Payment Protection Insurance (PPI)

Payment Protection Insurance (PPI) is a type of insurance that provides an income to maintain a borrower’s debt repayments in the event of an accident or sickness that prevents them from working, or unemployment.

Overview

PPI policies are obtainable to protect most forms of personal debt, including personal loans, mortgages, and credit card repayments. Insurance coverage is frequently purchased through the lender when the finance arrangement is organized. However, stand-alone policies are available at any time.

To be qualified for PPI coverage, the purchaser will typically have to be aged between 18 and 65 (or higher in some circumstances), and employed for at least 16 hours a week (or on a long term contract or have been self-employed for a period of time).

All PPI policies have a waiting period at the start of each claim before payments commence.

Once the insurer has accepted a claim, the payment periods will vary but claims are typically, paid for up to 12 months (but some may last as long as 24 months).

Whilst Payment Protection Insurance is the formal name given to this type of insurance, it is also sold under a host of other names such as: Accident Sickness and Unemployment Insurance, Accident Sickness and Redundancy Insurance, Premium Protection Insurance, Income Protection Insurance, Mortgage Payment Protection, Mortgage Payment Insurance and Loan Protection Insurance.

In fact, PPI has become a major source of income for UK banks with Datamonitor estimating that total premiums in 2005 were £5.7bn, although this was a decline from the year before. Considering that claims ration have historically been in the region of 15-20%, compared to claims rates that can be over five times as high in household and motor insurance, PPI remains a very profitable product. However, the rapid rise in UK bad debt and personal insolvencies, notably from 2005 onwards, coupled with increasing regulatory interest may have very negative implications for the long-term profitability of PPI.

Mortgage payment protection insurance

Mortgage Payment Protection Insurance (sometimes referred to as MPPI) is a type of insurance that is now very popular in the United Kingdom. It is often sold by the company that also arranges your mortgage when you buy a property. It is a way of ensuring that your monthly mortgage payments are made in the event of you becoming unemployed. Unemployment can be caused by accident, sickness or redundancy. It is usually the case that the claimant must register at an unemployment to be eligible for benefit from the Mortgage Payment Protection Insurance. Benefit is usually paid for up to either 12 or 24 months, this is usually sufficient time for the claimant to regain employment. People often believe that if they become unemployed the state will help them out, unfortunately this is no longer true.

The majority of MPPI policies have a fixed premium regardless of sex, age or occupation. The premium is normally expressed as a percentage of £100 per month of benefit selected. More recently Mortgage Payment Protection Insurance policies are being developed with new premium rating systems. These age related policies provide much cheaper premiums for younger ages making the insurance more affordable.

Controversy

In 2007, in the United Kingdom the Financial Ombudsman reported that 39% of all financial disputes in Britain involved PPI,[1] while the Financial Services Authority (FSA) has been investigating the mis-selling of PPI insurance. It has made provision for clients to claim back premiums with interest, in such where this is contested.[citation needed] Many claims management companies have been set up to assist the public is making claims. To the dissatisfaction of many financial institutions, these claims management companies have succeeded in informing the public at large of their claims rights. Some claims management companies, working closely together with solicitors, have been able to bypass the stage of contacting the financial ombudsman service. In this way they can fast track claims for their clients. Some of these companies work on a "no win no fee" basis, which is of particular benefit to those in financial hardship. Win commission rates of 25% are the norm.

It was revealed that most of the premiums for PPI came from sales bundled with other financial services such as loans (£45 billion in UK, in 2007, compared to only £73 million consisting of PPI alone), many times without informing the customer that PPI is optional (this was the main reason for FSI to charge insurers for mis-selling). The insurers argue that PPI was beneficial to consumers as a group - even those who don't buy PPI. The reason would be that it helps reduce risk for insurers: with it, insurers don't have to worry about loans being unpaid. With this lowered overall loan risk profile, they can then lower overall credit prices - even to those not buying PPI.