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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 for every 100 an insurer takes from you in PPI insurance, there is a 15% chance they will have to pay out claims, but a whopping 85% chance they will never have to. They will keep 85 out of every 100 paid to them. With credit cards the chance of them paying out drops to just 11%.

Why PPI insurance favours the lender – The majority of insurers sell their products through lenders like banks and building societies as well as direct to the consumer. Yet it isn?t the insurers that make the most profit. The price the insurers charge the lender isn’t the price the lender sells the PPI insurance to you for. In fact, there have been some instances where consumers have been quoted eight or nine times more for PPI insurance by a lender than they would pay if they went direct to the insurer. If you compare the monthly interest cost on a loan with the monthly cost of PPI insurance on the same loan, the PPI insurance is usually much more!

So how did mis selling PPI insurance become so common? Back in the late 1990s, lenders suddenly realised what a money-spinner PPI insurance was and began pressuring their staff to sell as many polices as possible. Their pay and benefits were linked to PPI insurance selling targets. Some lenders disciplined their staff then sacked them if targets were not met, while other lenders offered massive incentives to staff that sold the most PPI insurance.

Customer service staff with no sales experience was forced to sell PPI insurance any way they could to keep their jobs. Bear in mind, until this point the in-depth knowledge needed to ensure a financial product was right for someone and that they understood what was involved lay in the domain of trained and experienced financial advisors. Lenders were muscling in, sending out staff with the most minimal of financial training to sell financial products.

Mistakes started to crop up and due to the pressure from management for sales, people started to forget their ethics. Policies were being sold to anybody they could sell to, even if it did not suit them, and when consumers needed to claim on them, did the lenders stick to their side of the bargain?… No! They were simply told they couldn’t claim and made up an invalid excuse. This is why PPI has such a low payout ratio and has led many consumers to challenge their lenders for mis selling the policy to them.

Don’t get me wrong, PPI insurance can be a very useful tool if your finances take an unexpected turn or you are made redundant or become ill, but thanks to the behaviour of the lenders the reputation of PPI insurance will never be the same as what is was. It will be forever linked to the words ‘mis selling’.

If you have PPI there is a good chance it was mis sold to you. Use our PPI Reclaim Calculator to see how much you could reclaim.

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