Should the Joint Provision of Credit Insurance with Unsecured Lending be Prohibited? An Examination of the UK Payment Protection Insurance Market

Should the Joint Provision of Credit Insurance with Unsecured Lending be Prohibited? An Examination of the UK Payment Protection Insurance Market

By Ashton, J.

Abstract: This paper examines the joint pricing of credit insurance and unsecured lending. This case has wider regulatory implications following concerns that the sale of credit insurance as a secondary or add-on product has resulted in uncompetitive pricing, limited product utility and possible misselling. To explore these concerns a theoretical model is developed in which banks set prices for customers who have varying decision making ability. The model predictions are tested empirically. It is concluded that banks crosssubsidise unsecured lending by setting high credit insurance premiums. The form of sales and profit maximising by banks is central to causing such a cross-subsidy to arise. This cross-subsidy is observed to decline over time and is far more pronounced for proprietary rather than mutually owed banks.