Credit as­sur­ance of­ten ‘a bad deal’ for con­sumers

Weekend Argus (Saturday Edition) - - MEDIA& MARKETING -

“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.

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