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Payment protection insurance

Launched: April 2006

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Purpose of the study

To examine in more detail findings that:

1. consumers face difficulties in respect of (a) gaining information they need about alternative suppliers and (b) the technical nature and/or lack of transparency of the information available to them

2. there are high costs or other barriers to entry for stand-alone PPI providers

3. there is a wide degree of variation in pricing in the sector, and

4. gross profit margins appear high - although there is a lack of information on profitability, an indication of high profitability is provided by claims ratios - PPI claims ratios are estimated to be 15 - 20 per cent, which is low compared to other general insurance products: for example, claims ratios for motor insurance are 74 per cent and household insurance are 55.2 per cent.

(Study followed super-complaint.)

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The findings showed:

Structural features

1. PPI is a secondary or tertiary purchase, typically bought only as a result of buying the primary product.

2. PPI is an inherently complex product

3. information asymmetry

4. large point of sale advantage

5. switching barriers and costs, and

6. vertical integration of underwriting and distribution (60 per cent of the market).

Conduct of firms features

1. competition takes place on the primary credit product, but usually not on the PPI at all

2. firms do not make information available

3. firms do not make clear to customers that the grant of credit is not conditional on taking out PPI, and

4. practice of giving cancellation refunds that don't reflect cost or consumer risk profile reinforces barriers to switching.

Conduct of consumer features

Consumers do not actively shop around.

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Action following market study

Market investigation reference made in February 2007.

Emerging thinking published in November 2007: the underwriting market is concentrated - not all underwriters are big enough to underwrite the distributors' business. There do not seem to be significant barriers to entry though incumbent providers may have an advantage when re-tendering for contracts. On the whole there are no significant features that prevent, restrict or distort competition in the underwriting market.

Competition Commission (CC) looked further at the retail market to determine degree of competition, customer search costs, switching costs, levels of commission, pricing and profitability.

Vertical integration does not appear to affect competition adversely.

Provisional findings published end May 2008.

Final CC report published 29 January 2009 Draft Order for consultation published on 07 July 2009 and ended on 07 August 2009. CC working on final Order.

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Market study details and report

Download the OFT Report market study report 'Payment Protection Insurance: Report on the market study and proposed decision to make a market investigation reference' (pdf file 312 kb). October 2006

Download the annexes of the report:

Annexe A - 'London Economics report 'Research into Payment Protection Insurance in the UK'  (pdf 1mb). October 2006

Annexe B  - PPI consumer survey 'Research into Consumers' Experience of Payment Protection Insurance' (pdf file 437 kb). October 2006

Annexe C - Academic report 'The Psychology of Consumer Credit Risk Management: The Case of Payment Protection Insurance in the UK' (pdf file 163 kb). October 2006

Annexe D- OFT 'Summary 'Report of business surveys' (pdf file 363 kb). October 2006

Annexe E - OFT 'Summary report of mystery shopping exercise' (pdf file 188 kb). October 2006

Annexe F- 'List of those that have assisted OFT with study' (pdf file 63 kb). October 2006

See press release 'Payment Protection Insurance 'failing consumers'. 19 October 2006

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Background information

The study follows a super-complaint from Citizens Advice. 13 September 2005

Market study launched - see press release 'OFT launches study of payment protection insurance'. 3 April 2006

Download  PPI market study: emerging issues (pdf file139 kb). August 2006

Download  Non confidential transcript of PPI feedback session (pdf file 125 kb). August 2006

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