| SOUTH AFRICA – Serious problems in the consumer credit insurance industry is being reported in South Africa too, similarities to the PPI products found in Europe. |
CONSUMER INSURANCE SEEN AS SCAM, SAYS JUDGE
(Dispatch Online - South Africa)
CONSUMER credit insurance in SA has a bad name and is seen by many as a scam or a rip-off, Judge Peet Nienaber noted in a report on an inquiry into the industry released yesterday. However, not all the reasons for this are necessarily valid, and it is always necessary to distinguish between different insurers and different insurance products, he continued. While the industry fulfilled a definite need, its potential deficiencies lent themselves to the exploitation of consumers by practitioners more intent on profit than service. “Such deficiencies, if not neutralised, will substantially detract from the value proposition of consumer credit insurance. “Therefore, what is needed is not an outright and self-righteous condemnation of consumer credit insurance, but the elimination of its potential abuses.” The inquiry, instituted in July last year, suggested, among other things, that the servicing fee be deregulated, as should the introduction fee as it was the “only effective measure to combat improper incentive payments”. The inquiry also noted that the problem lay with the monitoring and the investigation of non-compliance.
http://www.dispatch.co.za/article.aspx?id=195703
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WHO’S BEEN A BAD BOY?
(Felicity Duncan, 22 Apr 2008 18:03, Moneyweb - Johannesburg,South Africa)
Committee releases its report on consumer credit insurance, names transgressors.
There are some serious problems in the consumer credit insurance (CCI) industry and government and companies need to fix them, according to a report issued today by an independent, private commission of enquiry into CCI. "Consumer credit insurance" refers to those policies that you are obliged to take out when you buy furniture on credit, or take a personal loan at the bank. The policy is required by, and provides benefit to, the creditor. If you default on your loan for some reason, such as death or retrenchment, the CCI policy pays off the outstanding balance of your debt. These policies are explicitly permitted under Section 106 of the National Credit Act (NCA), and help lenders manage their risk. Without the risk-mitigating effect of such policies, it would be difficult to have any credit industry at all. However, CCI has a bad reputation. Customers frequently misunderstand their policies, or are unaware that they have them, and often think that they are too expensive. Furthermore, in 2007, a number of media reports accused certain providers of CCI of bending the laws that cap commission payments on these policies. The CCI commission, headed by former long-term insurance ombudsman Judge Peet Nienaber, was established by the Life Offices' Association (LOA) and the South African Insurance Association (SAIA) in response to these media reports and to consumer suspicion of CCI. The panel set out to investigate current practices in the industry, looking for practices that broke the law, or were perceived to be unfair or prejudicial to the consumer.
To collect information, the panel sent out questionnaires and conducted hearings on a voluntary basis. Because the panel was private, not governmental, it had no power to compel insurers to give it information; it relied on their voluntary cooperation, which it admits may limit the applicability of the survey. Nevertheless, according to the panel, at a broad level the law governing CCI is in many areas unclear and open to dispute, and government must step in and provide clarity for insurers. As for current practices, the survey focused on three key areas, and found problems in each. It found that CONSUMER EDUCATION was sorely lacking, and that an effort must be made to remedy this situation. Further, it found that there are various types of MARKET MISCONDUCT that are common in the CCI industry, including misselling, lack of proper disclosure, and a failure to inform customers of their right to take complaints to the ombuds offices. It suggested that industry organisations and the National Credit Regulator should set up committees to monitor these areas of misconduct, and sanction insurers who misbehaved. The biggest area of interest, however, dealt with the payment of commissions.
Commission regulation
Commission payments are the aspect of the industry that got the whole controversy started. It's a fairly complex issue, but basically, two Acts of Parliament - the Short-Term Insurance Act (STIA) and the Long-Term Insurance Act (LTIA) - govern how much of a client's premium an independent intermediary can take as commission.
