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PPI value chain.
http://www.competition-commission.or...xt/542_2_9.pdf
providers of insurance broking services to companies).
(ii) record keeping; and
perform all administration, including claims management.
development can be undertaken by the underwriter.
6See Appendix 2.3 for further details.
16 and 17).
available the following information to underwriters submitting tenders:
benchmark their existing arrangements for the provision of PPI.
level of service) that can be offered to the prospective distributor.
underwriter when the contract with the incumbent underwriter terminates.
http://www.competition-commission.or...xt/542_2_9.pdf
The purpose of this appendix is to provide details of the participants in the value
chain for PPI, the principal activities they perform and their business models. The
appendix also describes how contracts for the provision of PPI are awarded, and the
main characteristics of the contractual arrangements regulating the relationships
between distributors and underwriters.
chain for PPI, the principal activities they perform and their business models. The
appendix also describes how contracts for the provision of PPI are awarded, and the
main characteristics of the contractual arrangements regulating the relationships
between distributors and underwriters.
The participants in the PPI value chain and their activities
2. The main participants in the product development, distribution and administration of
PPI are:
PPI are:
•
insurers/underwriters;
•
credit providers or distributors;1 and
•
intermediaries (eg brokers, independent financial advisers (IFAs)).
Other participants in the value chain include third party service providers such as
claim administrators (eg Cassidy Davis) and insurance underwriting brokers (ie
Other participants in the value chain include third party service providers such as
claim administrators (eg Cassidy Davis) and insurance underwriting brokers (ie
providers of insurance broking services to companies).
Underwriters
3. The insurers or underwriters of PPI products take on the risk
2 of a customer’s inability
to meet financial obligations arising from a loan or other credit agreement because of
unexpected events such as unemployment, accident, sickness or death. To insure
these risks, underwriters charge the customer a premium. As with general insurance
policies, by stipulating the benefits in the insurance products they offer, underwriters
can ensure that payments are made to those customers who are eligible to receive
them. By stipulating the exclusions, underwriters can restrict the circumstances under
which a claim would be paid, and thus reduce the level of the risk underwritten.
4. The activities typically, but not exclusively, carried out by underwriters include:
to meet financial obligations arising from a loan or other credit agreement because of
unexpected events such as unemployment, accident, sickness or death. To insure
these risks, underwriters charge the customer a premium. As with general insurance
policies, by stipulating the benefits in the insurance products they offer, underwriters
can ensure that payments are made to those customers who are eligible to receive
them. By stipulating the exclusions, underwriters can restrict the circumstances under
which a claim would be paid, and thus reduce the level of the risk underwritten.
4. The activities typically, but not exclusively, carried out by underwriters include:
(a)
underwriting;
(b)
claims management;
(c)
policy administration, which involves:
(i) premium collection;3
(i) premium collection;3
(ii) record keeping; and
1
We use the term ‘distributor‘ by which we mean distributors operating at the retail level (ie distributing PPI to retail customers).
Wholesale distributors (distributing credit products and PPI to companies, eg Lloyds TSB Asset Finance Division) are not
discussed in this appendix.
Wholesale distributors (distributing credit products and PPI to companies, eg Lloyds TSB Asset Finance Division) are not
discussed in this appendix.
2
Some of this risk can be taken on by the distributor or intermediary through profit-sharing arrangements.
3
Distributors can also collect premium on behalf of underwriters, undertake record keeping, and deal with complaints and
perform all administration, including claims management.
(iii) handling of policy-related complaints;
4 and
(d)
distributor support, which involves:
(i) sales and marketing (to distributor);
(ii) training;5
(i) sales and marketing (to distributor);
(ii) training;5
(iii) provision of management information; and
(iv) provision of regulatory information.
Underwriters may use outsourcing arrangements for part of their claim management
and policy administration activities ([
(iv) provision of regulatory information.
Underwriters may use outsourcing arrangements for part of their claim management
and policy administration activities ([
��]). In addition, product design and
development can be undertaken by the underwriter.
