Consumers urged not to fall into trap of in-house insurance policies with bonded properties

28 February 2012: When new homeowners purchase their property it is a requirement to have appropriate insurance in place to protect the lender’s investment should extensive damage be caused to the asset. However, a number of lenders are increasingly using

According to Peter Atkinson, Technical Portfolio Manager at the Financial Intermediaries Association of Southern Africa (FIA), while legislation requires that the consumer should have a ‘free choice’ as to what insurance policy is ceded as security; the reality is that many often feel pressured to take out a policy with the same lender. “For example, financial institutions tend to impose an additional ‘administration fee’ on clients who choose to provide their own insurance policy, ostensibly so that the lender can undertake an annual check that the cover is still in force.”

“This additional annual administration fee can sometimes prove to be quite considerable, with the result that even if the borrower is able to secure equivalent cover through another insurer at a cheaper rate, often the overall cost is higher than the premium offered under the ‘in-house’ policy.”

Atkinson notes, however, that in many cases, the lender also makes the provision of this proof an obligation on the borrower (or the borrower’s insurance broker through whom the ‘alternative’ insurance policy is arranged).

He says the financial institution – in an effort to ‘secure’ the client relationship and provide a single solution – will offer the client a policy from within its own stable. “This may be through an insurer that it owns or in which it has a substantial share, one which is held within the group, or even with one that it has come to some kind of beneficial business arrangement.”

“Where the client opts to exercise free choice, often considerable pressure will be brought to bear on the client to rather use their in-house services. For example, the institution may state that it requires some form of obscure or uncommon cover that is carefully included in their own offering, effectively ruling out most other ‘standard’ market policies.”

Atkinson says it is critical that all homeowners do have a suitable insurance policy on their home in order to protect their own as well as the lender’s interest in the asset. “One of the problems facing institutions, if the policy is provided by a third party, is that they do face the risk of the homeowner cancelling the policy, for example due to a debit order default, leaving the bank unknowingly exposed.”

“While one would think that this practice could be effectively controlled by the standard requirement in the bond agreement that the property must be suitably insured at all times, clearly this is not always sufficient.”

Atkinson says suitable life insurance on the borrower’s life is also important, both as additional security for the lender as well as to secure the property for the dependents of the borrower and again the client can opt to use a broker to scour the insurance market for the best deal or even offer an existing life policy as security, provided that it meets the requirements of the lender, rather than simply accepting the cover that the lender is likely to offer as part of the deal.

“It is crucial that financial institutions are able to protect their own interests when lending large sums of money to clients for an asset. However, with the advent of new legislation such as the Consumer Protection Act, the issue of consumers effectively being hoodwinked into buying a policy from the same institution should be carefully looked at as it does not have consumers’ best interest at heart,” concludes Atkinson.