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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 K. Ashton

    (Centre for Competition Policy and Norwich Business School, University of East Anglia)

  • Robert S. Hudson

    (Newcastle University Business School Newcastle University)

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.

Suggested Citation

  • John K. Ashton & Robert S. Hudson, 2009. "Should the joint provision of credit insurance with unsecured lending be prohibited? An examination of the UK payment protection insurance market," Working Paper series, University of East Anglia, Centre for Competition Policy (CCP) 2009-08, Centre for Competition Policy, University of East Anglia, Norwich, UK..
    • Handle: RePEc:uea:ueaccp:2009_08
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    References listed on IDEAS

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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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