We have previously written about the high charges associated with investment policies, particularly small policies. (See 2009 Annual Report p28). The following two case studies highlight this issue again in very stark terms. We realise that these policies were issued some time ago and are part of so-called "legacy business" and that insurers may now do business on a different basis. However, insurers cannot simply disregard these old policies; they may need further attention especially where the initial product design was not appropriate for the target market.

The policyholder contributed to a pure endowment policy (no risk cover) which commenced 1 February 2007. The details:

Term 5 years
Premiums of R550 per month at commencement with an escalation of 10% per year
Premiums paid over the 5 year term amounted to R37 877
The guaranteed maturity value was R30 300
The insurer stated that the average bonus rate was 6, 98% over the term
The actual maturity value paid on 11 January 2012 was R36 465
The charges of R5 410 amount to 13,4% of expected premiums and 14,2 % of the actual premiums received.

The Reduction in Yield* which was disclosed in the quotation was:
9,3% at the range of inflation was between 4 to 6%.
The net projection rate was assumed at 0,7% with a required gross return of 10%.
The illustrative maturity value was R41000.

and,

10% reduction if inflation was between 8 to 10%.
A net projection rate was assumed of 6% with a required gross return of 16%.
The illustrative value was R46300

*The Reduction in Yield shows the impact that charges have on the growth of the policy.

DISCUSSION

The chance of the policyholder getting a real return (i.e. a return after inflation) was remote given the high charges on the policy.

This case study demonstrates that disclosure of this kind does not always alert a policyholder to the impact of high charges. It is unlikely that the policyholder would have entered into the contract had he fully understood the implications of the disclosures. The quotation disclosed what the Reduction in Yield was and disclosed that even at a gross return of 10% the net return would only be 0,7% and yet the policyholder purchased the policy. These products were also marketed to unsophisticated investors.

The question does arise why anyone would purchase this policy. The converse question is why any insurer would develop and sell such a product as it does not seem to provide real value to policyholders.

This case study also demonstrates that disclosure by itself is not a panacea for all ills, particularly in an unsophisticated market. If a product is inherently flawed in its design can it ever be sufficient that the insurer has made the necessary disclosures?

RESOLUTION OF THE CASE

After a provisional determination from our office the insurer agreed to increase the maturity value in line with complainant's expectations as to what the maturity value would be, based on the marketing material. The complainant accepted the offer of an additional R7419 and the file was closed.

The insurer advised us that they had undertaken a review of the product with a view to improving other policyholders' benefits.

Two policies were issued in June 1992 for the complainant's two children (both policies were on the same basis). The policies were marketed under a name that indicated that it was an education policy. The details:

Term of 30 years (not elected in the application form but all policies were issued with this term)

Premiums of R30 per month increasing over the term

Total premiums of R32 127 per policy were paid over the period of 19 years the policy was in force

There was no recoupment of costs on surrender. The insurer had restructured the product so that there was no such recoupment after 10 years.

DISCUSSION

A question arose as to the term of the policy - it did not make sense for a policy marketed as useful for education purposes to have a term of 30 years. The term impacted on the cost. The extent of the charges seemed disproportionate.

RESOLUTION

The case was delayed after we made a provisional determination in favour of the complainant because the insurer advised us that some of the information on which we based the determination had been incorrectly supplied to us.

We then involved the CEO who advised us that the insurer had decided to undertake a review of the whole portfolio to see whether benefits for policyholders could be improved. This would take some time. To resolve this particular complaint, as the complainant had already suffered delays, an offer was made, which was accepted by the complainant, and the values of each of the two policies were increased by R10 455. A compensatory amount of R3000 was also paid for the poor handling of the complaint.

It is encouraging that in these two instances the insurers undertook reviews of the portfolios as a whole and did not only resolve the complaints in question. In both these cases the current insurer had taken over the business of another insurer and had not issued the products.