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The Competition Commission’s Emerging Thinking document on payment protection insurance has given the insurance industry and intermediaries a clean bill of health.

For years, I have maintained that the product is sound (apart from singlepremium cover) and, when sold properly, will provide a safety net and peace of mind for people who are unable to continue with their loan and credit repayments.

This is the basis for all insurance products and PPI is no different. It is the distribution and pricing that are flawed, not the underwriting.

The report offers no new radical insights but it is the most comprehensive investigation of the market.

There are no great surprises on the areas identified as requiring further investigation but the report does bring some interesting questions, such as do distributors’ PPI profits prop up losses made at credit product level?

It also asks whether PPI is necessary or if alternatives such as permanent health insurance, critical-illness, personal accident and life cover suffice? Further investigations are under way but I suggest that PPI does add value – when it is correctly sold.

Banks and building societies have an 80 per cent market share and there are concerns over this and the report is also concerned about the impact of vertical integration, where one company both manufactures and sells the product. Companies that operate in this way account for 60 per cent of sales.

The commission suggests that “a significant degree of countervailing buyer power is being exercised by distributors”.

In the retail market, the investigation found that commission levels were higher than for other general insurance products – between 50-80 per cent for personal loan PPI and 40-65 per cent for mortgage PPI.

The report says the cost of PPI can, in some instances, be higher than the interest paid on loans, there is limited competition at retail level and it is not convinced, as many would suggest, that credit provision and PPI sales are the same market.

Advertised credit APR does not include PPI costs and pre-purchase information is poor. Distributors are quick to counter that information is available but consumer feedback is that loan applicants do not seek it.

Consumers are, it appears, under the impression that buying PPI is a condition of obtaining credit and the overwhelm-ing message is that PPI is sold and not bought.

The commission confirms that inter-mediaries have a key role in the PPI sector, allowing consumers to source independent products from lenders.

I believe the commission would like to see all PPI distribution structured this way – as we all would – giving customers a choice in what product they buy alongside their credit.

The report touches on how networks such as Sesame and L&G Mortgages can secure competitive commission rates and service levels and recognises that “a significant volume” of MPPI is sold by intermediaries. Council of Mortgage Lenders’ figures show that 32 per cent of MPPI sales in the second half of 2006 were through intermediaries.

But feedback from Northern Rock reveals that 75 per cent of mortgage applications are through intermediaries, yet less than 10 per cent of customers take out Rock’s mortgage payment protection insurance with the mortgage. Compare this with 50 per cent of customers who buy MPPI when taking out a mortgage “in branch”.

I believe the right products are in the wrong hands and this view will, in time, be borne out by further commission research.

There are discrepancies over the market size. Mintel estimates it to be worth £5.35bn but commission data puts it at £4.4bn.

All the issues raised by consumers, such as lack of pre-purchase information, confusion over jargon and uncertainty over policy cover can be addressed by independent payment protection insurance providers.

BMRB consumer feedback says: “People buying through financial advisers do go through the documents and are encouraged to think about the purchase.”

It concludes: “Those who buy through inter-mediaries feel confident they have a value product as their adviser searched the market.”

One consumer, on learning that he/she did not have to buy the lender’s PPI cover and it would not affect the loan application, replied: “I feel a bit stupid now, especially when I have shopped around for other sorts of insurance, I don’t know why I didn’t think.”

What a poor indictment of financial services that consumers are beginning to think it is their fault. Distributors are tarnishing the image of the insurance industry. Questions will continue to be asked over the price variations on similar policies and whether PPI gains reduce bad debts and I look forward to the commission’s proposed remedies and final report due out by the end of 2008.

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