In the acts, an intermediary is defined as anyone who provides services as an intermediary. That includes a wide range of services that include: selling the policy; monitoring and servicing the policy; collecting and accounting for premiums; and receiving and processing claims. The net is very broad, and captures a lot of activity in the industry. According to the STIA, for motor industry CCIs, the maximum commission that can go to various intermediaries (as defined above) must be worth no more than 12,5% of the premium paid; for all other short-term policies, that figure is 20%.The STIA also makes provision for commission to underwriting managers. Basically, an underwriting manager is an agent, working for an insurer, who provides special knowledge when it comes to writing and issuing certain types of complex and unusual policies, for example professional indemnity and crop insurance policies. Under the STIA, there is no cap on payments to underwriting managers. Because of this, some insurers choose to act as both insurer and underwriting manager for a particular policy in order to get a higher commission. The panel found this practice to be illegal, although some insurers defended it, and said they had received legal advice that this was permissible. Under the LTIA, commission structures are slightly different. First, for a vanilla life policy, the maximum commission is 7,5% of the premium. For a credit life policy, that rises to 22,5%. The same structure applies to health and disability policies: 7,5% for individual policies, 22,5% when a credit insurance element is added.All intermediaries must be paid in terms of the above, depending on whether the CCI is sold under a short- or long-term license. The panel found a variety of creative contraventions of this law. A major point of disagreement between the panel and the industry centres on the definition of "intermediary". Insurers, after taking legal advice, interpreted this to mean only traditional intermediaries, like brokers. Thus, they decided that they are permitted to pay much extra remuneration/commission, above and beyond the capped amounts, to companies that don't fall within the traditional definition of intermediaries. Accordingly, a number of insurers outsourced the administration and processing of policies to external "administrators", and paid those administrators a fee additional to the statutory limits. The panel argues that this is not the correct interpretation of the law, and that payments to administrators should fall under the commission caps.
The article lists the insurers which in the panels view disobeyed the commission rules. The 300 page report contains a lot more detail, but essentially the panel recommends that surveillance and monitoring of CCI providers should be improved, and that consumers should be taught to understand and select these products in an informed way.
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INSURANCE INDUSTRY WELCOMES CONSUMER CREDIT INSURANCE REPORT
(ITInews - Insurance Times and Investments News - South Africa, Life Offices Association, Gerhard Joubert, editor@itinews.co.za)
IRREGULARITIES REGARDING REMUNERATION BECAUSE INSURANCE ACTS ARE UNCLEAR AND INCONSISTENT
The Life Offices’ Association (LOA) and the South African Insurance Association (SAIA) welcome the release of the Consumer Credit Insurance Enquiry Report by the independent panel of enquiry jointly appointed by the LOA and the SAIA in July last year to identify problem areas in the consumer credit insurance market.
The panel of enquiry, chaired by Judge Peet Nienaber (Pictured right), retired Ombudsman for Long-term Insurance, was appointed after some insurance companies active in the consumer credit insurance market were accused of engaging in undesirable practices. Gerhard Joubert, CE of the LOA, describes the findings and recommendations contained in the report as far reaching in that they are likely to impact considerably on how the credit life insurance industry functions in future, if accepted and implemented. “The insurance industry as a whole was very concerned when allegations of non-compliance first surfaced last year. At the time our member companies active in the consumer credit insurance market pledged their full cooperation to help identify problem areas and eradicate undesirable practices with a view to improving consumer protection,” says Joubert.
“An independent panel of enquiry was appointed almost immediately with the aim of achieving more appropriate consumer protection in the consumer credit insurance market, which largely services the more vulnerable consumer, and where fair and transparent practices are thus of utmost importance.” Joubert says the recommendations put forward by Judge Nienaber’s panel will be discussed by the relevant LOA Committees and proposals will then be made to the LOA Board for discussion at the end of May. “Some of the recommendations, especially on intermediary remuneration, already form part of our discussions with National Treasury and the Financial Services Board (FSB) on changing the way that commission structures work to the benefit of consumers.” Barry Scott, CE of the SAIA, says the association was pleased that the enquiry to a greater extent found compliance with the relevant legislation, and that where short-term insurers stood accused of non-compliance this was largely due to difficulties experienced with the interpretation of Section 48 of the Short-term Insurance Act. “The enquiry recommended that no action be taken against insurers, since some of the irregularities regarding remuneration for outsourcing administrative work occurred because the Long-term and Short-term Insurance Acts are unclear and inconsistent on this point and in need of review and revision.” Scott noted that the report also focused on the need for consumer education. “To this end the SAIA has developed, over the last four years, consumer education initiatives with its partners, the FSB and more recently the Life Offices’ Association and has to date spent more than R27-million on consumer education.” Both the LOA and the SAIA have expressed gratitude to Judge Nienaber and his panel for the passionate way in which they dedicated their time and expertise to scrutinising the consumer credit insurance industry, both its ills and its good sides.
