The Unsustainable Nature of PPI

From: Tyler Trunnell
December 13th, 2013 | 1 Comment

The recent payment protection insurance (PPI) scandal in the UK has shown old banking habits die hard. Similar to how US banks bought and sold customer loans for short-term gains (but long term fallout the rest of us are still dealing with), banks in the UK have come under heavy criticism for selling PPI to customers and not following through on promises to honor policies. Expectedly, customer unhappiness has come to a head.

As the Citizens Advice Bureau describes it, “Payment protection insurance (PPI) is sold to borrowers with the promise of peace of mind and reassurance that credit or mortgage payments will be covered if their personal and financial circumstances change for the worse. The PPI policy will protect the borrower against the risk that they will be unable to make repayments under the loan for reasons such as unemployment or incapacity to work through illness or disability.”

While this may sound like a useful service on paper, claim statistics suggest otherwise. Up to 85% of PPI claims are rejected. This is a complete reversal of other types of insurance in the industry (where claims have an 85% approval rate). Not only are PPI providers unlikely to pay out, this insurance is expensive, too. In many cases, PPI adds up to 20% to the total cost of a loan, keeping customers in debt instead of helping them stay out of financial trouble.

PPI is more about scaring customers into paying more for financial “protection” that rarely comes through.
In their words, PPI is a protection racket.

Even a cursory look at the practice of selling PPIs shows how ineffective and unsustainable this industry is. As the Guardian reports, in what is now Britain’s biggest financial mis-selling scandal, banks and building societies pushed PPI policies alongside loans and other credit deals, with the promise they would pay the loan if borrowers found themselves unable to work. But in many cases exclusions meant they could never make a claim.

It’s no wonder 86% of the complaints to the UK’s financial omsbudman were about PPI. Selling customers unnecessary insurance with the intention to never pay out on a policy is obviously not a strategy for long-term success, but let’s take a deeper look into PPI’s unsustainable nature.

It’s Too Expensive To Last

As mentioned, PPI significantly increases the cost of consumer debt and prevents many from ever fully paying off loans. In some cases, PPI adds 50% to the cost of a loan. Just like how payday loans create a cycle of debt, PPI is similarly destructive. Unlike sustainable business practices, PPI is destructive and short-sighted.

It’s Ineffective

If PPI were to be sustainable, it would actually have to work. unfortunately, since most claims are rejected, the insurance does little to protect consumers from inability to make loan payments due to unemployment or other unforeseen circumstances. Built-in exclusions and loopholes protect PPI providers from having to pay out in most circumstances.

It’s Unethical

PPI is often presented to consumers as being “essential” or sold to people who would never be able to successfully claim, such as the self-employed. This clearly violates several responsible business practices.

It’s Inefficient And Doesn’t Really Work

Think the insurance industry in the US is a mess? Look at the process of filing PPI claims in the UK. Even when a policyholder has a legitimate claim, paperwork delays and lengthy procedures delay payout as long as possible.

So What Can I Do Now?

It’s going to take a while to sort out the PPI mess, and millions of customers are beginning to take action against this practice. If you are one of these customers and looking to better understand your options, contact the PPI Claims Adviceline to learn about possible recourse.
If you’re a business owner, though, there are several lessons to be learned from the mishandling of PPI policies.
First, never provide a product intended to exploit your customers. It’s bad business, it’s unethical, and it’s shortsighted.
Next, If your business model is based on keeping your customers indebted to you, reconsider your monetization strategy.
Don’t misrepresent your products or services. Eventually, the truth will come out, and you’ll be left with an expensive mess to clean up.

  • Scott Taylor

    It’s interesting after reading so much about the statistics of people actually making a claim for mis-sold PPI to actually get some statistics for PPI itself. I hadn’t realised that over 85% of claims on these policies were rejected – no wonder so many consumers are unhappy! And let’s not forget those who were paying PPI as a hidden charge!