5. Underwriters distribute PPI through distributors or intermediaries; they do not generally
distribute PPI products on a stand-alone basis—that is to say, separately from a
credit product and/or direct to customers. The Cardif Pinnacle Helpupay product,
which is an MPPI product distributed over the Internet and by telephone, is one of the
very few examples of a stand-alone PPI product which is distributed directly to customers
by an underwriter. Aviva offered stand-alone PPI through its Norwich Union
Direct brand, but exited the market in 2004.
distribute PPI products on a stand-alone basis—that is to say, separately from a
credit product and/or direct to customers. The Cardif Pinnacle Helpupay product,
which is an MPPI product distributed over the Internet and by telephone, is one of the
very few examples of a stand-alone PPI product which is distributed directly to customers
by an underwriter. Aviva offered stand-alone PPI through its Norwich Union
Direct brand, but exited the market in 2004.
Distributors
6. Distributors (eg banks, building societies, mortgage providers, finance houses, credit
card providers) offer PPI alongside their credit products. They can also offer PPI
products on a stand-alone basis. For example, Barclays offers a stand-alone CCPPI
product for new and existing Barclaycard customers that allows Barclays customers
to insure non-Barclays credit cards. There are also products that are offered both
alongside a credit product and on a stand-alone basis.6card providers) offer PPI alongside their credit products. They can also offer PPI
products on a stand-alone basis. For example, Barclays offers a stand-alone CCPPI
product for new and existing Barclaycard customers that allows Barclays customers
to insure non-Barclays credit cards. There are also products that are offered both
7. Distributors can specialize in the provision of credit to prime customers or to nonstandard
customers.
8. Distributors can also specialize in the offer of credit cards, loans, mortgages or
overdrafts, or offer a portfolio of products. For example, banks such as Barclays and
RBSG offer credit cards, unsecured and secured loans, mortgages and overdrafts,
while financial institutions such as MBNA and American Express specialize in credit
cards.
9. Distributors typically take responsibility for product design and development (eg type
of benefits offered, type and level of exclusions), branding, marketing and selling the
PPI products, including compliance with any requirement covering regulated sales
and ongoing relationship with the customer. Distributors can also undertake a wider
range of functions including claims handling and ongoing policy administration.customers.
8. Distributors can also specialize in the offer of credit cards, loans, mortgages or
overdrafts, or offer a portfolio of products. For example, banks such as Barclays and
RBSG offer credit cards, unsecured and secured loans, mortgages and overdrafts,
while financial institutions such as MBNA and American Express specialize in credit
cards.
9. Distributors typically take responsibility for product design and development (eg type
of benefits offered, type and level of exclusions), branding, marketing and selling the
PPI products, including compliance with any requirement covering regulated sales
and ongoing relationship with the customer. Distributors can also undertake a wider
4
Typically, the distributor handles complaints in relation to the customer service.
5
This activity can be also performed by the distributor.
6See Appendix 2.3 for further details.
Intermediaries
10. An intermediary is a third party that offers services between PPI suppliers and
customers.
11. Intermediaries can distribute both credit products and PPI (or other insurance
policies), or PPI alone. However, they neither underwrite the PPI products nor
finance the credit. Intermediaries make available to customers the credit products
and/or PPI of one or more distributors and/or underwriters. These products are
usually distributed under the brand name of the lender or of the underwriter.
customers.
11. Intermediaries can distribute both credit products and PPI (or other insurance
policies), or PPI alone. However, they neither underwrite the PPI products nor
finance the credit. Intermediaries make available to customers the credit products
and/or PPI of one or more distributors and/or underwriters. These products are
usually distributed under the brand name of the lender or of the underwriter.
