BIBA response to Competition Commission Payment Protection Insurance – Notice of Possible Remedies
30th June 2008
The British Insurance Brokers’ Association (BIBA) is the UK’s leading general insurance intermediary organisation. We represent the interests of insurance brokers, intermediaries and their customers.
BIBA represents 2,300 insurance intermediaries including 98 of the UK’s top 100 insurance intermediaries. Our members handle about half the value of all UK home, contents, motor, travel, commercial and industrial insurance policies. Independent insurance intermediaries distribute nearly two-thirds of all UK non-marine general insurance, of which BIBA members account for over 80%. They also introduce £20 billion of premium income into London’s insurance market each year.
BIBA is pleased on behalf of its collective membership, to have the opportunity to respond to the Competition Commission’s Notice of Possible Remedies (NPR) as part of the ongoing market investigation into Payment Protection Insurance (PPI).
Our response follows in two parts: 1) NPR outline; 2) Options considered in the NPR
Notice of public remedies outline
Having issued the Provisional Findings there is now a need for market dialogue on possible remedies and a timescale to the end of June 2008 has been set for interested parties to make their representations.
BIBA is pleased to have the opportunity to provide the Competition Commission with its views. BIBA’s membership includes a number of brokers who transact stand alone PPI and MPPI and have extensive practical experience of this type of policy.
a) Increase customer search and address the failure of distributors to compete on price.
Consumers should be urged to consult Insurance specialists in their preferred manner of access. This can be via the internet, over the telephone or face to face. All access points should be of a similar nature to ensure consistency across the market and there should be a level playing field of disclosure.
b) Directly address the point-of-sale advantage
Point of sale access is important in the same way that travel insurance is when arranging a holiday. However there are still pockets of providers who pressurise the individual into buying PPI when it is not fully explained, not in the customer’s best interest and when it is wholly not appropriate.
c) Reduce switching costs
This can only be achieved if the loan amount is kept totally separate from the PPI cover. There seems to be little market innovation towards scope of cover and pricing by insurers and consequently the consumer is not aware of the savings witnessed in Home, Motor or Travel insurance.
d) Address the consumer detriment resulting from high prices
The Competition Commission’s report identified that insurers behind the contracts of insurance were operating fairly and took into consideration their own cost basis and that of claims. However the distribution mechanism, primarily from the loan provider, made almost 500% more than the claims payments. It was also established that the loan providers’ own distribution mechanism was running at approx 12%, leaving them with around 400% pure profit. This unfairly gives the impression that the insurance industry is “milking” the system at the detriment of the consumer or those who have indebtedness and are most at risk, when it is the loan provider that is profiteering.
The Competition Commission is considering 11 possible remedies, which are grouped under the following headings:
Options considered in the Notice of Possible Remedies
- Standard disclosure of cost to the customer of PPI and credit and requirement to provide a statement of ‘key messages’ on advertising and marketing material.
BIBA supports this option. All too often PPI is hidden behind a maze of words and the consumer is not able to differentiate between the cost of the loan, the cost of the insurance and the overall affect to the APR.
- Further standardisation of PPI information given to the customer at point of sale.
BIBA does not support the standardisation of policy wordings. This would undermine the market’s ability to change product designs and stifle product innovation. It is however, fundamental to ensure consistency in terminology.
All parties to the PPI contract should understand what is meant by a specific word or definition. There are three stakeholders in relation to PPI. The first is ‘the insurer’, the second is the loan provider (although we feel that an independent insurance broker would be beneficial as a fourth stakeholder) and the third is ‘the consumer’.
Examples of PPI jargon include terms like: ‘back to day one’, ‘waiting period’, ‘excess’, ‘initial exclusion period’. There is also a question of understanding which term applies to which section of the cover package (e.g. life, carer, hospitalisation).
BIBA advocates the use of a cross-market ‘consistent terminology’ of definitions and the introduction of a minimum ‘baseline’ generic PPI similar to the Association of British Insurers and Council of Mortgage Lenders baseline MPPI wording.
- Obligation to provide information about PPI and credit products to third party providers of comparative information for publication.
