In a new report, the UK's Office of Fair Trading (OFT) has heavily criticized the payment protection insurance (PPI) industry, on both pricing and profit grounds.
The OFT is investigating the industry, valued at GBP5.4 billion a year, following complaints that consumers are paying too much for the insurance -designed to cover outstanding payments on credit card bills or loans through sickness or unemployment.
The regulator discovered that PPI has an extremely low claims ratio compared to other types of insurance. PPI insurers are only paying 19% in claims of the total money made through premiums, compared to motor insurers which payout 74% and household insurers, which pay 55%.
The findings also revealed that claims may be refused depending on the type of illness stopping the claimant going to work. Many policies covering credit cards do not cover things such as stress and back problems, the Observer newspaper has reported.
Also when policies do cover the ailment, the payments will often only cover monthly repayments for about 12 months, but will not help clear the debt.
Another problem that the OFT found centers on how PPI is sold to consumers by salespeople earning an average 60% on the premium. The OFT found that over a quarter of customers surveyed felt taking out PPI would aid their loan application.
The OFT will publish its full findings and any planned reforms it intends to make later this year.