Changing times

The Competition Commission is due to make an order this month to give effect to the remedies set out in its report on the investigation into the UK payment protection insurance market. While a legal challenge by two major lenders is still being argued in the courts, it seems likely the Commission will continue to progress the order so PPI insurers and distributors must ready themselves for the 'new world'. But what will it look like and how can they best operate within its boundaries?

There are three key objectives the industry must work towards if it is to operate successfully under this new world order. First, insurers must look to rebuild customer confidence through delivering products that do what they say they will do, backed up with excellent customer service. Second, confidence amongst distributors needs to be rebuilt; they must be satisfied they are selling a product their customers trust. And, finally, acting as the foundation to rebuild confidence and trust, insurers need to manage their risk portfolio appropriately.

While PPI has long been an income generator for many, the market has contracted by almost 50% since 2005. So, it would be prudent for distributors to initially address what role PPI should play in their business model going forward. If not an income generator, should it become a marketing tool or perhaps a risk mitigator?

The amount and quality of information that distributors must provide will increase. The order has adopted a prescriptive approach, and there is no choice about using the templates created for marketing materials, personal quotes and annual statements. The latter, however, creates a serious matter to address: issuing an annual statement presents the consumer with an opportunity to cancel the policy and look elsewhere. Consequently, distributors will need to work with their insurance partner to develop a robust customer retention strategy that may not previously have been in place.

Several factors can positively impact the level of cancellations for insurer partners. These include superior customer service skills delivered by individuals that can uncover the reasons for cancellation; negotiate; problem solve; and communicate effectively" so that the customer decides to keep their existing policy.

Distributors will, of course, no longer be able to sell PPI at the same time as selling a mortgage, loan or other credit product. They will have to wait seven days, unless the consumer initiates the transaction after 24 hours and confirms they have seen the personal PPI quote. But this does not have to represent a major issue if the appropriate technology is harnessed to manage the restructured sales process. The question is how a business chooses to balance its development and implementation with all its other IT priorities. PPI is a secondary or tertiary product, and the investment required could well see it pushed down the list. Therefore, distributors should consider engaging with their insurance partner who may be able to help develop the right solution.

The order includes extensive compliance reporting to ensure the new regime is enforced to the letter. Providers that achieve a total annual gross written premium of £60m or more in the preceding year will have to commission an independent market research agency to undertake a mystery shopping exercise. One failure could damn an entire business as being non-compliant, so getting systems and controls in place right from the outset will be essential.

Keeping competitive

A panel approach, similar to those operated by many personal lines brokers, would enable a distributor to provide a higher proportion of competitive quotes, giving the consumer the opportunity to compare and choose the most appropriate policy for their needs. However, since this option would be subject to the same point of sale prohibition, amends to the sales process would still be required. While this may seem to present additional work, it does provide the distributor the opportunity to demonstrate transparency and provides customers with greater choice, which will go a long way towards rebuilding consumer confidence.

A key criticism of the order is that it will stifle product innovation. The Commission has made it abundantly clear that alternative products brought to market that look, feel or smell like PPI will be considered as PPI and subject to the provisions of the order. For example, a standalone protection policy unrelated to a credit product but linked to income or lifestyle would still be considered as PPI.

However, this does not mean a one-size-fits-all approach" albeit with a few bells and whistles" is the most appropriate way forward. The long-term viability of the traditional product is in question, as the economic turmoil experienced over recent months has highlighted a fundamental flaw with the current proposition. As the product is underwritten at the point of claim, it is impossible for an insurer to gain a true picture of an individual policyholder's risk exposure at the point of sale. This represents a significant hurdle in allowing an insurer to manage its risk appropriately. Arguably, therefore, providers should look to introduce a product that quotes an annual premium for an individual based on their own risk profile at the point of sale" no different to how motor or household insurance is packaged and sold. Such a product would not only better position insurers to manage their risk appropriately but also go some way to restoring confidence among both distributors and consumers.

With articles three, five and six due to come into effect six months following the date of the order" and the remainder after 12 months" insurers and distributors have a lot of work to do. Whether the ultimate outcomes will achieve all of the Commission's aims remains to be seen. But the alternative of leaving consumers without any protection is unconscionable.