Assurers dodge consumer laws to sell funeral cover
South Africa’s main life assurance companies are selling funeral assurance using structures designed to side-step consumer protection laws.
For many years, the funeral assurance market has been one of the biggest arenas for abuses by life companies, administrators and salespeople. As a result, there has been a steady increase in consumer protection regulation.
The Financial Services Board (FSB) is investigating the structures. Jonathan Dixon, FSB deputy chief executive in charge of insurance, says the FSB is speaking to the life industry about the structures.
“We are concerned,” Dixon says, particularly because low-income consumers, most of whom are not financially sophisticated, are the main target market for companies that sell funeral assurance.
The structures work as follows:
* A life assurer sells a single funeral assurance policy to a funeral parlour, burial society (often established by a funeral parlour) or the administrator of a funeral policy in the name of the funeral parlour, burial society or administrator.
* These entities sign up consumers as “members” of the policy.
* The life company sets the premiums paid by the funeral parlour, burial society or administrator based on the number of “members” and their average age.
* The funeral parlour, burial society or administrator can decide what to charge the “members” to belong to the policy.
* They can decide what share of the benefits to pay the “member” from any benefit paid by the life assurance company.
If the funeral parlour, burial society or administrator fails to pay out or provide the funeral benefits, the “members” can take action only in terms of the Consumer Protection Act. The “members” lose all the rights conferred on them under a number of Acts and regulations, which include:
* The Long Term Insurance Act;
* The Policyholder Protection Rules of the Long Term Insurance Act (see “Membership structures not part of protection rules”, below); and
* The Financial Advisory and Intermediary Services (FAIS) Act, which sets requirements for selling and advising on financial products. Funeral parlours, burial societies and administrators do not have to register under the FAIS Act, which means the “members” do not have the right to complain to the financial advice ombud.
Normally, funeral policies, which are legally termed “assistance business”, are sold on an individual basis or under a group scheme, where each consumer is an indivi-dual policyholder but undergoes no underwriting, such a medical assessment.
An “assistance policy” is defined in the Long Term Insurance Act as one where neither the benefits nor the premium exceed R18 000.
There is nothing in law that provides for a “membership” structure where a single policy is issued in the name of a body that sells on funeral benefits; this is simply a loophole of which the life assurance industry is taking advantage.
Sanlam admits that, “in our view, and the view of our legal advisers, the structure where the funeral parlour is the policyholder falls outside the ambit of Part VII of the Policyholder Protection Rules, because it does not meet all the requirements of the definition of ‘assistance group scheme’ as set out therein”.
Anne Livingstone, chief executive of Sanlam Sky Solutions, says a funeral parlour that has been issued with a policy in its name will offer “members” various funeral service options relating to the choice of coffin and hearse and the type of catering.
The service options and the related membership fees are agreed between the funeral parlour and its “members” and are not regarded as an insurance transaction/premium but as a monthly membership contribution to the funeral parlour to procure the burial and other ser-vices, Livingstone says.
MEMBERSHIP STRUCTURES NOT PART OF PROTECTION RULES
The Policyholder Protection Rules (PPR) do not make any allowance for a life assurance company to sell a funeral policy (assistance business) to another party, such as a funeral parlour, that allows consumers to become contributing “members” of the policy.
Life assurance companies are attempting to pass off as group business the practice of selling a single policy to a funeral parlour.
But the PPR define an “assistance business group scheme” as the provision of policy benefits where:
* Individual persons are the policyholders;
* There is no individual underwriting (such as a medical assessment);
* The individuals whose lives are insured under the group scheme directly or indirectly pay the premiums to the life assurer;
* The policy may be cancelled by either the policyholder or the assurer; and
* The policy provides term cover only – that is, there is no investment value.
The PPR also state that “group” means two or more people who, on the basis of group underwriting, have entered into a policy with an assurance company through an administrator (such as a funeral parlour) that has been given a mandate by the life assurer to facilitate its policies.
An “administrator” means a person or an entity that has a written mandate from an assurer to do administrative work in respect of a specific assistance business group scheme and that is licensed as a financial services provider in terms of, or who is a representative as contemplated in, the Financial Advisory and Intermediary Services Act.
