Payment protection insurers face a difficult time as an estimated 2m people become jobless

As the economic downturn continues to deepen and UK unemployment soars, payment protection insurers (PPI) face a challenging time, said Lane Clark & Peacock.

Estimates suggest 2m people could be out of work in the UK by Christmas.

Robert Murray, a general insurance partner at consulting actuaries Lane Clark & Peacock said: ‘Despite the apparently high premiums charged for PPI, insurers are still at risk of losing money in the current climate. This is because a large proportion of the premium is typically paid as a commission to the banks and retailers who bundle the insurance with their products.

‘It is important to maintain underwriting discipline in the face of increased moral hazard in the current economic climate. In recent weeks, there has been a significant increase in demand for PPI from those working in the banking sector. Cautious insurers not wishing to increase their exposure to moral hazards have restricted the sale of policies accordingly.’

‘In contrast to other personal insurance providers, PPI insurers have not had to develop recognisable and trusted brands as policies are often sold alongside a loan or credit agreement. With pricing and distribution channels likely to change following the recent FSA and Competition Commission investigations, the current economic gloom could provide an opportunity for insurers to establish a strong brand identity through direct marketing and improved internet access to products.’

‘With the global economic crisis we can expect creditor insurers across Europe and the USA to face similar issues.’