THE PANEL AND ITS TERMS OF REFERENCE
The members of the panel were Desmond Smith (director of companies and chairman of the LOA as from the end of last year), Ronnie Napier (former SAIA Chairman and senior partner of law firm Webber Wentzel), Louis Wessels, (former Head Legal and Policy at the FSB) and Moses Moeletsi (Chairman of the Board of the Ombudsman for Short-term Insurance and a member of the Long-term Ombudsman’s Council). The panel of enquiry was guided by the following terms of reference:
• Improper and inappropriate marketing and distribution practises.
• The payment of excessive commissions or other improper fees or incentives.
• The fairness of standard terms and conditions.
• The adequacy of the overall value provided to consumers.
• Pre- and post-sale disclosures and information provided to consumers.
• Promoting greater consumer understanding of credit life products, their benefits and the consumer’s rights.
The panel requested written submissions from interested parties, including members of the public, and listened to over 20 hours of evidence on practices in the consumer credit insurance market and their impact on the consumer. Evidence was given by life insurers, short-term insurers, credit providers, industry analysts, a member of the public, representatives of the LOA and SAIA, and the Ombudsmen for Long- and Short-term Insurance. Participation by companies in the enquiry was voluntary and members of the panel as well as the observers were impressed with the level of co-operation received from the LOA and SAIA member offices and the quality of presentations made to the panel. Representatives from National Treasury and the FSB attended the hearings as observers. The panel indicated that it was particularly impressed with the degree of openness displayed by companies that testified at the hearings. All companies were prepared to give evidence in the public domain and only one part of a submission had to be heard in camera for strategic reasons as cited by the company concerned. The panel’s final report has been submitted to National Treasury, the FSB, the Parliamentary Portfolio Committee on Finance and the National Credit Regulator (NCR) as well as to the boards of the LOA and the SAIA. Below follows an overview of the panel’s findings and recommendations as discussed in the report. The report is some 300 pages long and consists of 15 chapters, covering various problematic aspects of consumer credit insurance in South Africa. Also included is a chapter about comparable problems encountered in the consumer credit insurance industries in the UK, Australia and the USA. The full report can be downloaded at www.loa.co.za or www.saia.co.za.
AN OVERVIEW OF THE CONSUMER CREDIT INSURANCE REPORT
The panel of enquiry was appointed by the Life Offices’ Association (LOA) and the South African Insurance Association (SAIA) to identify problem areas in the consumer credit insurance market. In its final report, made public this week, the panel reports that structures had been put in place by some insurers for the payment to motor dealerships and furniture retailers of remuneration for outsourcing administrative work that, on the panel’s interpretation of the legislation, exceeded the permissible maximum. However, the panel accepted that these structures were put in place on the basis of legal advice received and accordingly did not find it necessary to recommend that any action be taken against any insurers by the Life Offices’ Association (LOA) or the South African Insurance Association (SAIA), save that the matter be taken up with the FSB by the LOA and SAIA and the individual insurers concerned. The panel noted in its report that both Insurance Acts are unclear on the point and in need of review and revision. The maximum commission provisions in the two Acts result in anomalies when applied to non-typical cover such as consumer credit insurance. “From the submissions received and the evidence given during several days of public hearings it became manifest that there was a lack of clarity and consistency in the manner in which individual insurers understood and applied the commission regulations issued in terms of the two Insurance Acts.”
As for other commission contraventions, the panel found that these had been corrected, especially since the spotlight fell on these practices last year. Judge Peet Nienaber, chairman of the panel and retired Ombudsman for Long-term Insurance, says while some of the insurers who made submission to the panel are mentioned in the report, the aim was not to name and shame, but rather to analyse and explain some of the practices in the consumer credit insurance industry as disclosed in written and oral submissions received. He says constraints encountered by the panel included the fact that it was dependent on the voluntary co-operation by LOA and SAIA member companies and that it had no powers to investigate and compel companies, especially non-members, to give evidence. “Nevertheless, the panel was gratified by the number of responses it received from both life insurers and short-term insurers. We were impressed with the co-operation received and the frankness and quality with which participants prepared and presented their submissions.”
IS CONSUMER CREDIT INSURANCE WORTH IT?
There are different types of consumer credit insurance products available to the consumer:
• Credit life insurance can be issued under a long-term or short-term policy and is designed to cover the outstanding balance of the money owed to the credit provider by the person whose life is insured should this person die, become disabled, develop a critical illness or become retrenched. Credit life insurance is available for the following credit transactions: personal loans, overdraft facilities, student loans, credit card facilities, mortgage bonds and asset financing.
• An extended warranty is marketed by motor dealerships or retailers on behalf of short-term insurers. This type of cover is designed to indemnify consumers against the risk of mechanical breakdown of the insured vehicles or goods like electronic equipment purchased. It normally comes into effect on the expiry of the manufacturer’s warranty.
