Protection Racket - Regulator threatens protection for low/medium income families

Regulator threatens protection for low/medium income families

So how much has the PPI mis-selling scandal cost UK banks?  The FT reported in February that the bill had risen to £20bn, though the final cost is likely to be more than £25bn. By making the banks hand out all that money to voters, the Government created a new form of quantitative easing.

This massive stimulus has, unsurprisingly, had consequences, none of them especially palatable.  The rush to compensation has created a plethora of claims management companies, plaguing us all with their texts and phone calls. 

More seriously though, the entire protection market has come under rapid regulatory fire. The FCA’s assault on this market – most recently via its enquiry into add-ons and ancillaries, threatens to penalise the very people who need these products most.

Payment protection insurance, accidental death cover, mortgage protection cover: all are value-based insurances which safeguard low – medium income families. If an employee loses their job, insurance offers cover for mortgage payments, for example, or income loss, until that person finds another job. If tragedy strikes, and a breadwinner dies in an accident, accidental death cover can see the family through the darkest of days. These are useful and valuable products designed to help people who would otherwise have no fallback.

Yet the FCA is proposing more restrictions on sales of add-ons, including forcing insurers to publish claims ratios for what it terms ‘poor value’ products.  The net result will be to widen the protection gap still further, set against a continuing fall in UK living standards.  In its report, the FCA noted that the claims ratio is lower than average across these product lines, indicating that “many consumers may be paying for products that are poor value.” The regulator cited the claims ratio for add-on personal accident insurance was less than 9%.

That may be so, but while few people claim – thankfully accidents are rare - those that do are generally very grateful for the cheque they receive.  Also the sums claimed can be significant in comparison to the premiums paid. In short, claims ratios are a poor measure of the overall value of an insurance product to the policyholder.  

While the regulator cracks down on a perfectly legitimate product, the squeeze in living standards creates a double whammy, as fewer people can afford insurance at all. Close Premium Finance reported at the beginning of October that 28% of people in the UK had cut back on their insurance cover during the past 12 months, primarily to save money. The highest proportion of ‘cutters’ were among young people between 18-34 (38%), and home was the most popular cover to cut.

Young people are also more likely to be on zero hours contracts, of which there are over 1.4 million in UK companies, according to Government data. And a report by the National Institute of Economic & Social Research showed that real wages for the have fallen since 2008, by 14% for U25s. For 25-29 year-olds, real weekly wages, adjusted for inflation, were down 12%. Real weekly wages overall have fallen by about 8% since 2008, equivalent to a fall in annual earnings of about £2,000 for a typical worker in Britain.

So it’s no surprise that insurance is one of the items being reduced or removed from household spending. In motor alone an estimated two million people are driving without cover. If people aren’t taking out cover, in the end the State (read taxpayer) has to become the insurer of last resort.  

PPI is a classic example of a useful product that was badly sold. The banks were too busy making super profits to think about the consequences. Financial penalties imposed by the FCA have been eye-watering, but reducing the number of protection products on the market, exacerbated by the FCAs investigations, will close off a valuable safety net for millions of people, and in the end, the taxpayer will pick up the bill.