Opening up the payment protection insurance market
LENDING STRATEGY - 1ST SEPTEMBER 2007
The Competition Commission has been speaking to market practitioners – including Simon Burgess, managing director of Britishinsurance.com – as it investigates the payment protection insurance market to establish exactly what sort of competition exists and how it can be improved.
Imagine watching the 100 metres final of the 2012 London Olympics and seeing a British athlete take up his starting position some 30 or 40 metres down the track. Admittedly, a Brit making the final is pretty unlikely, while getting such a home advantage would simply be out of the question – unfortunately.
However, this is very much what is happening in the payment protection insurance market. Credit providers have a huge advantage over customers when it comes to selling payment protection insurance, as the customer is already in front of them.
Taking out a loan is rarely an enjoyable experience and so shopping around and spending large amounts of time going through the various possibilities is not a labour of love. And when it comes to protecting their borrowing, people are even less inclined to take the time and effort to find the best deal. For the sake of an easy life, they are happy to hear about the payment protection insurance their credit provider can arrange and if they buy into the idea of having the protection then the purchase is made there and then.
The Competition Commission investigation into the payment protection insurance market is examining the problems created by the head-start that the large credit providers enjoy and has already begun to interview market practitioners.
Having been through such an interview, it is reassuring to know the commission is looking at all angles of the market and taking a wide perspective of the issues involved. But how is it going to pint the bigger providers back to the start line that everyone else is standing on, if and when it decides to offer recommendations for change?
There are two massive problems. The first is that the big name lenders already have customers sitting in front of them when it comes to making a payment protection insurance sale. The second is the inertia that client have shown regarding shopping around.
For independent providers it would take a huge advertising budget to draw consumers to their offerings in any significant numbers. Thus the market is all but closed to new entrants offering standalone payment protection insurance and this needs to be changed. The internet, however, offers a low cost, fast and effective means of communication with potential customers and more must be done to get them to research what is no offer.
A lot has been done by independent providers to generate coverage in the media about the issues and the message is a strong one. Independent cover is often cheaper and more flexible and the savings can be substantial. Continuing to push this message across is essential.
It may even be that in coming months and year independent providers will group together to develop marketing campaigns and collectively get their sales pitch across, without having to unilaterally spend vast sums of money.
In trying to prise open the point-of-sales environment, it will be interesting to see how far the Competition Commission is prepared to go. There have been murmurings that the sale of credit card associated payment protection insurance should be split. For lenders this will be like hearing Christmas has been cancelled. Such a decision would also stick in their throats as they have spent time and money building up their organisations only to find they are unable to take full advantage of the strong position it affords them.
However, it may be that rather than splitting the two sales completely a much firmer line is taken on the way payment protection insurance is sold. Work is already being done to ensure customers know that payment protection insurance is not mandatory and that it is not simply include in the credit package. Therefore, it might be a good idea to stop salesmen in such a situation acting as tied agents offering only one product. It may be that every credit provider could be forced into working from a small panel of providers in a bid to allow new players into the market and also ensure that what providers are offering is competitive with that from others in the sector.
Real success in generating competition in the market will only come when consumers believe there are a number of options open to them, which offer significant savings and will not be difficult to access or organise. But changing consumer attitudes is not going to be easy and will only happen over time. Increasingly, things like mortgage payment protection insurance is being advertised as a cost per £100 of cover and this should become a standard for all types of payment protection insurance, making it easier to compare exactly what is on offer.
There is also too much confusion over what a policy does and does not include and in many instances cover is sold to those who are actually ineligible to claim. As such the Council of Mortgage Lenders and the Association of British Insurers should push harder to improve the baseline standards they have already put in place for mortgage payment protection insurance. Other areas of the payment protection insurance market should also take up the gauntlet and introduce their own standards, making sure that they actually do an effective job, rather than simply ruling out the very worst products.
The Financial Services Authority must also be firm with provider over their sales processes and that clients are not misled over what they have to buy and how much it will cost them.
The FSA has started work on its payment protection insurance comparison tables and so long as it can market them to a wide enough audience and make them easy for consumers to use then these should also help.
Unfortunately, there will be no quick fix. However, it if improvements continue as they have done over recent years and a profile can be maintained in the media about the problems that exist. Then the momentum will build until we can genuinely say consumers across the board are getting the kind of deal they deserve.