7
Tenders and contracts
12. The contracts for the provision of PPI services are generally put out to tender by
independent distributors and by providers who operate a business model in which
part of the business is outsourced to underwriters. Vertically-integrated distributors
may also put their contracts for PPI out to tender, and we have received evidence
that vertically-integrated distributors have conducted tenders for the provision of PPI
services to their distribution part of the business.8independent distributors and by providers who operate a business model in which
part of the business is outsourced to underwriters. Vertically-integrated distributors
may also put their contracts for PPI out to tender, and we have received evidence
that vertically-integrated distributors have conducted tenders for the provision of PPI
Tender process and contract negotiations
13. Parties told us that the typical tender process could take between three and six
months, but that it could be much longer (eg 18 months). One of the circumstances in
which a tender process may take longer to complete is when a large number of
companies are invited to tender. The tender process includes the following stages:
months, but that it could be much longer (eg 18 months). One of the circumstances in
which a tender process may take longer to complete is when a large number of
companies are invited to tender. The tender process includes the following stages:
(a)
Underwriters sign confidentiality agreements.
(b)
The distributor issues invitations to tender9 to a number of underwriters (between
two [��] and ten [��]) and requests responses within a specific time period
(normally three weeks). Invitations to tender might be preceded by a request for
information on areas such as the underwriter’s corporate structure, capabilities
and credentials as a provider of PPI.
two [��] and ten [��]) and requests responses within a specific time period
(normally three weeks). Invitations to tender might be preceded by a request for
information on areas such as the underwriter’s corporate structure, capabilities
and credentials as a provider of PPI.
(c)
Underwriters submit their bids, which include a description of the relevant services
that they could offer—such as claims handling, product training and IT
infrastructure, service levels and the commercial pricing arrangements (see paragraphs
that they could offer—such as claims handling, product training and IT
infrastructure, service levels and the commercial pricing arrangements (see paragraphs
16 and 17).
d)
On the basis of the bids received, the distributor draws up a short-list of underwriters
from whom additional information will be sought.
from whom additional information will be sought.
(e)
The distributor visits the business sites of the short-listed underwriters to look for
evidence of the quality of services such as claims handling or account servicing.
evidence of the quality of services such as claims handling or account servicing.
(f)
The distributor makes a final decision as to which underwriter will be awarded the
contract.
14. An underwriter told us that, during the tender process, distributors usually make
contract.
14. An underwriter told us that, during the tender process, distributors usually make
available the following information to underwriters submitting tenders:
(a)
depersonalized portfolio information relating to borrowers with PPI products
(including age, gender, occupation, claims performance and the existing policy
terms and conditions);
(including age, gender, occupation, claims performance and the existing policy
terms and conditions);
(b)
summary level information on past sales volumes; and
(c)
summary level information on future sales.
Underwriters use this information to determine the price of the PPI and the commercial
terms to be offered to the distributor.
15. Parties told us that distributors sometimes sought bids from various underwriters to
Underwriters use this information to determine the price of the PPI and the commercial
terms to be offered to the distributor.
15. Parties told us that distributors sometimes sought bids from various underwriters to
benchmark their existing arrangements for the provision of PPI.
16. We were told that the starting point for determining the price of PPI to be offered to
the distributor was determining the basic PPI price. The underwriter determines this
price based on an evaluation of the risk associated with the product (ie life, accident
and sickness, and involuntary unemployment insurances, or some combination
thereof). The basic price on the non-life insurance element of PPI is based on
assumptions about the claim frequency and claim severity (ie average duration of
claims). These assumptions are based on portfolio information (see paragraph
14
the distributor was determining the basic PPI price. The underwriter determines this
price based on an evaluation of the risk associated with the product (ie life, accident
and sickness, and involuntary unemployment insurances, or some combination
thereof). The basic price on the non-life insurance element of PPI is based on
assumptions about the claim frequency and claim severity (ie average duration of
claims). These assumptions are based on portfolio information (see paragraph
14
14(a)), when that is made available by the distributor, or on the underwriter’s
analysis and experience of these indicators’ performance in other similar portfolios
that the underwriter underwrites. The pricing of life insurance tends to be heavily
influenced by the official UK mortality tables published by the Government Actuary’s
Department.
