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Credit Life Assurance
Thursday, May 1, 2008
Is it worth it? Yes, but……….

The Life Offices’ Association (LOA) and the South African Insurance Association (SAIA) welcome the release of the Consumer Credit Insurance Enquiry Report by the independent panel of enquiry jointly appointed by the two associations in July last year to identify problem areas in the consumer credit insurance market.

The panel of enquiry, chaired by Judge Peet Nienaber, retired Ombudsman for Long-term Insurance, was appointed following accusations that some insurance companies active in this market were engaging in ‘undesirable practices’.
Gerhard Joubert, CE of the LOA, describes the findings and recommendations contained in the report as far reaching in that they are likely to impact considerably on how the credit life insurance industry functions in future, if accepted and implemented.
The members of the panel were Desmond Smith (director of companies and chairman of the LOA as from the end of last year), Ronnie Napier (former SAIA Chairman and senior partner of law firm Webber Wentzel), Louis Wessels, (former Head Legal and Policy at the FSB) and Moses Moeletsi (Chairman of the Board of the Ombudsman for Short-term Insurance and a member of the Long-term Ombudsman’s Council).
The panel of enquiry was guided by the following terms of reference:
• Improper and inappropriate marketing and distribution practises.
• The payment of excessive commissions or other improper fees or incentives.
• The fairness of standard terms and conditions.
• The adequacy of the overall value provided to consumers.
• Pre- and post-sale disclosures and information provided to consumers.
• Promoting greater consumer understanding of credit life products, their benefits and the consumer’s rights.

The panel requested written submissions from interested parties, including members of the public, and listened to over 20 hours of evidence on practices in the credit insurance market and their impact on the consumer. Evidence was given by life insurers, short-term insurers, credit providers, industry analysts, a member of the public, representatives of the LOA and SAIA, and the Ombudsmen for Long- and Short-term Insurance.
The panel’s final report has been submitted to National Treasury, the FSB, the Parliamentary Portfolio Committee on Finance and the National Credit Regulator (NCR) as well as to the boards of the LOA and the SAIA.
One practice identified in its final report concerned the payment to motor dealerships and furniture retailers of remuneration for outsourcing administrative work that, on the panel’s interpretation of the legislation, exceeded the permissible maximum.
However, the panel accepted that these structures were put in place on the basis of legal advice received and accordingly did not find it necessary to recommend that any action be taken against any insurers by the Life Offices’ Association (LOA) or the South African Insurance Association (SAIA), save that the matter be taken up with the FSB by the LOA and SAIA and the individual insurers concerned.
The panel noted in its report that both Insurance Acts are unclear on the point and in need of review and revision. The maximum commission provisions in the two Acts result in anomalies when applied to non-typical cover such as consumer credit insurance. “From the submissions received and the evidence given during several days of public hearings it became manifest that there was a lack of clarity and consistency in the manner in which individual insurers understood and applied the commission regulations issued in terms of the two Insurance Acts.”
As for other commission contraventions, the panel found that these had been corrected, especially since the spotlight fell on these practices last year.
Judge Peet Nienaber says while some of the insurers who made submission to the panel are mentioned in the report, the aim was not to name and shame, but rather to analyse and explain some of the practices in the consumer credit insurance industry as disclosed in written and oral submissions received.
He says constraints encountered by the panel included the fact that it was dependent on the voluntary co-operation by LOA and SAIA member companies and that it had no powers to investigate and compel companies, especially non-members, to give evidence.
“Nevertheless, the panel was gratified by the number of responses it received from both life insurers and short-term insurers. We were impressed with the co-operation received and the frankness and quality with which participants prepared and presented their submissions.”

Types of credit life

There are different types of consumer credit insurance products available to the consumer:
Credit life. Credit life insurance can be issued under a long-term or short-term policy and is designed to cover the outstanding balance of the money owed to the credit provider by the person whose life is insured should this person die, become disabled, develop a critical illness or become retrenched. Credit life insurance is available for the following credit transactions: personal loans, overdraft facilities, student loans, credit card facilities, mortgage bonds and asset financing.
Extended warranty. An extended warranty is marketed by motor dealerships or retailers on behalf of short-term insurers. This type of cover is designed to indemnify consumers against the risk of mechanical breakdown of the insured vehicles or goods like electronic equipment purchased. It normally comes into effect on the expiry of the manufacturer’s warranty.
Top-up cover. Top-up or shortfall cover is a short-term policy and is designed to cover the shortfall between the amount still owed and the insurance payout in the event of loss or damage to the vehicle, furniture or appliance.
Minor chips cover. Minor chips and dents cover is a short-term policy issued under a short-term license and provides cover for minor damage to the bodywork of a vehicle, which usually falls within the excess of a comprehensive motor policy.
Asset insurance. Asset insurance is defined by the National Credit Act as part of the term “credit insurance” as “covering loss of or damage to property” and must therefore be considered a type of consumer credit insurance cover.

