Payment protection insurance slammed by OFT

October 19, 2006

The UK payment protection insurance (PPI) market has today come under fire from the Office of Fair Trading (OFT). The OFT has signalled that it is to refer the PPI industry to the Competition Commission.

The OFT launched a study into the PPI industry back in April this year to examine the effectiveness of competition and the benefits they would in turn bring the consumer in choice and value.

Payment protection insurance is completely optional and is provided to borrowers in case of the ability to be unable to keep up repayments on loans or other types of credit. The object is to provide protection to the policy holder in case they fall ill or lose emplyment, making the ability to repay much harder. The PPI is meant to step in and meet the monthly repayments that are due.

The problem lies in the credit providers who promote their own PPI scheme which very often costs more and offers less than independent providers. For a product that offers little, policy costs are extraordinaraly high.

The OFT has found that PPI policies have low claim ratios when compared to other insurance products. At the same time commision rates paid on PPI policies are also high.

John Fingleton, OFT Chief Executive, said, "'Following the work we have undertaken it is clear that many consumers are failed by PPI - insurance which gives them a poor deal and often less protection than they think. There is limited evidence the industry is taking steps to improve the situation, but we believe they will not make major improvements to competition in the market. Given our evidence and the scale of this market, our provisional view is that it would be appropriate for the Competition Commission to investigate further"