Banks only have themselves to blame for PPI

It is good to see Financial Ombudsman Service (FOS) chief executive Natalie Ceeney put the blame squarely on banks, not claims management companies, for exaggerated payment protection insurance (PPI) claims.

Banks have faced increasing numbers of claims for compensation from disgruntled customers who were mis-sold PPI. They have had to repeatedly add to their provisions for compensating customers who were mis-sold the product, with disastrous effects on their results.

For example, this morning, Barclays reported that its latest £700m increase to its PPI  provisions had helped push it into a third-quarter loss before tax of £47m.

In fairness to banks, many have seen the PPI mis-selling scandal as an opportunity to try and squeeze money out of the banks. In addition to genuine claims, banks have been inundated with claims that are opportunistic at best and fraudulent at worst.

For example, in May, Lloyds Banking Group chief executive Antonio Horta-Osorio said 25% of the PPI claims received by his bank were submitted by people who hadn’t bought any of its products.

It’s hardly surprising that banks are feeling put upon and looking for others to blame. Also in fairness to banks, they are not the only ones that have accused claims management companies of making a bad situation worse.

The FOS itself, faced with increasing demands on its resources from the PPI scandal, has hit out at claims management companies. Ceeney has said before that some were adding no value, simply passing on customer complaints to the mis-sellerand expecting to be paid for their trouble.

While clearly no fan of claims management companies and their activities, Ceeney rightly points out that had the banks not mis-sold the product in the first place, none of this would have happened.

She has also pointed out that banks could have been quicker to act, and should have identified victims and compensated them, rather than waiting for the claims to roll in.

Claims management companies may have made the situation worse than it needs to be, but the banks have no-one to blame but themselves.

Banks are not the only ones facing a claims storm. US insurers are waiting with bated breath to see how much Cyclone Sandy will cost them. Loss estimates have continued to roll in. The most recent, from risk modelling form AIR Worldwide, indicates that insured losses could be as much as $15bn (£9.3bn).

EQECAT, meanwhile, has revised its estimate to $5bn from a range of $5bn to $10bn.

Why the variation? It is still very unclear what damage Sandy has caused, and what further it could do. While the US East Coast has been hit by storms before, they have never covered so wide an area as Sandy, which has a diameter of about 1,000 miles.

Also, much of the damage is likely to be caused by flooding, and it is unclear how much of this insurers will be on the hook for, particularly for personal household.

A big unknown is business interruption. This risk often confounds those trying to make estimates, and the true picture may not be known for many months.