The days of excessive charges for credit life insurance and poor marketing practices are coming to an end. The final credit life insurance regulations, which were published in the Government Gazette last week, cap the cost of this type of cover and provide for the protection of consumers.
Credit life insurance, which covers your debts in the event of your death, disability or loss of income, is a highly profitable business. Consumers often aren’t even aware that they have the product, because it tends to be bundled with the entire credit offering.
Lack of awareness of the cover explains in part the low average claims ratio (the value of claims paid out relative to premiums received from policyholders) of about 20 percent. A low claims ratio is indicative of a low claims rate and/or a high rejection rate.
The regulations, which were published by the Minister of Trade and Industry in consultation with the Ministry of Finance, have been many years in the making. In 2007, a panel of enquiry chaired by retired judge and former long-term insurance ombudsman Judge Peet Nienaber was set up to investigate abuses in the market.
And in July 2014, National Treasury published a technical report on the consumer credit market, making 16 recommendations relating to regulating the sector.
Dr Reshma Sheoraj, the director of insurance at Treasury, says Treasury supports the regulations and will release “a road map” setting out a series of market conduct measures, which will complement the credit insurance price caps to protect consumers better.
Sheoraj says corresponding requirements for insurers to cap the cost of credit insurance in line with the regulations have already been introduced through amendments to insurance regulations and the Policyholder Protection Rules, published by Treasury in December for comment.
Personal Finance unpacks what you need to know about the new regulations, which come into effect on August 9 and will affect credit agreements entered into on or after that date.
1. Price of cover is capped
The regulations place a limit on how much you can be charged for credit life insurance, depending on the type of credit agreement.
For all credit agreements, except home loans and affordable-housing mortgage agreements, the most you can be charged for credit life insurance is R4.50 per R1 000 of cover. (The Lewis Group has been known to charge R8.75 per R1 000 of cover.) The cap means that, on a loan of R8 000 (which is the maximum that a microlender can lend you), you can’t be charged more than R36 a month for credit insurance if you’re charged a level premium.
If you’re charged a premium on a reducing-balance basis, your premium will start higher and decrease as your loan amount reduces.
The regulations provide for the charging of either a level premium or a reducing-balance premium.
For mortgage agreements and affordable-housing mortgage agreements, the maximum prescribed cost per month for credit life insurance is R2 per R1 000 of cover.
2. You get what you pay for
The regulations state that if you’re not employed when you enter into the contract, you can’t be charged for retrenchment cover. This is good protection for all borrowers, but particularly for social-grant recipients and pensioners, who have been charged for benefits for which they could never claim, such as retrenchment cover.
In 2015, the Lewis Group was taken to the National Consumer Tribunal for selling unemployment insurance to borrowers who were pensioners and self-employed and thus could not claim the benefit.
Lewis was also selling cover for occupational disability to pensioners. This type of cover pays out only if your disability results in your not being able to continue with your occupation.
3. Minimum benefits apply
The regulations state that credit life insurance cover must provide for the settlement of your total obligation under the credit agreement in the event of your death or permanent disability.
In the event of your temporary disability, the cover must pay all of your obligations under the agreement that become payable for 12 months, or during the remaining repayment period, or until you are no longer disabled, whichever period is shorter.
In the event of your being unemployed or unable to earn an income, other than as a result of permanent or temporary disability, all your obligations under the agreement become payable for 12 months, or during the remaining repayment period, or until you find employment or are able to earn an income, whichever period is shorter.
4. Exclusions and limitations
The regulations state that credit life insurance may exclude or limit cover in relation to various covered events only in the circumstances set out in the regulations.
Death and disability claims can be excluded or limited if you die or are disabled as a result of your abusing alcohol, drugs or narcotics; wilful self-inflicted injury or suicide; active participation in war, war-like operations, civil war, civil commotion or uprisings; participation in criminal activities; participation in hazardous activities such as mountain climbing, bungee jumping and speed racing; and the use of nuclear, biological or chemical weapons.
In the event of unemployment or your inability to earn an income (other than because of disability), your cover can be limited or excluded if you became unemployed due to retrenchment or termination of employment within the first three months after the commencement of cover, where the term of the credit is more than six months.
If you are lawfully dismissed, or dismissed as a result of wilful misconduct or wilful dereliction of duty, cover may be limited or exclusions may apply.
Exclusions may also apply if you retire, resign, take part in an unprotected strike, or take voluntary retrenchment, or voluntarily forfeit your income.
If you are retrenched and were aware of it during the three months preceding the date on which the policy commenced, cover may be excluded or limited.
5. Pre-existing conditions may apply
If you die or become disabled, your policy may exclude or limit the cover if your death or disability is a result of any pre-existing condition that you were aware of in the 12 months preceding commencement of the cover.
But the regulations state that a pre-existing condition may be excluded only if you are clearly informed of the specific exclusion when you take out the policy.
WHAT CREDIT PROVIDERS CAN'T DO
If you are currently paying less than maximum prescribed amount for credit life, your credit provider cannot suddenly start charging the maximum. The regulations state that a credit provider that increases its credit life insurance premiums to the maximum must, at the request of the National Credit Regulator, demonstrate that the cost of the insurance is determined by the actual risk and liabilities associated with the credit agreement.
YOU HAVE THE RIGHT TO BE PROPERLY INFORMED
The exclusions and limitations that apply to a credit life insurance policy must be explained to you on the date on which the credit agreement is entered into “and communicated to the consumer at regular intervals thereafter”, the regulations state.
YOU CAN SWITCH INSURERS AT ANY TIME
If you are paying more than the maximum prescribed amount, there is nothing stopping you from switching to a cheaper insurer. This is one of your existing rights under the National Credit Act. The credit life regulations say that you may exercise your right to substitute a credit life policy at any time after the credit agreement is entered into and the credit provider must accept such substitution provided that the new policy offers “at least” the benefits referred to in the regulations.