17. Once the basic price has been determined, the underwriter adjusts it for specific
variations of the cover being offered, such as waiting periods, exclusions and
customers’ age profile, to arrive at the ‘risk price’ for each component of the PPI
products it is bidding to underwrite. Data on sales plans (see paragraph 1414(b) and
1414(c)) is then combined with the underwriter’s risk price to project the underwriter’s
estimated profit or loss from the contract. On the basis of these estimates, the
underwriter can then determine the commercial terms (eg percentage of profit share,
analysis and experience of these indicators’ performance in other similar portfolios
that the underwriter underwrites. The pricing of life insurance tends to be heavily
influenced by the official UK mortality tables published by the Government Actuary’s
Department.
17. Once the basic price has been determined, the underwriter adjusts it for specific
variations of the cover being offered, such as waiting periods, exclusions and
customers’ age profile, to arrive at the ‘risk price’ for each component of the PPI
products it is bidding to underwrite. Data on sales plans (see paragraph 1414(b) and
1414(c)) is then combined with the underwriter’s risk price to project the underwriter’s
estimated profit or loss from the contract. On the basis of these estimates, the
underwriter can then determine the commercial terms (eg percentage of profit share,
level of service) that can be offered to the prospective distributor.
18. Distributors told us that, in setting the price of PPI, they benchmarked their product to
the products offered by their competitors. For example, HBOS said that it sought to
offer products whose quality and pricing was competitive relative to its mainstream
competitors, and in setting the price of PPI it considered customer feedback and the
position of its products in best-buy tables or lists on price comparison websites (such
as moneysupermarket.com). Northern Rock also told us that, when it offered personal
loans, it priced holistically across its unsecured loans and PPI products, and in
pricing the PPI products and the underlying credit products it sought to be in—or
close to the top of—best-buy tables or lists on price comparison websites.the products offered by their competitors. For example, HBOS said that it sought to
offer products whose quality and pricing was competitive relative to its mainstream
competitors, and in setting the price of PPI it considered customer feedback and the
position of its products in best-buy tables or lists on price comparison websites (such
as moneysupermarket.com). Northern Rock also told us that, when it offered personal
loans, it priced holistically across its unsecured loans and PPI products, and in
pricing the PPI products and the underlying credit products it sought to be in—or
Contract terms and length of contracts
19. The contracts between underwriters and distributors for the provision of PPI services
are negotiated on an individual basis and set out the type and level of services to be
provided, the financial arrangements, and the rights of the parties to make or request
changes to parts of the contract.
20. Contracts tend to have an initial fixed period after which the contract continues until it
is terminated, normally by the distributor giving notice to the underwriter. The length are negotiated on an individual basis and set out the type and level of services to be
provided, the financial arrangements, and the rights of the parties to make or request
changes to parts of the contract.
20. Contracts tend to have an initial fixed period after which the contract continues until it
of the initial fixed period varies between one and five years. Notice periods for
terminating a contract by either party tend to be between one and six months.21. Typically, the underwriter has exclusivity rights for the provision of the PPI product
provided by the distributor in connection with each lending product (eg credit card,
mortgage) except in the IFA/broker market. The distributor owns the customer data
and the underwriter, in the majority of cases, is not permitted to use this data for
marketing or promotional services.
22. Contracts set out the rights of the parties to set the premium paid by customers. In
most cases the customer premium is set by the distributor. However, some contracts
[
provided by the distributor in connection with each lending product (eg credit card,
mortgage) except in the IFA/broker market. The distributor owns the customer data
and the underwriter, in the majority of cases, is not permitted to use this data for
marketing or promotional services.
22. Contracts set out the rights of the parties to set the premium paid by customers. In
most cases the customer premium is set by the distributor. However, some contracts
[
��] state that the level of the premium paid by customers should be agreed between
the underwriter and the distributor.
23. Many contracts have provisions regulating the transfer of the PPI policies to the new
the underwriter and the distributor.
23. Many contracts have provisions regulating the transfer of the PPI policies to the new
underwriter when the contract with the incumbent underwriter terminates.
