Why the regulator is stepping in on price hikes

See story: FSA halts PPI rate hike and warns of further intervention

PPI has been a blemish on the industry’s reputation for years, and this latest move by the FSA demonstrates a continuing hardline. Of course, insurers are bound to increase premiums when risk increases, but the FSA seems to be suggesting some sharp practice in parts of the industry. Certainly, for it to be taking the time while there is so much else demanding its attention suggests that it suspects significant customer detriment.

So what exactly is the problem? According to a recent Defaqto report, premiums in the PPI sector have already seen increases of 120% and further hikes – up to another 50% - are on the cards. So, just as consumers need this protection most, they have to pay more when they can ill afford it. Moreover, as they seek to mitigate the growing risk, some insurers are taking other measures – for example, reducing cover on existing policies, or changing terms. Clearly, this is not in the consumers’ interest – particularly as, in PPI, few policies are sold through intermediaries, meaning many consumers struggle to fully understand what can be a complex and opaque financial product.

The FSA is acting off its own bat, but its letter to chief executives coincides neatly with a growing strength of feeling in the broker community, where those brokers who do sell PPI have been furious at having to explain huge and sudden rate increases to their clients. No-one would deny insurers the right to increase rates in proportion to growing risk – but many would argue that it should be done gradually and fairly, rather than through an opportunistic knee jerk reaction.

Given the intervention of the FSA, it now looks likely that this will be the case. The regulator is nothing if not staunch in its defence of consumer interests – some might say it pays them too much attention to the detriment of its other tasks – and it has made its feelings clear. It is up to insurers to react now – but don’t be surprised if some start to question the value of their being in this market at all.