Lenders take, take, take..

The over inflated premiums that the ‘big’ lenders charge for payment protection insurance (PPI) has been the subject of a lot of press and government interest over the past year. However, what isn’t so widely publicised is the fact that around 15-20p is paid out in claims for every £1.00 taken in premiums*.

That means that the 80-85p that is left over goes towards the insurers’ admin costs and the rest in commissions for their salespeople. This means a claims ratio is very, very low. If you look at motor insurance, the ratio is 82%; for household insurance it is 54%; for medical insurance 80% and for pet insurance 72%.

Someone somewhere is doing something very wrong to be making such a huge profit. Critics of the PPI market blame it on a number of issues.

The first issue is the consumers’ lack of understanding of the product. Many are sold it as an add-on when taking out a loan or credit card. They are given the hard-sell and rather than question what they are being sold, they simply accept that their loan or credit card is going to cost them a lot extra now.

Other consumers believe that if they do accept PPI, it will stand them in better stead for getting accepted for credit. Whether this is an impression given to them by the salesperson that is deliberate or inadvertent it is hard to know.

Those that do understand the product are often naïve, not realising that they can shop around for a standalone policy at often at a much better price.

As to the lenders, they take advantage of their clients. They have a stranglehold on the market - they are responsible for over 90% of all PPI sales - as well as a captive audience. They can get away with charging the premiums they like. And they do.

Simon Burgess from independent low cost payment protection provider BritishInsurance.com says that if consumers shopped around for a standalone policy, they could make huge savings. “Consumers are being ripped-off by their lenders. Up to 80% of the premiums they pay end up in the salesman’s pocket. It is quite abhorrent.”

* The Office of Fair Trading