The report discusses the question whether these are all true insurance products.
The panel, in its final report, concluded that there can be little doubt that consumer credit insurance is a key and integral element of the credit provision industry since there are many risks in a loan transaction for both the provider and the recipient of the credit, which can only be mitigated through the use of insurance.
“Without such risk mitigation access to credit would simply not be feasible. To this one may add the relative ease with which credit life insurance can be arranged, without medical underwriting or undue delay.”
The report lists the following as some of the reasons why consumer credit insurance is valuable to consumers:
• It enables many consumers to obtain credit which might not otherwise be available to them.
• It settles the remainder of the debt in the event of the consumer’s death, critical illness, permanent or temporary disability, or retrenchment. In these events it also ensures that consumers or their families do not have to give up on assets purchased which would otherwise be repossessed.
• It ensures that the consumer does not remain liable for the debt incurred in purchasing the asset even if the asset has been lost, destroyed or damaged beyond repair.
• It provides cover against the sudden and unforeseen mechanical breakdown of vehicles.
• It is tailored to consumers’ specific needs and benefit options.
• It is convenient, easy to obtain and to understand, and automatically accepted and free of medical underwriting.
• It is affordable.

The report lists the benefits for credit providers as being security for a debt which could turn into a bad debt. In addition, the consumer credit insurance business is a profitable one for insurers, credit providers and intermediaries.
Judge Nienaber says despite all these benefits, consumer credit insurance in South Africa has a bad name and is seen by many as a scam or a rip-off. This impression was confirmed by responses to the panel by consumer representatives and by comments in the media.
He says this poor reputation is due to a number of factors:
• The number of “add-ons” to a credit transaction of which consumer credit insurance forms a major part and which are often only disclosed, if at all, post-sale. Often these are disproportionate to the basic product price and to the risk profiles of consumers.
• The significant profit margins which are generally believed to be recovered at the ultimate expense of the consumer.
• The perceived low claims ratio on some of these products compared to insurance products generally.
• The technical defences on which some insurers sometimes rely to escape liability, and which only become apparent at claims stage.

He says not all of these perceptions are necessarily valid and it is always necessary to distinguish between different insurers and different insurance products.
“The fact remains that consumer credit insurance has huge value to both the provider and the receiver of credit. In effect it creates a platform without which access to credit would be limited – restricted largely to those who have a lesser need for credit. A viable, sustainable consumer credit insurance underpin is therefore essential for a sustainable credit industry which in itself feeds economic growth.”
In its report, the panel concludes that consumer credit insurance fulfils a definite insurance need for consumers. But at the same time there are potential deficiencies in the system lending themselves to the exploitation of consumers by practitioners more intent on profit than service.
“Such deficiencies, if not neutralised, will substantially detract from the value proposition of consumer credit insurance. Therefore, what is needed is not an outright and self-righteous condemnation of consumer credit insurance, but the elimination of its potential abuses.”
He says the panel has made recommendations relating to various undesirable practices and potential abuses. If these are left unattended by the industry itself and by the various regulators concerned with it, consumer credit insurance will continue to add to its current unsavoury reputation, and operate in practice to the ultimate detriment of at least some consumers.
He says the short answer to whether consumer credit insurance in South Africa has a sustainable value proposition, is accordingly “yes, but”.
According to Nienaber it is, however, also important that consumers realise they are not passive parties to consumer credit insurance policies. “The consumer has a duty to be vigilant as to how the policy affects his or her interests. This includes reading the contract. While consumers must be placed in the position where they can make informed decisions, they must then take responsibility for these decisions.”

