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The PPI market is fatally flawed and will only be saved by drastic action on the part of insurers and distributors, according to a damning report from Defaqto into payment protection insurance.

The report which comes months after Citizens Advise launched a super complaint into the product, which highlighted that mis-selling of the product had been rife and companies and distributors had been selling policies to customers who were ineligible to claim, and at prices which were unreasonable and unfair.

It said this had been particularly the case in the unsecured personal loan market, where high PPI prices had been used to sustain competition in the loans themselves.

In order to improve the situation, the report advocated the abolition of single premium PPI policies, and learn to dissociate the loan decision making process from the existence or otherwise of payment protection.

Clive Waller, senior partner for CWC, welcomed the report and pointed the finger at levels of commission earned on PPI. He said: "Commission is up to about 80 per cent commonly- it is ridiculously huge- bearing in mind it is not a one off commission and the single premium product is really, really dirty."

He added: "The industry is worth about £5bn a year and research from Citizens Advice reckons about 85 per cent of claims are turned down and it is regularly sold to people who could not claim."

To overcome current problems, Mr Waller suggested revising commission levels and reviewing the sales process. He said: "You could have a better PPI if you take a lot of the commission out you would leave more money for paying claims, moreover you could have a better sales process which cuts out much of the mis-selling."

Peter Le Beau, managing director of Le Beau Visage, urged the industry to make progress on the matter. He said: "I really hope we are going to be seeing the industry do something dramatic, because I think it is not something the industry can be really proud of. It is horrendously bad value."

Outlining the issues with PPI, he said: "The problems are that people do not really understand it, and that they are so anxious to complete their other transaction that they do not necessarily fully understand what they are buying."

But he said aspects of the insurance could be incorporated into other products to their advantage: "One of the interesting things about PPI that does help is that it can save on unemployment insurance and we should add unemployment to income protection to make it more attractive, even if the unemployment is only for something like a year."