| PPI, Why The Claims Industry Is So Profitable |
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| Written by David Baddeley |
| Friday, 03 September 2010 20:22 |
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If you looked at the amount of money lenders make in interest from loans and credit cards, you'd be hard-pressed to think of anything that could rival it for putting money in the pockets of the lenders. That is, until you compare PPI insurance with it. Years ago lenders realised that the real money and profitability doesn't come from loans or credit cards at all, but from selling PPI insurance alongside them, or in recent years, mis selling PPI insurance.
If you looked at the amount of money lenders make in interest from loans and credit cards, you'd be hard-pressed to think of anything that could rival it for putting money in the pockets of the lenders. That is, until you compare PPI insurance with it. Years ago lenders realised that the real money and profitability doesn't come from loans or credit cards at all, but from selling PPI insurance alongside them, or in recent years, mis selling PPI insurance. How is the money made by lenders on PPI Insurance - The idea behind insurance is to protect us in time of need, but if truth be told most of us would never need to claim for it and the lenders know this. Its all about averages and clever calculations. There is a vast amount of statistics and data available to lenders which allows them to calculate how likely you are to make a claim on your policy. For example, if a 20 year old decided to take out a health insurance policy, the insurers would know it is very unlikely that they will ever make a claim as most people at this age do not have any health problems. It is the perfect customer to them, they line the insurance companies pockets with cash and very rarely clam it back. This sort of product is very attractive to lenders as they make huge sums of money from it. To give you an idea of how much money they actually make from this scheme see the list below. These figures are from an investigation into the insurance industry which was undertaken by the Competition Commission back in June 2008. It shows the following payout rations; * Car Insurance - 78% * Home insurance - 54% * Mortgage PPI insurance - 28% * Personal Loan PPI insurance - 15% * Credit Card PPI insurance - 11% So for every 100 an insurer takes from you in PPI insurance, there is a 15% chance they will have to pay out claims, but a whopping 85% chance they will never have to. They will keep 85 out of every 100 paid to them. With credit cards the chance of them paying out drops to just 11%. Why PPI insurance favours the lender - The majority of insurers sell their products through lenders like banks and building societies as well as direct to the consumer. Yet it isn?t the insurers that make the most profit. The price the insurers charge the lender isn't the price the lender sells the PPI insurance to you for. In fact, there have been some instances where consumers have been quoted eight or nine times more for PPI insurance by a lender than they would pay if they went direct to the insurer. If you compare the monthly interest cost on a loan with the monthly cost of PPI insurance on the same loan, the PPI insurance is usually much more! So how did mis selling PPI insurance become so common? Back in the late 1990s, lenders suddenly realised what a money-spinner PPI insurance was and began pressuring their staff to sell as many polices as possible. Their pay and benefits were linked to PPI insurance selling targets. Some lenders disciplined their staff then sacked them if targets were not met, while other lenders offered massive incentives to staff that sold the most PPI insurance. Staff with little or no experience were forced to sell PPI insurance by any means possible and threatened with redundancy if they did not deliver. Up until this point only the most experienced sales staff were allowed to sell these types of insurance products as it was always the priority of the lenders to ensure the consumer got the best possible advice. But lenders were getting greedy and their legal obligations and morals were slowly slipping out of the window. Mistakes were made and sometimes ethics were forgotten in the mad scramble for sales and profit. Policies were sold that were never suitable for the individual persuaded to take them out, and when they tried to claim they found themselves excluded from doing so. This is part of the reason why PPI insurance has such a low pay out ratio and has led to many of the PPI mis selling claims that are made. There's no doubt PPI insurance is a useful thing to have if your income ever drops because of illness or redundancy, but unfortunately thanks to behaviour of lenders it is doubtful the reputation of PPI insurance will ever recover. It will forever be linked in the minds of us all with the words 'PPI mis selling'. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. If you have PPI there is a good chance it was mis sold to you. Use our PPI Reclaim Calculator to see how much you could reclaim. |