Peter Jackson column

Sep 22 2006 By Peter Jackson, The Journal

A mortgage broker has achieved the dubious distinction of being the first to be fined by the FSA for mis-selling payment protection insurance, PPI.

Last year, the FSA found a third of the firms it surveyed were mis-selling these types of policies, which are designed to allow people to continue to repay their mortgages, or service other debts, if they become unemployed or fall ill.

These PPI policies are common and anyone who has signed any sort of credit agreement recently will have been invited - with varying degrees of pressure - to take one out.

They are not cheap and can add appreciably to repayments.

But bolt-on insurance such as PPI is not something limited to the financial services world.

For years, anyone buying electrical goods in the high street will have similarly been invited to take out extended warranties on their purchases - in effect insurance policies against breakdown, covering the cost of repair or replacement. When I briefly worked as a sales assistant for a high street electrical retailer I sold a lot of these policies and was vigorously encouraged by my employer to do so, earning commission on every policy sold.

Competition means low margins on electrical goods and these margins can be dramatically increased for the retailers by the further sale of a warranty on behalf of an insurance company - a sale, which, for the retailer, carries hardly any further cost.

But are they such a good deal for the consumer? Consider this - the cost of five-year extended warranties on 11 domestic electrical goods - such as cooker, fridge-freezer, washing machine, TV and so on - in an average home - will come to about £1,000.

How unlucky would you have to be to spend £1,000 on repairs on 11 such items in five years?

A recent OFT survey found the average washing machine repair to be £45 to £65. So if you pay £150 for a five-year warranty, you are only in pocket if it breaks down about four times in years two to five.

Incidentally, a Which? survey found that 81% of washing machines don't break down at all in the first six years.

Insurance only buys peace of mind if you don't feel you've been had.