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

ESRC Centre for Competition Policy Working Paper No. 09-8

41 Pages Posted: 17 Oct 2009

See all articles by John Kevin Ashton

John Kevin Ashton

Bangor Business School; University of East Anglia (UEA)

Robert Hudson

Hull University Business School (HUBS)

Multiple version iconThere are 2 versions of this paper

Date Written: September 10, 2009

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.

Keywords: Credit, Insurance, Lending, pricing

Suggested Citation

Ashton, John Kevin and Hudson, Robert, Should the Joint Provision of Credit Insurance with Unsecured Lending Be Prohibited? An Examination of the UK Payment Protection Insurance Market (September 10, 2009). ESRC Centre for Competition Policy Working Paper No. 09-8, Available at SSRN: https://ssrn.com/abstract=1476220 or http://dx.doi.org/10.2139/ssrn.1476220

John Kevin Ashton (Contact Author)

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

University of East Anglia (UEA) ( email )

Norwich Research Park
Norwich, Norfolk NR4 7TJ
United Kingdom

Robert Hudson

Hull University Business School (HUBS) ( email )

Hull, HU6 7RX
United Kingdom

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
114
Abstract Views
719
rank
198,705
PlumX Metrics