protection insurance can vary quite significantly depending on the lender. A survey of forty-eight major lenders by Which? Ltd found the price of PPI was 16-25% of the amount of the debt.

PPI premiums may be charged on a monthly basis or the full PPI premium may be added to the loan up-front to cover the cost of the policy. With this latter payment approach, known as a “Single Premium Policy,” the money borrowed from the provider to pay for the insurance policy incurs additional interest, typically at the same APR as is being charged for the original sum borrowed, further increasing the effective total cost of the policy to the customer.^[7]

Payment protection insurance on credit cards is calculated differently from lump sum loans, as initially there is no sum outstanding and it is unknown if the customer will ever use their card facility. However, in the event that the credit facility is used and the balance is not paid in full each month, a customer will be charged typically between o.78% to 1% or £0.78 to £1.00 from every £100 which is a balance of their current card balance on a monthly basis as the premium for the insurance. When interest on the credit card is added to the premium, it can become very expensive. For example, the cost of PPI for the average credit card in the UK charging 19.32% on an average of £5000 each month adds an extra £3,219.88 in premiums and interest.

With lump sum loans PPI premiums are paid upfront with the cost from 13% to 56% of the loan amount as reported by the Citizens Advice Bureau (CAB) who launched a Super Complaint into what it called the Protection Racket.
PPI premiums as proportion of loan: cases reported^[8]

Loan Type	Loan Amount	PPI premium	Premium % of loan
Unsecured personal loan	£8,993	£2,217	25%
Unsecured personal loan	£11,000	£5,133	47%
Hire purchase for car	£5,059	£2,157	43%
Hire purchase for car	£6,895	£2,317	34%
Unsecured loan	£5,600	£744	13%
Secured loan	£25,000	£12,127	49%
Secured loan	£35,000	£10,150	29%
Conditional sale for car	£4,300	£2,394	56%

When interest is charged on the premiums, the cost of a single premium policy increases the cost geometrically. The above secured loan of £25,000 over a 25 year term and 4.5% interest costs the customer an addition £20,221.74 for PPI. Moneymadeclear^[9] calculates the repayment for that loan to be £138.96 a month whereas a stand alone payment protection policy for say a 30 year old borrowing the same amount covering the same term would cost the customer £1992 in total, almost one tenth of the cost of the single premium policy.

PPI claims

Payment Protection Insurance can be extremely useful insurance, however many PPI policies have been mis-sold alongside loans, credit cards and mortgages. There are many examples of PPI mis-selling and as a result may leave you with PPI that is no use to you if you came to make a claim. Reclaiming PPI is possible in this case and can either be started on your own or by the use of a Solicitor.

It is important to realise that making PPI claims is not just about claiming back what the borrower has paid, it also means claiming interest charges. If the loan has already been paid, then it is simply claiming everything back plus statutory interest. If the loan is still being repaid, the PPI Solicitor would advise that any settlement would reflect the future costs of the PPI and all interest charges are written off.

If the borrower at the time of the PPI claim owes money to the lender, the lender will usually have a contractual right to offset any PPI refund against the debt. If there is any PPI value left over, then the balance will be repaid to the PPI Solicitor and or the client.

The judicial review that hit the headlines as it eventually ruled in the favour of the consumer, came as good news to all that had/wanted to claim back their PPI.

Statistics

Insurance companies have sold more than 20 million individual policies of this type, of which 2 million have been used to claim compensation by the policy holder; the average payout is £2,500. 90% of customers bought a payment protection policy having received insufficient or mis-leading information from the seller.

References

1. ^ "Annual review 2009/2010 - what the complaints were about". financial-ombudsman.org.uk. http://www.financial-ombudsman.org.uk/publications/ar10/about.html#20. Retrieved September 6, 2010. 
2. ^ http://www.abi.org.uk/Media/Releases/2008/06/Insurance_industry_responds_to_Competition_Commissions_findings_on_PPI.aspx
3. ^ This is Money Do You Really Need PPI? - June 2008
4. ^ OPEN2 Over-sold, over-priced? - April 2006
5. ^ "Don’t Bank On It". moneyadviceonline.com. http://www.moneyadviceonline.com/dont-bank-on-it/. Retrieved May 12, 2011. 
6. ^ Payment Protection Insurance Market Investigation Order
7. ^ Daily Mail PPI price rise makes its critics' blood boil - April 2009
8. ^ http://www.citizensadvice.org.uk/index/campaigns/policy_campaign_publications/evidence_reports/er_consumerandebt/protection_racket.htm
9. ^ http://www.moneymadeclear.org.uk/tools.aspx?Tool=loan_calculator

External links

• FSA Money Made Clear – IPI