Why bother with payment protection insurance at all?

INSURANCE:Policies that pay out if you lose your job or become ill sound great but you would be better off saving the amount you're investing in cover

OVER THE past year, the UK Financial Services Authority (FSA) has introduced tough new measures to protect consumers in the payment protection insurance (PPI) market, which it says is “broken and needs to be fixed”. Is a similar clampdown required in the Irish market or are consumers already adequately protected here?

PPI is an insurance product that will pay out a certain amount of money to help cover monthly repayments on debts, such as personal loans and credit card bills, if you’re unable to work because of illness or injury, or you lose your job. In theory, this sounds like an eminently sensible safety net to have in place. However, the reality is not quite so compelling.

Firstly, PPI cover can be exorbitantly expensive. Furthermore, it can provide a false sense of security, as such policies contain a multitude of get-out clauses than can result in a claim being rejected, and even if the claim is accepted, the compensation is limited.

One of the largest credit card providers in the country charges a monthly premium of about 71 cent for every €100 spent on your card for PPI cover. While this may seem an inconsequential sum, Frank Conway of personal budgeting service CredyCare.ie points out that on an annual basis this amounts to an additional charge of 8.52 per cent. If you’re already paying interest of, say, 14 per cent on your credit card balance, this pushes up the total cost (interest plus PPI cover) to a “whopping” 22.5 per cent, he explains.

In return for this punitive payment, PPI policies sometimes only provide cover for the minimum monthly repayment amount (around 2 to 5 per cent of the credit card balance), and for a limited period of time, such as 12 months.

Payment protection for personal loans is similarly expensive. On a five-year loan of €10,000, PPI cover could end up costing more than €2,000. Take, for example, the cost of cover for a €10,000 loan over a five-year term with Bank of Ireland. The monthly repayments without any cover would be €226.82, rising to €261.51 with cover, meaning that the total cost of the insurance cover is €2,081.40.

Bank of Ireland’s PPI cover on personal loans comes in the form of a single-premium product. The upside of this type of product is that it provides consumers with certainty that their premium won’t fluctuate over the term of the loan (as can happen with regular premium policies). However, the major disadvantage is that the PPI premium is added onto the loan at the start of the term, with the result that interest is also applied to the premium, on top of the loan.

Last year the FSA banned the sale of this type of single-premium product on unsecured personal loans as this was identified as the “highest risk sector for causing detriment to consumers”. Some lenders in the Irish market have moved towards providing monthly-premium PPI cover, but there has been no move to prevent lenders and insurers from selling single-premium products.

Over the years the Financial Regulator has carried out various examinations of the PPI industry in Ireland. Following an investigation in 2005, a number of lenders had to refund customers for PPI overcharging.

In July 2007, the sale of PPI became subject to the provisions of the Consumer Protection Code (CPC). Under the code, providers were obliged to quote PPI cover separately to the cost of the loan, and the customer must be informed that this cover is optional. However, these requirements only applied to policies sold after the CPC came into effect in 2007, so it’s possible that there may be some legacy cases (pre-dating this) where problems now exist.

“I am encountering PPI in the personal budgeting cases,” says Conway. “In many situations, consumers do not offer any evidence that they are aware they have the cover and less evidence that they are aware of how it actually works.”

According to Bank of Ireland, it pays out on 76 per cent of PPI claims, while Guy Genney of Genworth Financial, one of the biggest PPI providers in Ireland, estimated that the company’s payout rate exceeded 80 per cent. Nonetheless, making a claim on a PPI policy can also be fraught with difficulty.

In July last year, the Financial Regulator examined the claims handling process for PPI policies. It found that the most common cause for declined claims on illness or disability grounds related to pre-existing medical conditions. “The present practice across the PPI industry is that, unlike, for example, life assurance policies, firms do not gather information from customers on their state of health or medical history,” the Financial Regulator pointed out. Instead, this information is analysed at the time of a claim being assessed.

Claims made on the grounds of unemployment or redundancy can be declined for myriad of reasons. For example, if you were aware at the time of taking out the policy of impending redundancies in your company, then your claim could be rejected. Also, if you’re employed on a contract basis or are self-employed, then you may find that you were actually ineligible for cover.

According to Genney, under the CPC, the seller should match the product with the customer’s needs, but he adds that it’s “really important” that consumers familiarise themselves with the eligibility requirements. However, the number of complaints received by the Financial Ombudsman relating to payment and loan protection insurance more than doubled to 216 in 2009, which suggests that consumers are becoming increasingly unhappy with how the product is sold, or how claims are handled.

So what’s the alternative? Arguably you would be better off simply saving up the amount that you would have spent on PPI cover.

Not only is this a cheaper alternative (as you’ll earn interest on this nest egg, rather than paying a premium), but it will provide greater certainty, as you won’t have to rely on the decision of an underwriter to access your safety net.