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Should the joint provision of credit insurance with unsecured lending be prohibited? An examination of the UK payment protection insurance market

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  • John Ashton

    (Bangor Business School)

  • Robert S. Hudson

    (Newcastle University Business School)

Abstract

This study examines whether the recent UK regulatory decision to introduce a blanket ban on the joint provision of consumer lending and credit insurance was justified. This case has wide regulatory implications following international concerns that the sale of credit insurance has been detrimental to customers due to overpriced credit insurance and a possible cross subsidy from credit insurance to unsecured lending. To explore this issue a theoretical model is developed considering why a cross-subsidy from credit insurance to unsecured loans would develop in these markets and whether the prohibition of joint sales would limit this practice. The presence of cross-subsidies is empirically examined indicating that while many banks do cross-subsidise unsecured lending through high credit insurance costs this behaviour is not a universal practice across all suppliers and at all times. This result is examined for all sample banks and a range of sub-samples to control for possible influences on credit insurance costs.

Suggested Citation

  • John Ashton & Robert S. Hudson, 2011. "Should the joint provision of credit insurance with unsecured lending be prohibited? An examination of the UK payment protection insurance market," Working Papers 11008, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    • Handle: RePEc:bng:wpaper:11008
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    Cited by:

    1. Ranyard, Rob & McHugh, Sandie, 2012. "Defusing the risk of borrowing: The psychology of payment protection insurance decisions," Journal of Economic Psychology, Elsevier, vol. 33(4), pages 738-748.

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    More about this item

    Keywords

    Interest rate setting; Universal Banking; Insurance premium setting; credit insurance; add-on goods; joint pricing.;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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