Reg­u­la­tors look hard at credit life cover

Weekend Argus (Saturday Edition) - - GOODPOSTER -

A joint dis­cus­sion pa­per by the Na­tional Trea­sury, the Na­tional Credit Reg­u­la­tor (NCR) and the Fi­nan­cial Ser­vices Board (FSB) could be pub­lished as early as next week aimed at halt­ing the ex­ploita­tion of peo­ple who bor­row money or buy items on credit and are forced to take out ex­pen­sive credit life as­sur­ance.

Fi­nal steps to be taken could be in place as early as the end of next year.

Op­tions un­der con­sid­er­a­tion in­clude pos­si­ble lim­its on what you pay in premi­ums for a credit life pol­icy sold in con­junc­tion with a credit agree­ment.

The cap­ping of premi­ums on th­ese poli­cies has al­ready been pro­posed by the NCR in its re­cently pub­lished draft Credit Providers’ Code to Com­bat Over-in­debt­ed­ness. The NCR sug­gested that premi­ums be lim­ited to R4 for ev­ery R1 000 of cover.

The dis­cus­sion doc­u­ment comes five years af­ter an in­dus­try-ap­pointed en­quiry un­der for­mer life as­sur­ance om­bud Peet Nien­aber found that credit life as­sur­ance only re­ally ben­e­fited the credit providers.

Credit life as­sur­ance is one of the most prof­itable as­sur­ance prod­ucts sold to con­sumers, who sel­dom re­ceive ben­e­fits. The rea­sons are that credit life as­sur­ance is usu­ally for short pe­ri­ods; it is used mainly by younger peo­ple, who bor­row more than older peo­ple but have a lower prob­a­bil­ity of mak­ing a claim. And pol­i­cy­hold­ers are of­ten not even aware they have the prod­uct when an event oc­curs that would al­low them to claim a ben­e­fit.

The Nien­aber com­mit­tee was ap­pointed by the long- and short- term insurance in­dus­tries fol­low­ing ex­po­sure by Per­sonal Fi­nance of se­ri­ous abuses in the credit life as­sur­ance in­dus­try.

Credit life as­sur­ance has been the sub­ject of in­creased at­ten­tion be­cause banks have stepped up un­se­cured lend­ing, of which com­pul­sory credit life as­sur­ance is an el­e­ment.

Some banks have tried to gain mar­ket share by ad­ver­tis­ing lower in­ter­est rates on loans but then charg­ing high premi­ums on the ac­com­pa­ny­ing credit life cover.

This cross-sub­sidi­s­a­tion of com­pany prof­its us­ing high credit life premi­ums is one of the is­sues of con­cern, Jonathan Dixon, FSB deputy chief ex­ec­u­tive in charge of insurance, told a FSB in­dus­try brief­ing meet­ing this week.

Dixon says it is well known that, to at­tract cus­tomers, many re­tail­ers (such as fur­ni­ture chains) sell goods at no profit or at lit­tle profit. They then make some profit from credit fi­nanc­ing of the sale, but make the most profit from the manda­tory pur­chase of credit life as­sur­ance.

Dixon says cus­tomers do not go to re­tail­ers to buy as­sur­ance – they go to buy an item. The last thing on their mind is credit life as­sur­ance.

“By def­i­ni­tion, credit life as­sur­ance is a sec­ond- or third-tier level of trans­ac­tion, with the ac­tual item be­ing the first level, fol­lowed by the fi­nanc­ing agree­ment and then the as­sur­ance.”

Cus­tomers – of­ten un­so­phis­ti­cated con­sumers – who “have their mind on the fridge they are buy­ing”, have lim­ited ac­cess to ad­vice and are pro­vided with lit­tle or no as­sur­ance prod­uct com­pa­ra­bil­ity, he says.

Credit providers are per­mit­ted to make credit life as­sur­ance con­di­tional on the pro­vi­sion of credit, but they must give the bor­rower free choice of as­sur­ance prod­uct provider. Dixon says that in re­al­ity it is im­prac­ti­cal for th­ese con­sumers to ex­er­cise choice.

In ef­fect, Dixon says you are a “cap­tured cus­tomer” for high-profit credit life as­sur­ance when you buy on credit or bor­row money.

He says, how­ever, that credit life as­sur­ance does have an im­por­tant role to play for con­sumers in pro­tect­ing them in the case of an un­ex­pected event.

He says the joint Na­tional Trea­sury/NCR/FSB task team that put to­gether the dis­cus­sion pa­per has made var­i­ous pro­pos­als for com­ment. Th­ese in­clude:

◆ Ways to limit the “cap­ture” of a cus­tomer which, in ef­fect, forces them to ac­cept the pol­icy of­fered by the credit provider;

◆ Lim­it­ing premi­ums, ei­ther by im­ple­ment­ing a com­pul­sory cap as pro­posed by the NCR, or by way of guid­ance to credit providers; and

◆ Mea­sures to im­prove com­pe­ti­tion be­tween credit life as­sur­ance providers to bring down charges.

Com­ment re­ceived by the NCR on the credit life as­sur­ance sec­tion of its Credit Providers’ Code to Com­bat Overindebt­ed­ness will be fed into the re­ac­tion to the joint dis­cus­sion pa­per.

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