The problems with PPI

Payment protection insurance may not offer as much protection against hard times as you think. But insurers and lenders are making a killing...

PPI is too expensive

PPI can be ridiculously expensive. For example, adding PPI to a £7,500 five year loan could cost an additional £2000-£3000. It can often cost as much, or more, as other types of insurance that provide much better protection.

Extra interest

Worse still, when sold alongside a personal loan or a finance agreement, PPI tends to be sold as a ‘single premium’ policy. This means a lump sum representing the cost of the insurance is added to the amount you’ve borrowed, so you end up paying interest on both the insurance premium and your loan.

This table shows how much this could cost you.

Store cards and mortgages

PPI linked to mortgages and credit or store cards usually pays out only for a limited amount of time, most often 12 months (although some policies offer a 24 month pay out period). Also on some credit card PPI, the insurance only covers the minimum monthly payment, meaning your balance may never reduce.

Medical exclusions

Policies also have many exclusions so it’s by no means certain that you’ll get any money if you do make a claim. For example, if you have an existing medical condition (even if this isn't particularly serious) when you take out the insurance, you won't be covered for anything that can be linked to your condition (and you may not be covered at all).

You also won't be covered for conditions like back pain or stress under most policies. If you’re on a short-term contract, or self-employed, you may not be covered for any redundancy claim.

Don't end up paying for nothing

Also, most PPI policies only last for 5 years, so if your loan or finance agreement term lasts for longer than this, you’ll still be paying interest on insurance that has long since expired.

Mis-selling

The profit each year from PPI policies is estimated to be £5 billion

Worst of all is that, despite clear rules about how insurance can be sold, many firms are still mis-selling PPI to customers who don’t realise it’s optional, or who may never be able to make a claim because they are barred by one of the exclusions.

Big profits on bad products

PPI is big business. In October 2006 the Office of Fair Trading (OFT) estimated there were approximately 20 million policies in force, with between 6.5 and 7.5 million further policies being sold each year. The profit the industry makes each year from the sale of PPI policies is estimated to be £5 billion.

And to make matters worse the OFT found only 20% of the money collected in premiums is ever paid out in claims. That’s a shockingly low figure compared to other general insurance products such as car insurance, where 82% is paid out, house insurance at 54%, pet insurance at 72% and medical insurance at 80%.

Overcharged by £1.4 billion a year

There was enough evidence to convince the OFT that the PPI market wasn’t working for consumers. In February 2007, the OFT referred the issue to the Competition Commission.

In June 2008 the Competition Commission published it’s provisional findings on the PPI market and concluded that ‘Companies face little or no competition when selling Payment Protection Insurance to their credit customers and as a result customers appear to be overcharged by over £1.4 billion a year.’

The regulator for financial services – the Financial Services Authority – has also carried out extensive research into the sale of PPI, resulting in several providers being fined. It published its findings in three reports. The latest, in September 2007, shows that despite previous warnings many firms are still failing to treat customers fairly.

More information

The Financial Services Authority website includes details of their research into the sale of PPI. You can find information on the OFT's referral of the PPI market to the Competition Commission on the OFT website.