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Advice or bust

14 January 2021 Gareth Stokes

The Ombudsman for Long-term Insurance has warned the country’s life insurers not to gloss over aspects of financial advice when selling policies to the low income market. In a media release, issued on the 9th of December 2020, Judge Ron McLaren noted that insurers “could not hide behind the contention that a policy sold on a non-advice basis in the lower income market placed the onus on the policyholder to be familiar with exclusions”. He was commenting on the resolution of a complaint brought against Santam for failing to honour a claim against a Structured Life policy, which the insurer admitted had been sold on a non-advice basis.

It is common practice for telesales agents at large insurers to sell policies ‘off script’. In such cases the agent does not give advice but merely shares information with the customer. Unfortunately, a lack of understanding about how a life insurance product performs can have significant repercussions at claims stage. This complaint centred on a Structured Life policy that was purchased on the 30th of August 2018 and commenced on the 25th of September of the same year. One of the insured on the life policy passed on the 19th of August 2019; but the resulting claim was rejected. The Ombudsman writes: “Santam declined the claim on the basis that the cause of death was related to a pre-existing medical condition from which the deceased suffered”. 

Shortcomings in non-advice sales

The outright refusal to pay a small capital benefit on a life policy often ends up at the Ombudsman’s office. In this case the complainant alleged that the policy exclusions had not been explained when the agreement was entered into. Santam could not dispute this fact based on the initial sales interaction. Instead, they pointed out that the non-advice sales process that they relied upon placed the onus on policyholders to familiarise themselves with the policy provisions, including any exclusions that might apply. 

They also relied on a post-sale telephone conversation with the client, during which an upgrade to the policy was proposed, to support their contention that the policyholder was made aware of the exclusions. But the Ombudsman remained unconvinced. McLaren noted that the purpose of the upgrade call was to sell additional cover to the policyholder and not to provide additional product information. Of greater concern, he observed: “The call had been conducted in an underhand manner; that the complainant did not appear to understand that an additional premium was to be paid; and that whilst the pre-existing exclusion clause was mentioned, it was not explained”. 

The Ombudsman ruling does not preclude the sale of life policies on a non-advice basis; but encourages insurers to impart all the necessary information about the product being sold. “We took cognisance of the fact that these policies are sold in the lower income market and found that the script contained no information in relation to the pre-existing exclusion clause”, wrote McLaren. He observed that the complainant had undoubtedly taken out the policy without any attention being brought to its exclusions. 

There was another problem which lay squarely in the treating customers fairly (TCF) remit. The Ombudsman, having reviewed the sales script and application form, concluded that the policy was similar to a funeral policy. This meant that “the application of a pre-existing exclusion clause for the duration of the policy term was unusual”. It was thus suggested that the exclusion being relied upon to refute the claim should not have been incorporated in the product design. 

An unhappy outcome

The Ombudsman ruled that the contract be considered void and that all premiums contributed to the insured be refunded to the complainant. The decision to void was based on the fact that there was no consensus regarding the policy terms because there had “not been a meeting of the minds at application stage”. At this point you would be forgiven for thinking ‘case closed’; but the insurer had one last roll of the dice. They argued that they should only refund the premium relating to the affected life because they had been on risk for all other life assureds. The Ombudsman ruled that the complainant, by the completion of one composite application form, applied for one policy, covering multiple lives and that it was “artificial” to say that the policy was divisible. Santam was instructed to repay the princely sum of R663,68 to the complainant. 

Many questions arise when contemplating this matter. How do such matters continue to occur in South Africa’s highly-regulated financial services environment? What are insurers doing following such rulings to revise their distribution models and in-force policies? And can the low income market be protected under a regulatory framework that introduces significant compliance costs to financial advisers and product providers. It is clear that low income consumers remain subject to a range of abuses by product providers who can, for example, sidestep the onerous advice requirements in the Financial Advisory and Intermediary Services (FAIS) Act. It is equally clear that the advice requirements envisioned in FAIS are uneconomical in the microinsurance segment. 

The way forward for low income advice

Will the Ombudsman’s ruling on non-advice sales of life insurance policies result in big changes in insurance distribution? Our gut feel is that little will change. Insurers have been selling policies in this manner for decades and have little incentive to go about addressing the legacy brought about by sloppy sales practices. The voiding of a policy does not harm the insurer, they simply carry on as if the sale never happened… For the insured who receives R663,68 instead of a R20000,00 pay-out, the damage is immeasurable. 

Writer’s thoughts:
This case serves as a warning to financial advisers and product providers involved in life insurance distribution. Advisers who comply with the FAIS Act should never hear their clients say “I did not know that” at claims stage. You have a responsibility to protect your clients by studying the product supplier’s ‘script’ and informing your clients of any potential shortcomings. The question is: Are you able to stand up to the product provider when their script introduces potential harm to your client? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

Comments

Added by Francois Meyer, 14 Jan 2021
Would like to clarify are sure this is a product sold by SANTAM for SANTAM is not a long term insurer and not SANLAM.
It is about time that Insurers should stop making use of Call Centres selling any of these insurance products at all.
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QUESTION

How to give affordable and appropriate financial advice to the low income market segment. There is little room on a R50 pm policy for advisers to be remunerated for the time it would it would take to educate & fulfil admin function. What is the solution?

ANSWER

[a] Eliminate non-advice sales / telesales
[b] Implement industry standards for non-advice information
[c] Introduce an insurer-funded pro-bono advice network to low income earners
[d] Reinforce the Policyholder Protection Rules
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