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Protection racket

13 September 2005
Protection racket report cover

CAB evidence on problems with payment protection insurance

Protection_racket_summary [ 55 kb]

Protection_racket report [ 270 kb] - CAB evidence on problems with payment protection insurance.

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.  However, many CAB clients find that they cannot make a successful claim on their policy because of exclusion clauses and administrative barriers to making a claim.  Premiums for PPI policies can add 20 per cent or more to the total amount to be repaid on a loan agreement, thus increasing people's indebtedness rather than preventing it.

This report, based on evidence from 270 Citizens Advice Bureaux in England, Wales and Northern Ireland, calls on insurers, lenders and market regulators to take urgent action to improve payment protection insurance.


Payment protection insurance is commonly sold linked to credit.  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.  Selling PPI is big business, with an estimated 20 million policies in force and annual gross premiums in excess of £5 billion.

Although PPI clearly plays an important role in protecting many borrowers against indebtedness, CAB evidence suggests that it fails a significant number of our clients.  CAB enquiries about PPI include a disproportionately high number of complaints about claims being turned down.  A survey of CAB debt clients in 2001 found that 85 per cent of those that had claimed on PPI had been unsuccessful.  In constrast industry figures show around 85 per cent of claims are successful.  As CAB clients are often subject to financial and social exclusion, this suggests that PPI is a particular problem for the most vulnerable borrowers who are also the people at greatest risk of facing financial difficulties.

Main findings

1.    The price that people have to pay for cover

PPI does not come cheap.  As the table shows, PPI premiums paid by CAB clients represent anything from 13 per cent to a staggering 56 per cent of the amount loaned.  It is common for PPI on loan agreements to be paid for by a one off premium included in the loan itself and for interest to be charged on PPI permiums.  

PPI premiums as proportion of loan: cases reported by breaux

Loan Type

Loan amount

PPI permium

Permium as a percentage of total loan

Unsecured personal loan




Unsecured personal loan




Hire purchase for car




Hire purchase for care




Unsecured loan




Secured loan




Secured loan




Conditional sale for car




Unsecured personal loan




Credit card PPI payments are generally added to the monthly balance, but this is not necessarily any cheaper in the long term.  On some policies the cost of PPI premiums would increase the cost of borrowing by about nine per cent per year.

Despite their cost, many PPI policies do not actually guarantee to pay off debts.  For example, some insurers will only cover payments for no more than a year, and only cover the minimum payment in some cases.

Lenders are squeezing extra loan business out of borrowers who are paying over the odds to protect themselves and the creditor if their circumstances change.  Two different estimates suggest that PPI premiums are about three times the cost of providing cover.  This implies that borrowers could be over charged by as much as £3 billion per year for PPI cover.

2.    The design of payment protection insurance policies

Many PPI products contain clauses designed to exclude people from cover.  CAB clients have found that claims arising from bad backs and mental health problems are completely excluded from policies sold by some high street lenders.  People who are self employed or who are employed in fixed term contracts also face exclusion from cover.

3.    How PPI products are sold

CAB evidence shows that borrowers are often sold policies that are completely inappropriate.  High pressure selling or unfair practices such as inertia selling can force people to take out insurance that they cannot afford, do not want or need.  These practices are widespread throughout the credit industry.

Bad practice in the sale of PPI products is also linked to irresponsible lending.  Citizens Advice Bureaux often report that people in financial difficulties are offered consolidation loans that they clearly will not be able to pay.  In some cases these loans are rolled over with a new PPI policy sold each time.

4.    How PPI claims are administered

CAB clients find that the administration of PPI claims is often bureaucratic, insensitive to their financial difficulties and sometimes even responsible for increased indebtedness.  This has resulted in lenders adding administration charges to borrower's debts and threatening court action.

Some borrowers cannot successfully claim on their PPI policy due to unreasonable requirements to provide medical evidence.  For other CAB clients the costs of obtaining medical evidence represent a considerable barrier to claiming.

Regulation of PPI

The issues we raise in this report are not new.  A Citizens Advice report published in 1995 highlighted similar problems.  This suggests that not enough has been done to address failures in the PPI market in the last ten years.

Although the Financial Services Authority (FSA) now has responsibility for general insurance, they do not regulate issues of competition or price.  Their rules on sales of insurance provide a poor safeguard against mis-selling of PPI, whilst rules on the content of policies are too vague to set an effective standard.  The Office of Fair Trading also has a dual role in identifying competition issues and regulating consumer credit, but has not investigated all the problems relating to PPI.  We believe it is time for regulators to take joint action to tackle these problems.

Protection_racket_summary [ 55 kb]

Protection_racket report [ 270 kb] - CAB evidence on problems with payment protection insurance.