Regulators look hard at credit life cover

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.