When does the relentless paying end?
According to the Financial Services Board (FSB), the Financial Planning Institute, the South African Insurance Association (SAIA) and Government, high costs are one of the biggest challenges that is affecting the financial services industry. The increased costs are not limited to fuel, toll gates and food only but affect the financial services industry quiet significantly as well, particularly in retirement and motor vehicle repairs.
Perfect endowment?
A typical endowment policy is designed to pay a lump sum after a specified term or on death. Maturities are ten, fifteen or twenty years up to a certain age limit. Because it is an investment, brokers will shop around for a product provider which will offer the best endowment to the consumer and engage with the provider on the premise that the provider will do their best to maximise returns.
A part of this is keeping costs as low as possible. But this is not the case with some product providers, two of which have been accused of unreasonably inflating prices.
Moonstone reports that the Long-term Ombud (Ombud) recently published two examples of excessive charges on endowment policies which confirmed the view that a revision of product provider costs is possibly a bigger problem than advisor fees.
This was already pointed out in the Ombud's 2009 Annual Report, and is still a problem today.
The Ombud recognises that the two examples posted are part of the 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.
In the first case, the policyholder contributed to a pure endowment policy (no risk cover) which commenced 1 February 2007. The term was over five years with premiums of R550 per month. The product provider offered an annual premium increase of 10%.Total premiums paid over the five year term amounted to R37 877 and the guaranteed maturity value was R30 300 and the endowment carried an illustrative maturity value of R46300. The insurer stated that the average bonus rate was 6, 98% over the term.
However, the actual maturity value paid on 11 January 2012 amounted to R36 465. The charges of R5 410 amount to 13,4% of expected premiums and 14,2 % of the actual premiums received.
In the second case, two policies were issued in June 1992 for a 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 term of the policies was 30 years – which was not elected in the application form but all policies were issued with this term – and carried premiums of R30 per month increasing periodically over the term. Total premiums of R32 127 per policy were paid over the period of 19 years that the policy was in force.
There were small risk components associated with the policies. There were death and disability waiver of premiums and a funeral benefit of R11 500. The premium split was as follows: the premium allocated to investment amounted to R15 731, the death and disability waiver charge was R4 947, costs of Risk Benefits cover amounted to R833 while commission and administration charges came to R10 614.
Charges amounted to 40% of the premium - after deducting risk costs - or 33% of the full premium.
Charges to administer the endowments is understandable, but to administer costs of 14,2% and 40% of the endowment values makes it impossible and unsustainable for policyholder's to continue with their investment. Even though the Ombud ruled in favour of the policyholder's in both of these cases, trust has been broken and the policyholder's will look to move their policies elsewhere.
Continued annoyance
The question that everyone is raising is when will this relentless policy of charging maximum administration costs stop. Even when we see examples of the FSB, the Short-term Ombud and the Life Ombud coming down hard on companies who want to employ these policies, there are still many more cases of this which are apparent.
But there are also initiatives to decrease costs within the industry. Government has been outspoken on the fact that charges are having a major effect on retirement savings, and the move by many big companies towards umbrella funds where costs can be shard is a major step in the right direction. However, one must ask if this is enough or is it a case of Government fighting a losing battle.
How feasible will it be for insurance companies to sit down with Government and motor manufacturers to come up with a way to decrease the price of parts that are supplied to panel beaters? By all accounts, this is the largest contributor to the costs of repairs and is complicated by the fact that South Africa has to import all of its parts as there is no local manufacturing capacity in the local market. The question here is; does Government really need to impose an import duty of close to 100% on all imported goods? Surely if decreasing import duties on motor vehicle components will benefit the market, what is stopping Government from doing this?
Editor's Thoughts:
It is clear that the South African financial services industry is in serious need of policies which will look to reduce costs. The steps taken by the FSB to regulate the industry in order to protect consumers and to make it possible to increase participation is a move in the right direction. However, are they a lone crusader in the dark when change needs to happen at a Government level? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
Institutions have voraciously helped themselves to spurious costs ever since I entered the industry in 1981.
The intermediary was ALWAYS the scapegoat but actually plays only a fractional (and quantifiable) role in this problem.
The only costs that have always been disguised ( and adjustable but only UPWARDS ) are the internal charges and penalties levied by the product providers themselves. Report Abuse