When you, as a consumer, go in to bat in the insurance market, you need protection against any bouncers or beamers that may come your way. That's why the government has issued two sets of regulations that look after your interests when you buy a short-term or a long-term insurance policy. We report on how the policyholder protection rules can help you.
Since 1994, the government and its diverse regulators have enforced numerous laws and regulations aimed at protecting consumers against scam artists and the excesses of the wider financial services industry.
However, too often neither consumers nor financial services companies are aware of the protection that is accorded to consumers.
For example, Judge Brian Galgut, the Ombudsman for Long-term Insurance, recently had to write to the Life Offices' Association, the representative body of the life assurance industry, pointing out that some of its members were not adhering to the policyholder protection rules.
The policyholder protection rules, known in the industry as the PPRs, are regulations issued in terms of the Long-term and Short-term Insurance Acts. There are two sets of these rules. The set issued in terms of the Long-term Insurance Act essentially covers risk life assurance against death and disability, as well as investment assurance products, while the rules under the Short-term Insurance Act mainly govern insurance for your possessions.
Although the two sets of rules - which came into force in 2004 - are similar, they contain some significant variations because of the differences between the two types of insurance.
You can read both sets of rules in full by going to the website of the Financial Services Board (FSB), www.fsb.co.za. Select "Policyholder protection" from the "Document search" drop-down menu and click the search button.
The most significant things you need to know about the PPRs are:
1. Objections and applications
The PPRs are over and above the provisions of the Financial Advisory and Intermediary Services (FAIS) Act and its regulations. The FAIS Act requires that you are provided with appropriate financial advice and products.
Nothing in the PPRs can be used by an insurance company to sidestep the requirements of the Act.
The objective of the PPRs is to ensure that any long- or short-term insurance policy sold to you is "entered into, executed and enforced in accordance with sound insurance principles and practice in the interests of the parties (you and your insurance company) and in the public interest". In simple terms, this means that when you make a legitimate claim for a benefit, you will receive it and the insurance company will be there to pay it.
2. Rules for direct marketers
In the past much mis-selling and many scams have arisen from hard-sell direct marketing. The emphasis in the PPRs is to place a requirement on direct marketers to take due care at all times to provide you with honest, fair, diligent and skilful service.
To achieve this, direct marketers must:
- Tell you upfront who they are and what they are selling when they contact you. They cannot mislead you into believing they are, for example, undertaking a survey.
- Provide you with written information in plain language that is factually correct, adequate and appropriate, and is not misleading.
- Inform you about all the amounts, values, charges, fees and commissions or monetary obligations that are involved in the product.
- Inform you within 30 days of:
* The insurance company's contact details;
* The name, class or type of policy you have purchased, with a general explanation of the relevant principles of the contract, and the nature and extent of the benefits, including any minimum or guaranteed benefits;
* Any restrictions or penalties for early termination of the policy;
* Any special terms and conditions, including exclusions, waiting periods before a benefit will be paid and premium loadings;
* The costs, including commissions;
* Any investment amount you have agreed to pay;
* How to institute claims; and
* The details of the appropriate ombudsman to whom you can complain.
- Execute as soon as reasonably possible all your reasonable requests or instructions relating to a policy, and give your interests priority over those of the direct marketer.
- Keep in a safe place proper records of all communication with you, along with your transactions, for at least five years.
3. Intermediaries
Intermediaries (financial advisers) cannot of their own accord sell you the products of a financial services company. Insurance companies may sign agreements only with intermediaries who are licensed financial services providers or who are representatives of licensed financial services providers in terms of the FAIS Act.
This implies that an insurance company may agree to allow an intermediary to sell products only in the range for which the intermediary is licensed to do so. For example, if the intermediary is licensed to sell only funeral policies, the insurance company cannot allow that intermediary to sell investment products.
The agreements can be cancelled by either party and will lapse if the FSB cancels an intermediary's financial services provider licence.
4. Cooling-off periods and cancellation
In terms of the long-term insurance PPR, in the case of any product where you have not already been paid or claimed a benefit, you are entitled to cancel a contract within 30 days after you receive the policy summary or from the date on which it can be reasonably deemed that you received the policy.
Any premiums you have paid must be refunded to you, subject to the deduction of the cost of any risk cover (for example, for death and disability) actually enjoyed in the period between when you signed the insurance contract and its cancellation, and subject to any market loss, where the market value of the investment made decreased in the intervening period. If a policy cannot be cancelled, this must be pointed out to you when you sign the contract.
There are no cooling-off rules for short-term insurers. However, there are strict rules that prevent a short-term insurer from unilaterally cancelling a policy without giving you 30 days' notice.
A short-term insurer also cannot unilaterally cancel a debit order for a payment of your premium to, in effect, create a payment default to allow it to unilaterally cancel your policy.
Again, you must be given 30 days' notice that the debit order will be cancelled. You also have to be provided with a 15-day period of grace in which to pay any outstanding premium.
