NCA extends to credit life insurance business
The introduction of the National Credit Act (NCA) on 1 June 2007 will now extend the impact of the act past lending institutions, to various other financial service providers. The sale of life insurance in conjunction with credit extension is one area that will be affected through the roll-out of this phase of the act, as the insurance sector will receive various regulatory guidelines.
"The major impact of the NCA on credit life insurance is likely to be the changes to the charging structure of premiums," comments Andre Dreyer, business development actuary at RGA Reinsurance Company of South Africa. "Single premium credit life insurance can no longer be charged. The NCA will require that a recurring premium structure be adopted, which means we may see an increase in costs due to the greater administrative burden on insurers."
Section 106 of the NCA pertains to credit life insurance and states that credit providers may require consumers to maintain credit life insurance during the life of a credit agreement. However, credit providers who, in the past, may have only proposed their own policy of insurance will now be required to inform consumers of other available options. "While this may create a more competitive market from a price standpoint, there are other issues that need to be addressed," states Dreyer. "Should the consumer take an insurance product with another provider, the credit agreement and related insurance could be mismatched, meaning all parties involved are left open to possible problems."
This separation means that, should a consumer lapse on their insurance, the bank or credit provider may not know of the lapse. "At that point the credit provider no longer has security in the loan and any dependents on the client's side may be left with the burden of the pending debt," states Dreyer. While banks and credit providers have never been allowed to force insurance sales onto clients, there has always been a requirement to ensure security on the part of the lender. "By creating a single point of sale for financial and insurance solutions, credit providers can offer clients added value through convenience, while also ensuring that the insurance provided is sufficiently comprehensive."
In terms of industry regulation the National Credit Regulator, established following the introduction of the NCA in 2006, will now be required to monitor credit life insurance trends in terms of sales patterns, costs and the performance of credit life insurance in meeting the obligations of consumers. "At this stage it is believed the regulator will take on more of a monitoring role and the industry will generally be left to self-regulate. The regulator will, however, ensure that controls are in place to monitor this self-regulation, with intermediaries being placed under the greatest scrutiny", says Dreyer.
"The intent of the NCA is definitely positive and this latest phase will have a significant impact on the business of credit life insurance. Provided that the credit and life insurance providers, as well as intermediaries manage the new processes properly it should continue to benefit consumers by ensuring they are protected at all stages of credit transactions", concludes Dreyer.
