Banks and insurers have warned that proposed changes to payment protection insurance (PPI) could destroy the market, leaving thousands of people in debt should they lose their jobs.

According to the Association of British Insurers said proposals by the Competition Commission to reform the £5bn-plus PPI market could prompt companies to stop offering the cover.

The Association of British Insurers said: “We are very concerned that the Commission's proposed remedies could destroy this market, particularly while we are facing a period of economic uncertainty.”  

Echoing the sentiments, Angela Knight, chief executive of the British Bankers' Association, said: “If the recommendations are adopted it could leave customers exposed just as economic conditions are worsening.”

The comments came after the Commission released the findings of its 16-month investigation into PPI. The Commission said it was looking at ways to encourage consumers to shop around.

Among the number of changes proposed are, temporary price caps and making it compulsory for lenders to tell borrowers that cover can be bought from third-party providers.

In order to encourage consumers to consider switching to cheaper deals after taking out a policy, the Commission said it was considering forcing lenders to ask consumers to renew their policies annually.

In September 2005, the charity Citizens Advice made a complaint to the Office of Fair Trading, which referred the market to the competition watchdog last February.
But yesterday the Commission said that British consumers are being overcharged for Payment Protection Insurance by £1.4billion a year due to a lack of competition in the market.

The watchdog made the disclosure also revealed that the market for the insurance, which protects credit repayments if the holder is unable to work or loses their job, was failing to work competitively, leaving distributors able to charge higher prices.

According to the CC, the vast majority of the UK's 14million PPI policyholders were sold the cover at the same time as they took out a credit agreement and made a snap decision on whether to purchase it without considering its true cost.

But in a statement today, Mike Pullen, partner at law firm DLA Piper, said: “The Competition Commission should be looking at more transparency for the consumer before or at the point of sale. Other remedies such as temporary price caps are draconian and won't work.”

Most PPI policies are sold to protect consumers with personal loans, credit cards, mortgages and unsecured loans. The insurance is designed to cover repayments should the policyholder be made redundant or be unable to work because of sickness or an accident.

However, the high price of the cover, and the feeling among consumers that the terms of policies are misleading and do not pay out when they are expected to, has drawn criticism.