5. Funeral policies (assistance business)
Assistance business policies are issued by long-term insurance companies. Most of the policies are for funeral policies.
An assistance business policy is defined as a policy where an individual is the policyholder, where the policyholder does not need to undergo a health check-up before being issued with the policy, the policyholder directly or indirectly pays the premiums and the policy is for a specified period.
(Note: You may be asked questions about your state of health when you take out a funeral policy. If it is found that you gave incorrect information, the insurance company may repudiate the policy when the beneficiaries make a claim.)
Most assistance business is sold through individuals, schemes and businesses that are managed as separate businesses whose owners are different from those of the long-term insurance company.
Nobody and no entity, such as a funeral business administration company or a group scheme, may sell assistance business without a written agreement with a long-term assurance company. The reason for this is that in the past many funeral business administrators, including funeral parlours, have claimed to sell funeral policies without being licensed to do so. They were in fact operating illegally as insurers.
The agreement must include the premiums that may be charged (including commissions), and how and when the premiums will be paid to the insurer.
The scheme or administrator that acts on behalf of an insurer must provide the insurer with the names of the policyholders and their beneficiaries, as well as the identity numbers of the policyholders.
If an administrator or a scheme changes insurers, the new insurer must provide written confirmation to the old insurer that it has taken over the business. The new insurer will not be able to impose new terms or conditions, including new waiting periods before claims will be paid, on the existing policies.
6. Rejection of claims
You must be notified in writing of the reasons when a short- or long-term insurance company rejects your claim or disputes the amount of your claim. You must also be told how the insurance company calculated any reduction in a claim.
You then have 90 days to make representations to the insurance company. You are still entitled to use other avenues of recourse, such as the courts or the short- or long-term ombudsmen. However, note that you cannot lodge an appeal with the ombudsmen if you have taken the legal route.
If your claim is rejected by someone on behalf of an insurance company, the person who has rejected the claim must provide you with the details of the company and tell you in writing that you should make representations or objections to the company.
7. Signing blank or incomplete forms
No insurance company or intermediary may ask or even permit you to sign any blank or partially completed form related to selling you a long- or a short-term insurance policy, particularly when another person will be required or permitted to fill in any necessary details. The reason for this is to prevent you from being defrauded.
Examples of such fraud include increased premium amounts being filled in to provide unscrupulous intermediaries with higher commissions, and intermediaries paying themselves initial and/or ongoing commissions that were higher than those to which you would have agreed. A particularly heinous practice has been unscrupulous advisers filling in their names as the beneficiaries of a risk life assurance policy.
7. Lie detectors
Short-term insurance companies have been banned from using lie-detector tests when you make a claim. The rule covers all forms of lie-detector tests, including polygraphs and truth certification tests. Prior to the implementation of the PPRs, some companies insisted on lie-detector tests; they claimed it was one way that could help them decide whether a claim was fraudulent.
You may also not be induced to voluntarily undergo a test or procedure that seeks to verify whether or not you are telling the truth. And even if you do voluntarily undergo such a test, the results of the test cannot be used to repudiate your claim.
If there is any dispute over a short-term insurance claim, it may be resolved only by arbitration.
9. Policy loans
When you take out a loan against your life assurance policy, the life assurance company must keep you informed about the loan on an ongoing basis. You are entitled to certain information when you take out the loan, as well as every three months thereafter and when your policy is about to cease as a result of the loan equalling the value of the policy.
When you take out the loan, you must be told:
- The interest rate you will pay;
- Whether the interest rate on the loan is likely to fluctuate; and
- The repayment arrangement of the loan - for example, the amount you undertake to repay to pay off the loan.
Every three months the life assurer must inform you of:
- The outstanding loan amount and accrued interest in relation to the value of your policy; and
- The applicable interest rate and any changes to the rate.
You must also be told:
- When your loan is about to equal the value of your policy; and
- When the benefits under the policy are about to cease as a result of the policy loan equalling the value of the policy. In other words, you must be told if and when your policy is about to lapse because the interest has been eating away at your accumulated savings. This will occur if and when you fail to maintain repayments at a sufficiently high level.
If your policy lapses, you may lose any risk assurance cover against death and/or disability attached to the policy.
10. Waiver of rights and complaints
No insurance company or intermediary may ask you or induce you to waive any right or benefit you have in terms of the PPRs. Neither can it recognise, accept or act on any waiver you may sign.
An insurer must also, within a reasonable period of time, inform you of the details of any internal complaints-resolution system it may have and the procedures required for making a complaint. Long-term and short-term insurers must also provide you with details of the relevant industry ombudsmen.
The ombudsmen are:
- Long-term insurance (life assurance).
Judge Brian Galgut. Telephone 021 657 500; fax 021 674 0951; [email protected]; or Private Bag X45, Claremont 7735.
- Short-term insurance.
Brian Martin. Share call 0860 726 890; fax 011 726 5501; [email protected]; or PO Box 32334, Braamfontein 2017.
This article was first published in Personal Finance magazine, 4th Quarter 2008. See what's in our latest issue