How Much Are Insurers Ripping Us Off?

Wouldn't it be great if we knew exactly how much profit is built in to insurance policies? There's a chance that we soon will!

In Fine Times Are Here To Stay, I wrote about financial watchdog the Financial Services Authority (FSA) fining a number of firms for mis-selling products and treating their customers unfairly.

Earlier today, I spotted a comment which FSA chief executive John Tiner made in an announcement to the Insurance Institute of London. Mr Tiner mentioned that a detailed exploration of the issues around commission disclosure will be a priority for the FSA's Business Plan for 2007/08.

This set me thinking: wouldn't it be great if we could see the commissions generated by all of the insurance and investment products which we buy? At present, only investments and certain long-term protection products (such as life insurance, income protection and critical illness insurance) are obliged to reveal the commissions paid to advisers and introducers in the key documents given to the public.

What I'd like to see is full commission disclosure across the board, to include all general insurance policies, such as car, home (buildings and contents) and travel insurance.

Although the market for home and motor insurance is very competitive, the same cannot be said for travel insurance. Tour operators and travel agents used to have a stranglehold on this market, and they still sell up to half of all travel insurance policies. Alas, as I warned in Don't Trust That Travel Agent, premiums for these policies can be five -- even ten -- times higher than those charged by Best Buy policies!

This clearly indicates that the commissions paid by insurers to travel agents and tour operators are extraordinarily excessive, and urgently need trimming back. Of course, it would be great if rule changes forced the sellers of travel insurance and other rip-off policies to reveal exactly how much they pay in commission to their agents, brokers and introducers -- right down to the last penny.

In particular, I'd like to see full commission disclosure on all payment protection insurance (PPI), because these stand out as the worst-value policies ever sold. As I revealed in this article, premiums for PPI could be as high as £6 billion this year. However, the banks and insurers who flog PPI pocket about £5 billion of this sum as pure profit, leaving just £1 billion to be returned to claimants who are sick, injured or unemployed.

In other words, the typical commission/profit for selling PPI is over 80%, or four-fifths of the entire premium. Compare this to the commission rates for, say, motor insurance (typically 12% to 15%; sometimes as low as 7.5%) and home insurance (around 25%) and you start to realise how big the PPI problem is.

Frankly, the widespread over-charging for, and mis-selling of, PPI is a national scandal on a breathtaking scale, and (as an ex-industry insider) I'm determined to see it stopped. Although the FSA and the Office of Fair Trading are both investigating the PPI market at the moment, our problems could be solved in one fell swoop. Imagine if you saw this statement on your loan or other credit agreement:

	£	Notes
Loan advance	5,000
Interest on advance	500
PPI premium	800	(made up of a net premium of £200 plus commission of £600)
Interest on PPI	80
Total	6,380

This plainly and transparently shows that you are paying £800 plus interest for cover which is really worth £200, with the lender pocketing £600 of your hard-earned cash. How many of us would happily sign on the line if these outrageous commissions were brought to light in this way?

Finally, I doubt there's much chance that the FSA will go down this route this year or next. Thus, my advice is always ask how much of your insurance premiums are gobbled up by commissions. If no-one can give you a straight answer in writing, then don't buy the protection on offer -- keep looking for a Best Buy policy instead. It's as simple as that!

More: Get quality quotes for car, home, life and travel insurance today!