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 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!
Mis selling PPI insurance – When did it become so common? When lenders realised what a money spinner PPI insurance was back in the late 1990s, they started pressuring their staff to sell as many policies as possible. They were given targets to hit and their pay was linked so if they didn’t sell their wages decreased. Some lenders even sacked their staff if targets were not met, whilst other lenders offered huge benefits and incentives to those who could sell the most in a day, week or month.
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 you could be eligible for a reclaim worth thousands. Don’t hesitate; use our reclaim PPI calculator to see how much you could reclaim.