Wonga SA lauds greater regulation of credit life insurance
11 November 2013
Kevin Hurwitz, Wonga.com
Tighter regulation of the credit life insurance industry by the National Credit Regulator (NCR) is a necessary move to protect consumers from being charged for a service they sometimes do not fully understand or even need.
This is according to Kevin Hurwitz, Chief Executive Officer of Wonga.com South Africa, who says the possible amendments to the National Credit Act (NCA) by the NCR will help strengthen the control of credit life insurance products in the market, ultimately curtailing abuse by some credit providers.
”For some reason credit life insurance products seem to have largely escaped regulation and Financial Services Board (FSB) guidelines. A turnaround in the way these products are regulated is needed in the industry, which includes a review on the term and amount of loans that can be accompanied by credit life insurance.”
He explains that originally, credit life insurance products were developed specifically for long-term secured loans, which helped protect credit providers in the event of the consumer’s death. "The use of these products seems to be increasingly widespread and it has now become the norm for many credit providers to offer this type of cover on short-term low-value loans.”
However, consumers often do not understand that there is little benefit to them in taking credit life insurance on a short term loan and are sometimes told it is a compulsory requirement as part of the loan, says Hurwitz. "As a result, certain credit providers are reaping the financial benefits.”
Hurwitz says that while credit life insurance is a separate product, the relatively higher fees and interest connected with unsecured loans is substantiated by the risks attached. "The fees charged by credit providers who offer unsecured loans are higher than on a secured loan in order to cover the higher risk involved with not securitising the loan. Therefore, we believe it is questionable for consumers to be charged an additional fee in the form of credit life insurance on top of the fees already allowed under the NCA.”
Hurwitz says it is a positive that the costs and practice of offering credit life insurance may now be challenged.
Recent reports suggest the Regulator is reviewing what a fair and reasonable premium, on top of the principal loan amount is, to ensure minimum cover and protection. "Based on current industry practices, it would be interesting to see what the margins from credit life insurance on short term loans are, in comparison to what credit providers have been forced to write-off due to death of consumers,” adds Hurwitz.
While the possible amendments aim to tackle the pricing structure and regulations around these products, more transparency is also needed, says Hurwitz. "Many consumers are often unaware they are paying for this cover on their loans or that they have the option to choose credit life insurance cover separate to that offered by the credit provider. According to current legislation, credit providers do have the right to insist that credit life is taken out to ensure that loans are repaid in the event of death; but we believe the choice should lie with the consumer over which provider offers the credit life cover. ”
"At the very least, credit providers should be forced to be transparent about how much the consumer is being charged for credit life insurance”.
"We are approached almost daily by agents wanting to sell credit life insurance on our loans, which is a clear indication that the use of this kind of insurance is widespread and financially beneficial for the providers.” Wonga does not believe it is ethical to charge credit life insurance on a loan the value of which is less than R2500, for a term of approximately 30 days, says Hurwitz.
At the end of the day, credit life insurance benefits the lender and not the consumer. "It is imperative that this tighter regulation is implemented sooner rather than later,” concludes Hurwitz.