BIBA Submission to Competition Commission’s report on Payment Protection Insurance market investigation – Emerging Thinking

27th November 2007

The British Insurance Brokers’ Association (BIBA) is the UK’s leading general insurance intermediary organisation. We represent the interests of 2,300 insurance brokers and intermediaries and have partner members from the leading companies in the insurance industry.

BIBA members handle around half the value of all UK home, contents, motor, travel, commercial and industrial insurance policies and insurance intermediaries introduce £22 billion of premium income into London’s insurance market every year.

BIBA was pleased to make a previous submission to the Competition Commission in relation to Payment Protection Insurance (PPI), copy attached for your reference. BIBA members, who sell this type of insurance product, as well as Mortgage Payment Protection Insurance (MPPI), believe them to be of benefit to the consumer, serving it in a variety of ways.

There are two main aims of this type of policy. The first is to protect the mortgage company or loan provider. The second is to protect the customer BUT only in relation to their specific indebtedness to that loan provider. It does not protect the consumer in the same way as a home or a motor policy. Indeed, some intermediaries believe that the PPI should be on a diminishing term basis so that the sum insured is reduced in line with the indebtedness over the term of the loan period.

While we support PPI in itself as a product, we do have some concerns about the operation of the distribution mechanism as well as the sales methods of some of the banks.

We have five main areas of concern, which we review below, linking them with your consultation document.

1. Loan PPI Linking – ss 93 – 97

This has always been seen as expensive, especially in relation to unsecured loan applications. Linking the single premium policy to the loan amount prior to the rate of interest being added creates anomalies. Excessive profit is made on the insurance as the APR is often double the APR for the loan. Many customers purely focus upon the loan APR and ignore the premium APR. Some banks have stated that they are not able to offer variable payment methods because of the cost, yet many intermediaries could arrange home or motor policies with an annual premium of several hundred pounds and still allow the consumer to pay over six, ten or 12 months.

A compromise would be to have a “fixed” term cost, but again this would need to be payable over the period of the loan agreement and on a realistic or average APR. An alternative is to introduce external funding for the premiums or have truly monthly policies which would not involve financing.

Single premium policies amalgamated into a loan amount would still be an issue if the customer decided to terminate the insurance portion of the contract. This could result in the consumer having to arrange alternative financing, which could be higher than the original APR (due to either the movement of interest rates or the fact that PPI was linked and consequently a lower, capture rate was used). A straight pro rata calculation should be offered and provided to the consumer in the event of cancellation. One of our previous main arguments was the unilateral de-linking of loans and insurance coverage. This unbundling would give clarity to the consumer and allow them to make an informed decision in relation to the loan, the insurance policy and the providers of both.

BIBA recommends that consideration be given to de-linking and that further work be undertaken to educate consumers at this point.

2. Own linked branding

The use of own branded products from banks which could cost substantially more than open market available product shows inconsistencies within the system. Some companies have moved away from the “insurance” product to circumnavigate this issue and have an income in which they pay out claims. For example, if the premium is £100 and the insurer pays out £10 in claims then their profit is 90 per cent. In insurance terms this would mean a brokerage of 90 per cent which is unacceptable. Moreover many banks would have a brokerage income of in excess if 60 per cent on their insured policies. This is not in the interest of the consumer and they should be made aware that this is the company’s own branded policy.

Many intermediaries will offer a number of products, whereas others would be “tied-agents” of a particular insurance company. However in both cases the intermediary’s prime function is to treat their customers fairly (TCF). Therefore they are under a duty to explain to the customer what they can offer within their own suite of policies and allow the consumer to choose from them or elsewhere.

Many of the banks have started to explain to their customers that the provision of a loan has no bearing on the PPI sale but with potentially high earnings for that institution the sales process is open to manipulation and the hard sell as experienced by our own members of staff.

3. Excess distributor power

The vast majority of policies are brought at the same time as arranging a loan. This is the obvious area for the PPI sales. However, if the market is to be more transparent then a greater number of players need to be encouraged to enter this arena. This could be done by either competing with Loan/PPI products or selling PPI policies in isolation. In our experience, however, there is little competition as most sales are conducted through a small number of banking houses.

An alternative is for a single indebtedness contract to be formulated which could grow and reduce depending upon the circumstances of the customer.

4. Lack of product knowledge

There is a distinct lack of knowledge amongst intermediaries of either PPI or MPPI products. Within BIBA’s 2,300 member database we only have a small number of specialists who regularly advise and sell these two important products. The main general insurance brokers have purposely avoided this area on grounds of insufficient market and the cost of gearing up their work force to be in a position to be able to sell these products competently.

This action has left the banks with a clear field in which to operate and they decide in relation to their own competences on selling their single product, but not the products generally available in the market which may be more appropriate to the customer.

5. MPPI market

This market has, by and large, been one of the success stories of PPI mainly due to the advice and enhanced product range that mortgage brokers have brought to the equation. FSA face-to-face and the mystery shopping exercises have shown that MPPI products are being sold and administered competently. BIBA’s view is that MPPI should be removed from this exercise as the constant criticism of the PPI markets has no doubt had a significant effect on the sale of products to protect the home owner when they most need it.

Thank you for taking the time to consider our views. The BIBA executive would be pleased to meet with your team to discuss in more detail if required. For further information please contact Peter Staddon on 020 7397 0204 [email protected].

Yours sincerely,

Eric Galbraith
Chief Executive
[email protected]
Tel: 020 7397 0201