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  • PPI Value Chain - Insurers/Underwriters

    PPI value chain.

    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.
    The participants in the PPI value chain and their activities
    2. The main participants in the product development, distribution and administration of
    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

    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:

    (a)
    underwriting;

    (b)
    claims management;

    (c)
    policy administration, which involves:
    (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.

    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

    (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 ([
    ��]). 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.
    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.
    6


    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.

    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.
    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.
    8


    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:
    (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.

    (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

    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.

    (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.

    (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

    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);

    (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

    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
    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 14
    14(b) and
    14
    14(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.

    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
    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
    [
    ��] 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

    underwriter when the contract with the incumbent underwriter terminates.


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