Why PPI Insurance is so often mis sold?
You might think the money that lenders make from PPI insurance is a drop in the ocean compared to how much interest they must receive from loans and credit card. However nothing could be further from the truth. Years ago lenders realised that the real money and profitability doesn’t come from loans or credit cards at all, but from selling PPI insurance alongside them.
Why is PPI insurance is so profitable?
There are no guarantees in life. Insurance can help protect us in case the worst happens, but actually most of us will never claim on our policies – and insurance companies know this. Insurance companies have access to vast mountains of data and statistics that tell them how likely it is they will have to pay out on claims. For example, if a 25 year old takes out health insurance, the insurers know it unlikely they will ever make a claim as 25 year olds are generally strong and healthy. In this respect they are an ideal customer – they put money in the pockets of the insurer and rarely claim it back. This alone makes insurance a very attractive financial product for lenders to sell.
In June 2008, The Competition Commission published the results of a 15 month investigation into insurance and found the following average payout ratios:
- Car Insurance – pays out 78% of the time
- Home insurance – pays out 54% of the time
- Mortgage PPI insurance – pays out 28% of the time
- Personal Loan PPI insurance – pays out 15% of the time
- Credit Card PPI insurance – pays out 11% of the time
So for every £100 a loan provider takes from you in PPI insurance, it knows there is an 85% chance it will never have to pay out to you. With credit cards that rises to 89%.
Why PPI insurance favours the lender
Lenders don’t sell their own insurance products - they sell the products of a preferred insurer, but it isn’t the insurers that make the most profit. The price the lender charges you for a policy isn’t the price the insurers charge them. In fact, there have been some instances where consumers have been quoted eight or nine times more by a lender than they would pay if they went direct to the insurer. If you compare the monthly interest cost on a loan with the monthly cost of PPI insurance on the same loan, the PPI is usually much more!
So what does this have to do with mis selling PPI insurance?
Back in the late 1990s, lenders began to realise just what a money spinner PPI insurance was and directed their staff to begin selling it alongside every loan, credit card and mortgage. But they went too far. They pressured their staff to sell as much as possible, linking their pay and benefits to hitting targets. In some cases, staff were disciplined and then sacked if targets were not met. Other lenders offered massive incentives to staff that sold the most policies.
Suddenly customer service staff with no sales experience were sent on quick courses about selling financial products then forced to sell PPI policies any way they could to keep their jobs. Bear in mind, until this point the in-depth knowledge needed to ensure a financial product was right for someone and that they understood what was involved lay in the domain of trained and experienced financial advisors. Lenders were muscling in, sending out staff with the most minimal of training to sell financial products.
In the scramble for sales, mistakes were made and ethics were forgotten, leading to the problems with PPI mis selling that we see today. PPI insurance can be very useful and can help people out of a tight spot, but thanks to lenders it is doubtful the reputation of this type of insurance will ever recover. It will forever be linked with the words ‘PPI mis selling’.
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