A life assurance company’s agreement with the administrator of a group policy must include the following:
* The premium rates that will be charged by the assurer, including the commission payable to an intermediary.
* Any fees that will be added by any other party.
* If the administrator collects the premiums and pays them over to the life assurance company, when the premiums will be paid to the assurer, the assurer’s right to audit the administrator’s books, and for the administrator to provide the assurer with the names and identity numbers of the policyholders and the names of the beneficiaries.
* If the assurer authorises the administrator to pay out claims to policyholders, the circumstances under which it may do so.
LIFE COMPANIES WON’T ANSWER THE KEY QUESTIONS
It seems that the major life companies see nothing wrong with side-stepping consumer protection legislation by selling funeral policies in the name of a funeral parlour, burial society or funeral benefits administrator.
None of the life assurance companies can explain why Parliament would enact legislation to protect consumers only so that it can be side-stepped and nullified. None of the life companies wanted to provide Personal Finance with details of the extent of their funeral assurance or membership structure business, or simply ignored our questions.
The responses that Personal Finance did receive from the assurers include the following:
Sanlam, which provided the most comprehensive response, says it believes that communities ensure that funeral parlours behave ethically.
Anne Livingstone, chief executive of Sanlam Sky Solutions, which services the entry-level market, says the role of the funeral parlour and its relationship with its members are unique and deeply embedded in African culture and the values of ubuntu.
“There are typically deep levels of trust between the members of the community and the particular funeral parlour. This relationship has many advantages, including reduced fraud and non-performance on the part of the funeral parlour.
“We believe that insurers contribute positively to the financial stability of the parlours with which they partner, which secures appropriate products and services to the end client,” she says.
Livingstone says the members have a claim against the funeral parlour to be provided with the agreed burial services. As a result of the nature of the relationship between the members and the funeral parlour, and the fact that the parlour is part of the community, the community in general will retaliate against a parlour that does not make good on its promises.
Livingstone admits that Sanlam does not police the provision of benefits, but “we endeavour to do business with reputable funeral parlours, and take complaints extremely seriously. We will not hesitate to terminate relationships with parlours which are found to be behaving unethically.”
Old Mutual’s executive head of the foundation market, Thembisa Mapukata, says that when selling policies to burial societies, Old Mutual:
* Insists that money paid by, or due to, members is held in a trust account;
* Undertakes all communication to members that concerns premiums and the payment of claims;
* Advises members of the non-payment of premiums, as well as claims paid or declined; and
* Issues membership certificates to members of the burial society. These certificates state the premium, the cover, when the benefits will and will not be paid, the names of all the lives assured and how to lodge a complaint, including the contact information of the relevant regulatory bodies.
Metropolitan, under whose brand MMI (Momentum and Metropolitan) sells funeral assurance policies, refused to answer the questions submitted by Personal Finance.
Belinda Faulkner, Metropolitan brand executive, says it would be premature to answer the questions, because “we are currently in the process of engaging with the FSB [Financial Services Board] in regard to this issue in the context of the binder regulations. We will be happy to provide you with the answers to your questions post the outcome of our discussions with the FSB.”
Note: the binder regulations cover the white-labelling of a life assurance product and have nothing to do with funeral assurance sold through a membership structure.
A few years ago, Metropolitan’s refusal to take responsibility for its white-label products led to a change in legislation and a toughening up of the binder regulations.
Liberty Life admits that it uses the membership structure but claims it treats the members as policyholders.
Graham Thomas, head of risk product solutions for Liberty Corporate, says the policies are sold primarily under its Capital Alliance Life Group Risk and Liberty Active Limited licences.
Thomas says Liberty seeks to ensure that, where the policy is issued to an institution (whether a funeral parlour or an independent administrator), “the family of the deceased is protected, because the costs associated with the funeral are paid for. So, although we issued the policy to the institution, we treat the underlying members as individual policyholders …
“Our view on these structures is that they create a mechanism for reaching policyholders who otherwise would not normally be reached by the insurance sector in terms of individual or retail policies. Having said that, it is important that the compliance and governance issues around these policies are applied properly to protect the individual members and their families.”