OFT to probe PPI market

The OFT (Office of Fair Trading) is to launch a major probe into the workings of the PPI (Payment Protection Insurance) market. The market study, which is the outcome of the OFT's consideration of a super-complaint from Citizens Advice (CitA), will be launched early in 2006.

PPI is applied to a number of credit products including mortgages, loans, credit and store cards, and protects a borrower's ability to pay the loan in case of accident, sickness or unemployment. Around 6.5 to 7.5 million policies are taken out each year and it was estimated in 2003 that £5.4 billion in premiums were generated.

The OFT has decided to carry out a market study because a number of factors, notably, the size of the sector, the complexity of the product coupled with limited understanding on the part of the customer, and the way in which the product is sold (as a secondary purchase to the credit product) point to a potentially high risk of consumer detriment.

It has identified a number of issues which point to the sector not working well for consumers and which indicate the need for a more detailed examination.

For example, consumers face difficulties in respect of gaining information they need about alternative suppliers.

Also there are high costs or other barriers to entry for stand-alone PPI providers. And there is a wide degree of variation in pricing in the sector.

Finally, gross profit margins appear high - although there is a lack of information on profitability. An indication of high profitability is provided by claims ratios - PPI claims ratios are estimated to be 15-20%, which is low compared to other general insurance products: for example, claims ratios for motor insurance are 74% and household insurance are 55.2%.

As John Fingleton, OFT Chief Executive, makes the point, PPI is a complex product, often bought almost as an afterthought.

Borrowers may shop around for credit, but the complex nature of PPI and a lack of choice mean that they are less likely to shop around for PPI. There is a high potential for consumer detriment - our study will look at whether consumers are getting a good deal or not, he says.

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