Banks make a lot of money through providing people with loans and credit cards, there no doubt about it. You would be hard-pressed to think of any other product they could make the same, if not more money from, until that is, when you compare it with selling PPI insurance. A long time ago, light bulbs turned on in the greedy banker’s heads when they realised how much money could be made from selling (or in recent years ‘mis selling’) PPI insurance and so started the PPI era.
How do banks make big profits on PPI insurance – Insurance is designed to protect us in time of need in return for a monthly premium, but insurance companies know that most of us will never actually claim against them. They know this as they have access to a vast amount of data and information and can calculate how likely it is they will have to pay out on claims. For example let’s take health insurance. If a 25 year old were to take out health insurance, the insurers will know there is a very slim chance that he or she will ever make a claim. This is their ideal customer, someone who is young and healthy and very unlikely to make a claim so more profit for them! It is like free money to some extent.
So how much do they make then? Well in March 2007 the Competition Commission decided to launch an investigation into the insurance industry and in June 2008 they published the results. Below are the average payout ratios;
* Car Insurance – 78% * Home insurance – 54% * Mortgage PPI insurance – 28% * Personal Loan PPI insurance – 15% * Credit Card PPI insurance – 11%
So out of every 100 paid to an insurance company for a PPI policy, there is only a 15% chance anyone will ever claim on it. So there is an 85% chance the banks will never have to pay out, meaning that for every 100 paid to them, 85 is sheer profit! The payout ratio on credit cards is even lower at 11%. Not a bad mark up eh?
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!
When did it become so common to mis sell PPI insurance? PPI has been around for years but it wasn?t until the late 1990s when it became mainstream and the lenders actually realised how much could be made from it. Lenders started pressurising their staff to hit high sales targets and sell and many policies as possible. They linked their salaries with their bonuses so if targets were not hit, they would not get their usual pay level. In extreme circumstances, disciplinary action was taken against those that could not hit the targets, whilst other companies were offering huge bonuses to those sell on a daily basis.
Inexperienced staff were being put on the front line and forced to sell PPI insurance to anybody they could in order to keep them from getting the sack. Bear in mind that up until this point it had been the job of a trained and experienced advisor to sell insurance products in accordance with government regulations, but the lenders got greedy and compliance slowly disappeared in order to gain bigger profits with no consideration for the consumer.
Serious mistakes began to arise and peoples ethics went out of the window in the race for sales and profits. Consumers were being persuaded to take out policies even though they were not suitable for them, and when they came around to reclaim on their policy they found themselves being told, ’sorry, computer says NO!’. This is one of the main factors why PPI has such a low pay out ratio and has led to a wave of PPI mis selling claims being made.
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 been mis sold PPI don’t hesitate, reclaim your today. Use our PPI reclaim calculator to see how much you could reclaim.