The main recommendations

Intermediary remuneration. The root of the problem is the attempt in the commission regulations to control the payment for the outsourcing of administrative work.
A key recommendation is that the servicing fee should be deregulated completely. This will not be to the detriment of consumers since market forces will ultimately determine the level of the premiums and the amount of remuneration payable to intermediaries.
As for the introduction fee some members of the panel believe that this should also be deregulated in its entirety. Others believe that the introduction fee should continue to be regulated at the upper income end of the market as the only effective measure to combat improper incentive payments.
At the lower income end of the market the panel supports the view expressed in National Treasury’s recently issued discussion paper on Micro-Insurance, namely that there should be no commission capping at all.
Any deregulation of intermediary remuneration must be accompanied by full and proper disclosure.
If commission regulations are not scrapped, the present regulations should be thoroughly revised and commission caps under the Long-term Insurance Act and the Short-term Insurance Act should be aligned.
Market conduct. During the hearings numerous manifestations of market misconduct were brought to the panel’s attention, with lack of proper disclosure being the main problem. In the panel’s view, the regulation of market conduct in South Africa compares favourably with similar forms of regulation elsewhere. The real problem is therefore not the regulation as such, but the monitoring and investigation of instances of non-compliance with the regulations.
Better disclosure. Disclosure is the cornerstone of consumer protection. Therefore there must be proper disclosure to consumers of the remuneration and any other payments to the third party, be it the intermediary, retailer, dealer or credit provider.
Consumer credit insurance is often sold as part of a package when a credit transaction is concluded. Unless consumers’ attention is specifically drawn to the credit insurance transaction, they may not be aware of its existence. The panel therefore recommends that the identity of the insurer be disclosed to the client together with the insurance premium as part of the breakdown of the installment payment. In addition consumers should be advised to inform their families of the existence of the cover and its importance.
Standardise terminology. The LOA and SAIA should look into standardising terminology used in consumer credit insurance documentation. In addition consumers must be alerted to exclusion clauses and other limitations in their credit insurance cover. The consequences of the non-payment of premiums must also be spelled out.
Health declaration. The importance and the consequences of the health declaration that is signed by consumers when applying for consumer credit insurance must be highlighted.
Better communication. Insurers should consider sending policyholders a welcome letter together with their policy document, highlighting important issues. These could also be sent out with every monthly statement as a constant reminder.
Obligations spelt out. Both the LOA and SAIA need to explore ways of highlighting in an effective way to consumers what is due by them in terms of payments and what is due to the consumer by way of benefits.
Standardised waiting periods and exclusion clauses. The panel believes that the standardisation of waiting periods and exclusion clauses should be explored by insurers as this would introduce greater certainty into the consumer credit insurance industry and pre-empt consumer exploitation.
Single premiums. Single premium payments were definitely a malpractice prevalent in the consumer credit insurance industry, but this has thankfully been outlawed by the National Credit Act.
Who controls the industry? Consumer credit insurance is different from other forms of insurance. It cannot be separated from credit. Its principal beneficiary is often not the consumer but the credit provider. Consumer credit insurance should accordingly be treated as a category separate and distinct from other forms of insurance.
Whoever controls credit should also control consumer credit insurance.
One of the main purposes of the National Credit Act (NCA) is to provide for the general regulation of consumer credit. This Act already contains a section that deals specifically with credit insurance with the aim of ensuring consumer protection.
The members of the panel believe that the National Credit Regulator (NCR) should assume control of market conduct of consumer credit insurance as well as of intermediary remuneration where it is regulated.
This will require appropriate amendments not only to the NCA itself but also to the Long- and Short-term Insurance Acts and the FAIS Act. The LOA and SAIA Codes may also require revision.
A key recommendation of the report is accordingly that the principal regulatory control of consumer credit insurance should rest with the NCR. The NCR has the manpower and the means at his disposal to exercise such control.
Consumer education and awareness. In the view of the panel adequate market regulation requires commitment and effort on the part of the regulator with the manpower to supervise the market on an on-going, hands-on basis by means of on-site visits and formal inspections and the authority to act decisively if instances of non-compliance are encountered.
The industry developing a distinct culture of compliance, individually and through its trade associations, thereby serving not only their own interests but also those of their customers.
As a result of the current socio-economic developments in South Africa, consumers are increasingly exposed to new and sophisticated financial products and services. Consumers must be educated to understand these products and to appreciate and enforce their rights. There is an urgent need for representative and strong consumer organisations. Consumer activism is an imperative for truly effective market regulation. A separate chapter in the report is devoted to consumer education and awareness.
Mr Joubert says the recommendations put forward by Judge Nienaber’s panel will be discussed by the relevant LOA Committees and proposals will then be made to the LOA Board for discussion at the end of May.
“Some of the recommendations, especially on intermediary remuneration, already form part of our discussions with National Treasury and the Financial Services Board (FSB) on changing the way that commission structures work to the benefit of consumers.”
Barry Scott, CE of the SAIA, says the association was pleased that the enquiry to a greater extent found compliance with the relevant legislation, and that where short-term insurers stood accused of non-compliance this was largely due to difficulties experienced with the interpretation of Section 48 of the Short-term Insurance Act.
“The enquiry recommended that no action be taken against insurers, since some of the irregularities regarding remuneration for outsourcing administrative work occurred because the Long-term and Short-term Insurance Acts are unclear and inconsistent on this point and in need of review and revision.”
He noted that the report also focused on the need for consumer education. “To this end the SAIA has developed, over the last four years, consumer education initiatives with its partners, the FSB and more recently the Life Offices’ Association and has to date spent more than R27-million on consumer education.
“The insurance industry as a whole was very concerned when allegations of non-compliance first surfaced last year. At the time our member companies active in the consumer credit insurance market pledged their full cooperation to help identify problem areas and eradicate undesirable practices with a view to improving consumer protection,” he says.
The report is some 300 pages long and consists of 15 chapters, covering various problematic aspects of consumer credit insurance in South Africa. Also included is a chapter about comparable problems encountered in the consumer credit insurance industries in the UK, Australia and the USA. The full report can be downloaded at www.loa.co.za or www.saia.co.za.

Pull quote: The National Credit Regulator should assume control of market conduct of consumer credit insurance as well as of intermediary remuneration where it is regulated.

Copyright © Insurance Times and Investments® Vol:21.4 1st May, 2008
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