Credit assurance often ‘a bad deal’ for consumers
“Consumer credit insurance has a bad name – and not only in South Africa.”
This bald statement introduced the final chapter of the 275-page report in 2008 by the panel of investigation appointed by the then Life Offices’ Association, which represented life assurance companies, and the South African Insurance Association, which represents the short-term insurance industry. The panel was appointed after Personal Finance in 2007 exposed how Regent Life paid commissions in excess of those set by the Long Term Insurance Act.
The heavyweight panel was headed by Peet Nienaber, a former judge of the Supreme Court of Appeal and the former Ombudsman for Longterm Insurance.
The panel found that, all too often, consumer credit assurance is only in the interests of the lender, who does not want the hassles of claiming from an estate if the borrower dies before the loan is repaid, while simultaneously attracted by the inordinate profits it can make. The panel criticised:
The cost of consumer credit assurance. It found that consumer credit assurance is the most profitable form of assurance.
Unmanaged conflicts of interest, where, all too often, the purveyor of the product, the credit provider and the insurance product provider are fundamentally the same party, which then also acts as the intermediary.
The use of lawyers to find gaps in legislation and to create structures to side-step the law so that consumers can be further ripped off by, for example, ignoring the intention of the legislature when it capped commissions and prevented the payment of perverse incentives.
How serious gaps and contradictions in the law and regulations have allowed too many product providers to exploit consumers.
According to the panel’s report, the worst hit are the most vulnerable – namely, low-income earners. The wealthy can use other avenues of financing that enable them to avoid being exploited.
The report contains a long list of recommendations, which include making a much-needed improvement to the law that governs consumer credit assurance.
The panel canvassed the issues of whether premiums for consumer credit assurance should be fixed, whether commissions should be fixed, and whether insurance companies should be able to outsource administration work to other parties, and, if so, whether there should be limits on the payments for these services.
Initially, the panel said it was of the view that premiums should be regulated, but it changed its mind on the advice of the National Credit Regulator.