BIBA is not certain what this would achieve. There are companies such as defaqto who would analyse the market. Aggregator sites would put choice on price. Only a qualified individual or the self-service portal on the internet [of similar nature and consistency as described in a) above] would provide the customer with the information they need.
- Prohibition on selling PPI at the credit point of sale and within a fixed time period of the credit sale.
There would be benefits if the loan or credit facility was divorced from the sale of PPI. However, the majority of PPI sales are at point of sale so prohibition would not benefit the consumer. The simplest answer is to ensure that the deterrent from the regulator (FSA) is sufficient that the seller fully identifies why the product is recommended, what alternatives they have considered and the benefits and disadvantages of taking out the cover. Deterrents such as the provider losing their permission to sell PPI would be a good start.
- All policies to be annually renewable.
This is a good idea so long as the consumer has the ability to switch PPI provider or to choose an alternative channel or distributor. Single premium contracts do have some advantages, since the policy is non-cancellable and contract terms cannot be changed or altered. If the PPI is linked to a specific loan period then annually arranged policies should have the same characteristics as the single policy i.e. non-cancellable by the insurance company unless the premium has not been paid. There should be no change to policy terms in the duration of the contract without both parties’ agreement.
- Annual statement of cost and a reminder of the customer’s right to cancel and early settlement terms.
BIBA believe this would incur additional costs to the provider or distributor and would only be beneficial if the consumer needed such details. An alternative is to have the annual statement readily available via the internet in the same way that premium payment providers have the ability for the customer or their appointed agent to review the payments for their loan, to see when the next payment is due and the outstanding balance. The proposal could also encourage “churning” which is detrimental to the insurance industry and brings various associated costs.
- Remedies to address problems with single premium policies.
As mentioned under item 5) above, single premium policies have a place in the market as long as the provider fully explains their ramifications and associated costs. An alternative is for the distribution mechanism to offer alternative premium funding provision in the same way that Home and Motor policies are funded. This could be via the insurance companies’ own in-house premium funding provision or that of the distributor. The APRs and the actual monthly costs of the insurance contract and that of the associated loan amounts need to be clearly identified to the customer.
- Minimum standards for elements of PPI policies that act as a barrier to switching (initial exclusion periods and pre-existing conditions qualification periods).
One of the fundamental clauses of any PPI contract is the waiting period. Transferral to another provider would mean that the customer would have to wait for a specific period prior to cover being activated. The ability for new policies to offer a waiver of this clause for transfer in would be beneficial. We have this in the Private Medical Insurance market, but for some inexplicable reason the PPI market has decided to reject this provision. This would also link with item 2) above.
- Obligation to share information about other customer claims.
BIBA does not support this option and is concerned about possible implications under the Data Protection Act. The insurance market already has initiatives on Claims Underwriting Exchange (CUE) and the Insurance Fraud Bureau (IFB). Both organisations have the ability to exchange information to predict and address fraudulent issues. Insurance companies could, for certain policies (e.g. Home, Motor) issue to the customer or their appointed agent, an “Authenticated Claims Experience” which would be used by the quoting insurer in risk based pricing. Good customers would benefit from lower premiums as in the private motor insurance market. However this is on the basis that some of the holding insurers will not release any claims information whilst using the excuse of the Data Protection Act as seen in paragraph 1.18 in the Competition Commission’s report.
- Obligation to share information about customer’s credit balance with a nominated underwriter.
BIBA is not convinced of the benefits of sharing the customer’s credit balance. The provider needs to ascertain that the customer has an exposure, the ability to pay, and that the insurance contract being recommended is fair, appropriate and beneficial.
- Price Caps.
BIBA believes that price caps run counter to best insurance practice and would mean that all insurers would charge the same level up to the cap. In the commercial world, when a limit is placed on the cost of goods and services then the vast majority of firms will charge that price – irrespective of the cost incurred and their own profit margin. If the Competition Commission is interested in the idea of capping, it might consider its own words in paragraph 4.49 and 4.57 and consider capping the gross earnings of the distributors.
Thank you for taking the time to consider our response. If you have any further queries please contact BIBA’s Head of Technical Services Peter Staddon for further information on 02073970204 or [email protected].
Direct Tel: 020 7397 0200
Direct Fax: 020 7626 9676
Email: [email protected]