Payment protection insurance has had a bad press of late. But this product can be a lifeline for policyholders – if it is sold properly

Payment protection insurance (PPI) has had a bad rap in recent years. It is widely agreed, however, that it can be a worthwhile product when it is sold properly.

PPI – a £3.8bn-a-year industry – is intended to cover credit card, loan or mortgage payments if a policyholder cannot work because of accident, sickness or unemployment. Many regard it as a lifeline, particularly during tough times.

But the product – particularly single-premium PPI – can leave the policyholder worse off. For example, some customers have been sold PPI when they were ineligible to claim. The market has also been accused of having low claims ratios, high commission rates and a lack of competition.

Crackdowns by the Competition Commission, the FSA and other bodies have begun to change things, however.

Last month, for instance, the FSA fined Swinton £770,000 for “serious failings” in sales of single-premium PPI. Swinton had automatically included PPI in insurance quotes, without making it clear to the customer. Between December 2006 and March 2008, the broker also failed to tell customers about PPI costs.

Actions like this have resulted in a massive reduction in mis-selling. The FSA has said that most firms now make it clear to customers that PPI is optional. Many have also moved to provide refunds on single-premium policies.

“We will continue to support the Competition Commission in driving through changes aimed at fixing the structural problems in this market, as its remedies support our own work to deliver better consumer outcomes,” an FSA spokesman says. “Our standards for the sale of PPI are unaffected, and we expect all firms selling PPI to meet them.”

However, even with the crackdown, some firms – either wittingly or not – still don’t have the right sales processes. Therefore, it’s important to learn how to sell PPI safely.

Broker tips

Millennium Insurance Brokers’ Stephen Clowes says that, first and foremost, brokers should not let a customer choose a product based on price alone. Its benefits are more important.

“He or she needs to ask, ‘If I was off work ill or made redundant, when would I receive the first payment to ensure I could pay my bills?’” he says.

“The best cover is ‘Back to day one’, which means that after 30 days, the claim is treated as though from day one and will pay the first claim on Day 31. If you see 90 days’ deferred period, the claim will only start to be paid from Day 121 – that is, 30 days after the 90-day period.”

Brokers also need to find out whether a customer’s employer will still pay if he or she is off sick, and for how long. For example, if an employer pays for 90 days, then the PPI wouldn’t need to kick in until after that.

Age is also important. What happens as a client get older? Does the premium go up each year? Is it fixed or will it jump after, say, five years?

Clients also must understand the initial exclusion period.

Clowes says: “Insurers will offer shorter periods when PPI is purchased with a credit product. This is because credit providers undertake things such as credit checks to underwrite the loan.”

He adds that brokers should make sure the cover is suitable for self-employed and contract workers. “Most mortgage payment protection products are, as they need to meet the baseline PPI wording agreed between the Council of Mortgage Lenders and the ABI.”

Finally, brokers need to check the period of time before any non-chronic medical conditions are covered again after a claim. And any pre-existing problems must be declared.

Meanwhile, Assurant Intermediary’s Kevin Paterson says insurers have traditionally expected brokers to do a level of underwriting on their behalf at the point of sale. “Arguably, brokers are best placed to do this, but it hasn’t been done effectively in many instances.”

Now, as PPI insurers are “haemorrhaging claims”, he says they are getting tougher on enforcing policy terms and conditions.

“We’re seeing claim failure rates increase as a result and this, in turn, is putting the pressure firmly on the broker’s shoulders when it comes to selling PPI,” Paterson says. “While it seems there are moves by some insurers towards a change in the way PPI is underwritten, the key for brokers to successfully sell PPI is to ensure they are totally familiar with policy terms and conditions.

“They need to firmly guide their clients through to ensure it is an appropriate policy for them and one they can be confident in being able to make a successful claim against.”

Point of sale squabble

Last month, in a case appealed by Barclays, the Competition Appeal Tribunal ruled that the Competition Commission must review its proposal to stop lenders selling PPI when customers apply for loans and credit cards.

The Commission said providers would have to wait seven days after loans were agreed before they could contact customers to sell them PPI. One might expect brokers to rejoice. But Biba’s head of technical services Peter Staddon says the industry is concerned that a seven-day wait leaves customers taking on new debts unprotected. Biba also feels a two-stage process will mean higher cost and less cover.

“This is at odds with the need to ensure customers have adequate protection. There is already a 30-day cooling off period with PPI, which addresses the concerns of the regulator,” he says.

Staddon believes the removal of the sale of PPI from the original credit application will damage the market and go against the government’s targets to increase the sales and therefore the protection of PPI.

However, he also acknowledges that the vast majority of PPI sales are when applications are made. “Brokers would have a real issue trying to arrange such coverage to compete on a standalone basis,” he says.

As a result, Biba is considering a new scheme that brokers will sell as annually renewable policies, such as home and motor.

“As an industry we need to review our suite of products and come up with an alternative market-leading offer, such as the standalone variable lifestyle or indebtedness contract, which is portable and not linked to any one lender,” he says.

The Competition Commission published a draft order for consultation in July this year, setting out how its measures to introduce competition into the PPI market would be implemented. The seven-day wait following the sale of a credit product was one of its measures. It also wants a ban on single-premium policies, and improved information for customers.

With last month’s judgment creating a hitch in its plans, however, it is unclear how the Commission will move forward. For now, it is taking stock, with a spokesman saying: “We will study the judgment closely before deciding our next steps.” IT