The best way of ensuring that the credit life insurance industry treats you fairly is to improve competition by regulating the cost of this insurance and by forcing the credit industry to insure itself, National Treasury and the Financial Services Board (FSB) are proposing.
They also want to regulate how it is sold to you through effective disclosure.
Credit life insurance settles your debt if death, disability or retrenchment prevents you from repaying the loan. In 2012, consumers paid R16 billion in credit life insurance premiums.
Some credit providers have found that credit life insurance is a quick route to profits, by charging high premiums and paying few claims.
High premiums are particularly prevalent in the retail furniture industry, where credit life cover adds, on average, 16 percent to the cost of credit, a report on credit life insurance issued by National Treasury and the FSB this week says.
The report notes that the average claims ratio for credit life policies – the claims paid relative to the premiums collected – is 20 percent, whereas the average claims ratio for other life assurance business is 45 percent.
Treasury and the FSB say the credit life insurance market is falling short of the outcomes expected under the Treating Customers Fairly principles that have been adopted for the financial services industry.
They propose a number of regulatory measures to ensure you are treated fairly. Among these is making creditors insure themselves against “bad luck” events. Currently, such events are typically covered by credit insurance, for which you pay, but you may not even know you have cover.
The policymaker and the regulator say that, although credit life insurance may be appropriate for higher-cost credit, such as vehicle and home loans, creditors should insure themselves against defaults on smaller unsecured loans or credit for goods such as furniture and cellphones.
Currently, the National Credit Act (NCA) permits credit providers to insist that you take out insurance. The report notes that a loan with compulsory cover is less risky than a loan without it and therefore should have a lower interest rate – a “partially secured” interest rate.
The report also suggests that if credit providers are allowed to continue to compel you to take out insurance as a condition of a loan, the cost of this insurance should be regulated.
Treasury and the FSB suggest that premiums be regulated by introducing recommended rates for different types of credit insurance and requiring insurers to justify charging above these rates.
Personal Finance reported last year that the National Credit Regulator (NCR) was of the view that credit insurance should not cost more than R4 in premiums for every R1 000 in cover.
Recent amendments to the NCA empower the Minister of Trade and Industry, in conjunction with the Minister of Finance, to limit the cost of the insurance that credit providers insist you take out.
Regulating the cost of credit insurance was first suggested by a 2007 inquiry led by retired judge Peet Nienaber.
As an alternative to regulating the cost of credit life insurance, Treasury and the FSB suggest that the interest rate on the loan covered by the insurance should be regulated. Their third suggestion is that the total cost of credit, including interest, credit insurance premiums and other charges, be regulated.
The key issues that Treasury and the FSB seek to address in their report are:
* The lack of transparency about the total cost of credit;
* The high premiums for credit life insurance; and
* Your inability to compare and choose the most cost-efficient credit life cover.
To address these issues, Treasury and the FSB have recommended the following:
* Mandatory credit life insurance should be standardised to improve comparability and competition.
* Credit providers must offer you a choice of at least three credit life policies.
* Insurers must make standardised disclosures about mandatory credit life cover, so that it will be easier for you to compare or switch your cover and understand what the credit costs in total.
* Disclosures about credit life policies should make it clear which cover is mandatory and which is not and allow you to opt out of buying unnecessary cover.
* Insurers must provide you with ongoing information about your credit life cover so that you can assess the suitability of the product as your needs and circumstances change.
* Credit life insurers must maintain claims ratios within bands set for different types of credit life insurance, or publicly disclose the claims ratios of the different credit life providers.
* Conflicts of interest that arise when a credit provider is also the insurer, or the insurer is part of the same group of companies as the credit provider, should be eliminated by:
– Unbundling credit and credit life insurance and banning credit providers from offering group scheme credit life cover in their own names. Instead, separate policies should be ceded to the insurer to cover the credit risk.
– Banning commission payments for credit life cover provided from a credit provider’s group scheme policy.
– Removing the maximum commission – allowed under the Long Term Insurance Act – of 15 percent of the premium, which is paid to the sales agent for administrative work related to a policy. This will reduce the maximum commission on credit life policies to 7.5 percent of the premium.
– Prohibiting volume-based sales incentives on mandatory credit life cover.
* Insurers must provide separate application forms for credit life cover and credit, and no commission should be paid on cover that is sold without financial advice.
* Insurers that offer credit life cover must check the outstanding balance of the loan and pay only that amount to the credit provider and the balance to you or your dependants.
* Insurers must obtain adequate information about the risk you pose when they sell you a policy instead of rejecting your claim because, for example, you had a pre-existing condition.
* Where the insurer outsources the insurance to a third party, the insurer should remain liable for ensuring that the claims practices are fair.
* The FSB, not the NCR, should be the primary regulator of credit life insurance, with insurers required to report to the FSB about credit insurance.
* Advice to consumers about credit should be subject to the Financial Advisory and Intermediary Services (FAIS) Act. Currently, only the credit life transaction is subject to the FAIS Act.
* Short-term insurers should not be allowed to sell credit life insurance; they should be restricted to selling insurance for the asset, such as the car or fridge, that is bought on credit.
Comments on the proposals, which are available on National Treasury’s website (www.treasury.gov.za), should be submitted by September 30.