The Secrets Behind PPI, Why It Is So Profitable

Written By: Jane Edwards on September 7, 2010 No Comment

Banks make a lot of money through providing people with loans and credit cards, there no doubt about it. You would be hard-pressed to think of any other product they could make the same, if not more money from, until that is, when you compare it with selling PPI insurance. A long time ago, light bulbs turned on in the greedy banker’s heads when they realised how much money could be made from selling (or in recent years ‘mis selling’) PPI insurance and so started the PPI era.

How lenders make money from PPI insurance – Insurance protects us from the worst, but most of us will never claim on our policies and insurance companies know this. They have access to vast mountains of data and statistics that tell them how likely it is they will have to pay out on claims. For example, if a 25 year old takes out health insurance, the insurers know it is unlikely they will ever make a claim. They are an ideal customer – generally strong and healthy, they put money in the pockets of the insurer and rarely claim it back. This makes insurance very attractive for lenders to find a way to profit 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 out of every 100 paid to an insurance company for a PPI policy, there is only a 15% chance anyone will ever claim on it. So there is an 85% chance the banks will never have to pay out, meaning that for every 100 paid to them, 85 is sheer profit! The payout ratio on credit cards is even lower at 11%. Not a bad mark up eh?

Why does PPI insurance favour the lender? Insurance companies mainly sell their financial products through high street lenders, like banks and building societies as well as directly to consumers. But contrary to popular belief, they don’t make the most money out of this enterprise; it is the lenders that make the majority of the profit. The price you are being charged by the lender is the not the price the lender is being charged by the insurer. In fact, there have reports that some consumers have been quoted up to 9 times the actual cost of the insurance by the lender than if they would have gone direct to the insurers themselves. If you analyse the monthly interest on a typical loan and compare it with the same loan but with PPI, the PPI insurance is usually vastly higher!

When did it become so common to mis sell PPI insurance? PPI has been around for years but it wasn?t until the late 1990s when it became mainstream and the lenders actually realised how much could be made from it. Lenders started pressurising their staff to hit high sales targets and sell and many policies as possible. They linked their salaries with their bonuses so if targets were not hit, they would not get their usual pay level. In extreme circumstances, disciplinary action was taken against those that could not hit the targets, whilst other companies were offering huge bonuses to those sell on a daily basis.

Customer service staff with no sales experience was forced to sell PPI insurance any way they could to keep their jobs. Bear in mind, until this point the in-depth knowledge needed to ensure a financial product was right for someone and that they understood what was involved lay in the domain of trained and experienced financial advisors. Lenders were muscling in, sending out staff with the most minimal of financial training to sell financial products.

Mistakes started to crop up and due to the pressure from management for sales, people started to forget their ethics. Policies were being sold to anybody they could sell to, even if it did not suit them, and when consumers needed to claim on them, did the lenders stick to their side of the bargain?… No! They were simply told they couldn’t claim and made up an invalid excuse. This is why PPI has such a low payout ratio and has led many consumers to challenge their lenders for mis selling the policy to them.

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’.

If you have PPI there is a good chance it was mis sold to you. Use our PPI calculator to see how much you could reclaim.