• Top-up or shortfall cover is a short-term policy and is designed to cover the shortfall between the amount still owed and the insurance payout in the event of loss or damage to the vehicle, furniture or appliance.
• Minor chips and dents cover is a short-term policy issued under a short-term license and provides cover for minor damage to the bodywork of a vehicle, which usually falls within the excess of a comprehensive motor policy.
• Asset insurance is defined by the National Credit Act as part of the term “credit insurance” as “covering loss of or damage to property” and must therefore be considered a type of consumer credit insurance cover.
The report discusses the question whether these are all true insurance products. The panel, in its final report, concluded that there can be little doubt that consumer credit insurance is a key and integral element of the credit provision industry since there are many risks in a credit transaction for both the provider and the recipient of the credit, which can only be mitigated through the use of insurance. “Without such risk mitigation access to credit would simply not be feasible. To this one may add the relative ease with which credit life insurance can be arranged, without medical underwriting or undue delay.” The report lists the following as some of the reasons why consumer credit insurance is valuable to consumers:
• It enables many consumers to obtain credit which might not otherwise be available to them.
• It settles the remainder of the debt in the event of the consumer’s death, critical illness, permanent or temporary disability, or retrenchment. In these events it also ensures that consumers or their families do not have to give up on assets purchased which would otherwise be repossessed.
• It ensures that the consumer does not remain liable for the debt incurred in purchasing the asset even if the asset has been lost, destroyed or damaged beyond repair.
• It provides cover against the sudden and unforeseen mechanical breakdown of vehicles.
• It is tailored to consumers’ specific needs and benefit options.
• It is convenient, easy to obtain and to understand, and automatically accepted and free of medical underwriting.
• It is affordable.
The report lists the benefits for credit providers as being security for a debt which could turn into a bad debt. In addition, the consumer credit insurance business is a profitable one for insurers, credit providers and intermediaries. Nienaber says despite all these benefits, consumer credit insurance in South Africa has a bad name and is seen by many as a scam or a rip-off. This impression was confirmed by responses to the panel by consumer representatives and by comments in the media.
He says this poor reputation is due to a number of factors:
• The number of “add-ons” to a credit transaction of which consumer credit insurance forms a major part and which are often only disclosed, if at all, post-sale. Often these are disproportionate to the basic product price and to the risk profiles of consumers.
• The significant profit margins which are generally believed to be recovered at the ultimate expense of the consumer.
• The perceived low claims ratio on some of these products compared to insurance products generally.
• The technical defences on which some insurers sometimes rely to escape liability, and which only become apparent at claims stage.
He says not all of these perceptions are necessarily valid and it is always necessary to distinguish between different insurers and different insurance products. “The fact remains that consumer credit insurance has huge value to both the provider and the receiver of credit. In effect it creates a platform without which access to credit would be limited – restricted largely to those who have a lesser need for credit. A viable, sustainable consumer credit insurance underpin is therefore essential for a sustainable credit industry which in itself feeds economic growth.” In its report, the panel concludes that consumer credit insurance fulfils a definite insurance need for consumers. But at the same time there are potential deficiencies in the system lending themselves to the exploitation of consumers by practitioners more intent on profit than service.“Such deficiencies, if not neutralized, will substantially detract from the value proposition of consumer credit insurance. Therefore, what is needed is not an outright and self-righteous condemnation of consumer credit insurance, but the elimination of its potential abuses.” Nienaber says the panel has made recommendations relating to various undesirable practices and potential abuses. If these are left unattended by the industry itself and by the various regulators concerned with it, consumer credit insurance will continue to add to its current unsavoury reputation, and operate in practice to the ultimate detriment of at least some consumers. He says the short answer to whether consumer credit insurance in South Africa has a sustainable value proposition, is accordingly “yes, but”.According to Nienaber it is, however, also important that consumers realise that they are not passive parties to consumer credit insurance policies.“The consumer has a duty to be vigilant as to how the policy affects his or her interests. This includes reading the contract. While consumers must be placed in the position where they can make informed decisions, they must then take responsibility for these decisions.”
MAIN RECOMMENDATIONS IN SHORT
INTERMEDIARY REMUNERATION:
• The root of the problem is the attempt in the commission regulations to regulate the payment for the outsourcing of administrative work.
• A key recommendation is that the servicing fee should be deregulated completely. This will not be to the detriment of consumers since market forces will ultimately determine the level of the premiums and the amount of remuneration payable to intermediaries.
