The Competition Commission has issued details of its emerging thinking into the payment protection insurance (PPI) market and believes more examination is required at the retail level.
It is in the process of undertaking what it describes as a major survey in an effort to further understand consumer behaviour and get a better picture of the competition that currently exists in the retail sales channel.
Price differentials
One of the biggest issues to be resolved in the PPI sector is the huge variance that exists in the price between policies, which are essentially the same. The Office of Fair Trading and Which?, along with many others, have all been outspoken on this point and the emerging thinking document highlights price differentials of over five and a half times for some policies.
It is difficult to believe that a market, which carries this sort of discrepancy between its cheapest and most expensive products, is truly competitive. Nor is it possible to excuse the price gap through differing scopes of cover.
However in looking at the structure of the PPI market, the Competition Commission says that distributors are in a strong negotiating position when it comes to dealing with underwriters.
Underwriters have to compete hard for the business they win and distributors have the power to hammer out a good deal, although it is questionable whether this is creating a good deal for the customer. The question the competition watchdog needs to answer is why, when distributors are on such a good footing with the underwriters, are they not using it to secure consistently low cost insurance for their clients?
There are a number of intermediaries who have managed to negotiate excellent deals, but the majority of high-street loan providers have eschewed this opportunity. Unfortunately the answer seems pretty clear.
In whose best interests?
Typically commission rates for PPI distributors run at anything between 40 per cent and 80 per cent. There are also a number of agreements in place, which mean that if the number of claims is less than expected the distributor will receive a profit commission of between 90 per cent and 100 per cent of the resulting profit.
This arrangement means it is not always in the best interests of the distributor to negotiate down on the premium or to ensure that its sales practices are secure and ensure only eligible clients take out the insurance.
Because PPI is intrinsically linked to the credit sale in the current set up, the high-street loan providers dominate the market and have a very strong position at the point of sale when it comes to offering PPI.
This means it is difficult for independent providers to get in front of consumers and genuinely compete, while giving the larger players no incentive to use their powerful negotiating position to deliver for clients.
Too early to know
It is too early to know what the Competition Commission will say in its final report due next year and where it will want to see changes to the market. However, it seems very clear that the status quo is not delivering for consumers and that although there is a highly competitive credit market in place, the secondary insurance market that sits behind it is buffered from the potential effects of competition because clients are all but secured by that stage.
Indeed so far the work carried out points to the very separate nature of the two markets and yet because of the way they are currently structured it has been incredibly difficult for PPI to escape from the shadow of the credit sale.
It may also be that as the Competition Commission completes its investigations into PPI distribution channels, it begins to recognise that there is a clear distinction between the first mortgage market where MPPI is offered by lenders, intermediaries and increasingly on a standalone basis and, on the other hand, the loan and credit card markets, where lenders have largely maintained a stranglehold on PPI distribution.
Addressing the problems
How the regulators will decide to address these problems remains to be seen. They may look to split the sale of PPI and credit, impose minimum product standards or change the sales process to ensure consumers are better informed of the choices available.
Whatever happens, there are a lot of points still to be ironed out and it is important we take the opportunity that this investigation represents and use it to create a market that works better for consumers and offers them the choice and value they should be able to expect as a matter of course.
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