You cannot separate credit insurance from credit
The results of the long awaited enquiry into practices in South Africa’s consumer credit insurance industry were released to the media at a function in Johannesburg yesterday. The independent panel was jointly appointed by the Life Offices’ Association (LOA) and the South African Insurance Association (SAIA) following allegations of improper conduct made against some players in the consumer credit insurance market.
First convened in 2007 the panel includes Desmond Smith (director of companies and chairman of the LOA), Ronnie Napier (former SAIA chairman and senior partner of law firm Webber Wentzel), Louis Wessels (former head of Legal and Policy at the FSB) and Moses Moeletsi (Chairman of the Board of the Ombudsman for Short-Term Insurance and a member of the Long-Term Ombudsman’s Council). The panel was chaired by Judge Peet Nienaber.
What did the panel have to determine?
The panel’s mandate was fairly broad and included investigating various allegations made against companies in the credit life industry and making recommendations on possible improvements going forward. Special attention had to be given to allegations of:
- improper and inappropriate marketing and distribution practices
- the payment of excessive commissions or other improper fees or incentives
- the fairness of standard terms and conditions
- the adequacy of overall value provided to consumers
- pre and post sales disclosures and information provided to customers
The panel was also asked to promote greater consumer understanding of credit life products, their benefits and consumers rights. And they’ve produced a comprehensive report spanning 300 pages and organised in 15 chapters. Fortunately the panel’s major findings can be summarised under four headings. These include intermediary remuneration, market conduct, monitoring & control and consumer education & awareness.
Intermediary remuneration: no commission capping in the lower income market
The panel identified intermediary remuneration as one of the main regulatory issues. Attempts to “regulate the payment of the outsourcing of administrative work” were not working. They believe the servicing fee aspect should be “deregulated in its entirety” and that introduction fees should either be deregulated across the industry or only regulated in the upper end of the market. The panel stressed that deregulation in the industry regards service fees and introduction fees be accompanied by full and proper disclosure. “If commission regulations are not scrapped, the present regulations should be thoroughly revised and commission caps under the Long-Term Insurance Act and Short-Term Insurance Act should be aligned,” suggests Nienaber.
Market conduct: disclosure is the cornerstone of protection
During the presentation the panel referred to a FinMark Trust survey of lower income groups. The survey showed that 0.5% of the LSM 1 to 5 consumers indicated they had a credit life policy, while 25% said they had purchased furniture or appliances on credit. This raises huge questions about the effectiveness of selling and market conduct in this segment. The panel’s first observation in the market conduct section is that “disclosure is the cornerstone of consumer protection.”
The panel felt it was imperative that the consumer was advised of the insurer’s details when purchasing credit life – and that the consumer be told to advise his family of the policy. In addition the “importance and consequences of the health declaration that is signed by consumers” must be highlighted. Each consumer should know what is promised in terms of benefits and what is expected in terms of premium payments.
Another major concern was the industry statistics which showed that as many as 48% of credit insurance claims that reach insurers are repudiated – with the aggressive time barring policies preventing many possible claims from being made. This prompted the panel to suggest that “the standardisation of waiting periods and exclusion clauses should be explored by insurers as this would introduce greater certainty into the consumer credit insurance industry and pre-empt consumer exploitation.
Monitoring & control: you cannot separate credit insurance from credit
The panel stated that credit insurance is an integral part of the South African credit environment. To this end the panel believes that “whoever controls credit should also control the consumer credit insurance.” It was suggested that the National Credit Regulator (NCR) would be a logical choice to “assume control of market conduct of consumer credit insurance as well as of intermediary regulation where it is regulated.” However, this proposal would require extensive and appropriate amendments to a raft of regulations including: The Long-Term Insurance Act, The Short-Term Insurance Act, the FAIS Act, the National Credit Act and the LOA and SAIA Codes.
Consumer education & awareness: strong consumer organisations needed
No single party can accept full responsibility for education. The panel believes the regulator, the industry and the consumer all play a vital role. The panel also notes “there is an urgent need for representative and strong consumer organisations.”
Judge Nienaber provides a pertinent sign-off for this article: “The consumer has a duty to be vigilant as to how the policy affects his or her interests. This includes reading the contract. While consumers must be placed in the position where they can make informed decisions, they must then take responsibility for these decisions.”
Editor’s thoughts:“The enquiry recommended that no action be taken against insurers, since some of the irregularities regarding remuneration of outsourcing administrative work occurred because the Long-Term and Short-Term Insurance Acts are unclear and inconsistent on this point…” said SAIA CE Barry Scott. Would you have preferred the panel take a tougher stance on insurers who may have contravened? Add your comments below, or send them to [email protected]
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