The payment-protection insurance scandal of the past few years in the United Kingdom generated a number of important industry lessons, particularly the need for better reaction to consumer feedback, quicker attention to fixes recommended by regulators, and a more-focused attention to detail when selling policies, a London-based analyst tells PaymentsSource.
“People got hooked on the income created by the PPI and forgot some of the basics about insuring a quality product sold in a compliant way,” says Matt Simester, managing director for Auriemma Consulting Group. “A lot of (banks) are very, very nervous about selling these products now, so a lot of them have withdrawn from the market. The paradox is as the economic environment gets worse in the UK, more people could actually use this as a proper product.”
Simply put, payment-protection insurance activates when a consumer becomes unable to pay his credit card, mortgage or personal loan payment. It’s a useful and legitimate product, but many were sold without full disclosure or any disclosure Simester says.
The market in packaging and cross-selling insurance policies linked to payment cards and bank accounts last year was about 4 billion euros (US$5.3 billion) across 20 countries in terms of gross written premiums and other revenues, according to the fourth edition of London-based financial research publisher Finaccord’s report “Insurance and Assistance linked to Payment Cards and Bank Accounts in Southern and Western Europe,” released in April. Credit card payment protection accounted for more than 1.6 billion euros of that total.
Customers paid the bulk, about 3.21 billion euros, while banks and other card providers paid about 790 million euros, according to the report. The UK led the 20 countries in number of value-added accounts in which consumers paid a fee.
Government and consumer-advocacy groups in the UK began reviewing selling practices for payment protection insurance in 2005. Based on its findings, the government began fining companies in 2006; in 2009, it recommended that companies stop mis-selling the policies, then asked them to stop, then banned the sale of single-premium payment-protection insurance. Banks asked for a judicial review in 2010 and after the High Court ruled against them in 2011, Lloyd’s Banking Group and the British Banker’s Association dropped their legal challenges.
Improper sales practices included telling consumers that approval of credit depended on buying payment-protection insurance, adding the insurance despite consumer refusal, not explaining terms and conditions, and selling policies to consumers who were ineligible for the PPI due to job status or age.
In October 2006, the UK’s Office of Fair Trading estimated there were approximately 20 million policies in force, with about 7.5 million new policies being sold each year, according to Simester. The profit the industry made each year was estimated to be £5 billion.
The Office of Fair Trading also found that only 20% of the premiums collected were paid out in claims, which compared poorly with other insurance types, such as car insurance, which paid out 82% of premiums collected; house insurance, 54%; pet insurance, 72%; and medical insurance, 80%. This indicated the product was being mis-sold.
In 2011, British courts ruled that companies in guilty of mis-selling would be fined and ordered that they inform the public how consumers could file claims.
The regulation and rulings have dramatically altered the payment-protection insurance market in the UK, Alan Leach, Finaccord director, tells PaymentsSource.
“Regulatory intervention and massively unfavorable press coverage mean that the markets for PPI linked to credit cards and other consumer loans have fallen dramatically from their peak of several years ago,” he says.
Two problems fed the scandal, says Simester: payment-protection insurance providers did not respond early enough to market feedback and regulator criticism, and remedial action was too slow and not consumer-oriented.
Sales practices must change to avoid similar abuse, and marketers must satisfy a few concerns when dealing with consumers, he says.
“They’ll have to make sure there are extremely well-governed sales processes and very much see themselves from a customer point of view, and ultimately try to get the claims rate the same as you see with other insurance products,” says Simester.
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