• As for the introduction fee some members of the panel believe that this should also be deregulated in its entirety. Others believe that the introduction fee should continue to be regulated at the upper income end of the market as the only effective measure to combat improper incentive payments.
• At the lower income end of the market the panel supports the view expressed in National Treasury’s recently issued discussion paper on Micro-Insurance, namely that there should be no commission capping at all.
• Any deregulation of intermediary remuneration must be accompanied by full and proper disclosure.
• If commission regulations are not scrapped, the present regulations should be thoroughly revised and commission caps under the Long-term Insurance Act and the Short-term Insurance Act should be aligned.
MARKET CONDUCT
During the hearings numerous manifestations of market misconduct were brought to the panel’s attention, with lack of proper disclosure being the main problem. In the panel’s view, the regulation of market conduct in South Africa compares favourably with similar forms of regulation elsewhere. The real problem is therefore not the regulation as such, but the monitoring and investigation of instances of non-compliance with the regulations.
The panel has made a number of recommendations including:
• Disclosure is the cornerstone of consumer protection. Therefore there must be proper disclosure to consumers of the remuneration and any other payments to the third party, be it the intermediary, retailer, dealer or credit provider.
• Consumer credit insurance is often sold as part of a package when a credit transaction is concluded. Unless consumers’ attention is specifically drawn to the credit insurance transaction, they may not be aware of its existence. The panel therefore recommends that the identity of the insurer be disclosed to the client together with the insurance premium as part of the breakdown of the installment payment. In addition consumers should be advised to inform their families of the existence of the cover and its importance.
• The LOA and SAIA should look into standardising terminology used in consumer credit insurance documentation. In addition consumers must be alerted to exclusion clauses and other limitations in their credit insurance cover. The consequences of the non-payment of premiums must also be spelled out.
• The importance and the consequences of the health declaration that is signed by consumers when applying for consumer credit insurance must be highlighted.
• Insurers should consider sending policyholders a welcome letter together with their policy document, highlighting important issues. These could also be sent out with every monthly statement as a constant reminder.
• Both the LOA and SAIA need to explore ways of highlighting in an effective way to consumers what is due by them in terms of payments and what is due to the consumer by way of benefits.
• The panel believes that the standardisation of waiting periods and exclusion clauses should be explored by insurers as this would introduce greater certainty into the consumer credit insurance industry and pre-empt consumer exploitation.
• Single premium payments were definitely a malpractice prevalent in the consumer credit insurance industry, but this has thankfully been outlawed by the National Credit Act.
MONITORING AND CONTROL
• Consumer credit insurance is different from other forms of insurance. It cannot be separated from credit. Its principal beneficiary is often not the consumer but the credit provider. Consumer credit insurance should accordingly be treated as a category separate and distinct from other forms of insurance.
• Whoever controls credit should also control consumer credit insurance.
• One of the main purposes of the National Credit Act (NCA) is to provide for the general regulation of consumer credit. This Act already contains a section that deals specifically with credit insurance with the aim of ensuring consumer protection.
• The members of the panel believe that the National Credit Regulator (NCR) should assume control of market conduct of consumer credit insurance as well as of intermediary remuneration where it is regulated.
• This will require appropriate amendments not only to the NCA itself but also to the Long- and Short-term Insurance Acts and the FAIS Act. The LOA and SAIA Codes may also require revision.
• A key recommendation of the report is accordingly that the principal regulatory control of consumer credit insurance should rest with the NCR. The NCR has the manpower and the means at his disposal to exercise such control.
CONSUMER EDUCATION AND AWARENESS
In the view of the panel adequate market regulation requires commitment and effort on the part of:
• The regulator with the manpower to supervise the market on an on-going, hands-on basis by means of on-site visits and formal inspections and the authority to act decisively if instances of non-compliance are encountered.
• The industry developing a distinct culture of compliance, individually and through its trade associations, thereby serving not only their own interests but also those of their customers.
• Consumers themselves. As a result of the current socio-economic developments in South Africa, consumers are increasingly exposed to new and sophisticated financial products and services. Consumers must be educated to understand these products and to appreciate and enforce their rights. There is an urgent need for representative and strong consumer organisations. CONSUMER ACTIVISM IS AN IMPERATIVE FOR TRULY EFFECTIVE MARKET REGULATION. A separate chapter in the report is devoted to consumer education and awareness. |
| ID: |
41221 |
| Author(s): |
SCR |
| Publication date: |
23/04/08 |
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