Debit order alert to new insurance users from FNB Insurance Brokers

Energetic steps have to be taken by the short-term insurance industry to alert a new generation of consumers to the dangers of debit order cutbacks to ease financial pressures.

The need for consumer education on “false economies” has been emphasised by FNB Insurance Brokers, short-term insurance broking arm of the FirstRand Bank financial services group.

“Rising income levels, black economic empowerment and the emergence of a new middle class have helped to grow the market for short-term insurance products in recent years, says Debbie Donaldson (pictured right), MD Personal Lines.

“Thanks to sustained GDP growth, we see hundreds of thousands of new home owners and credit users. Now – for the first time in their experience – they face substantial increases in their monthly repayments. Belts are being tightened and some debit orders may be cut.

“Experience shows, however, that cutbacks on insurance can be a false economy, exposing the consumer to major risks. More has to be done to alert the new consumer to these risks.”

Short-term insurance covers tangible items that face real risks; for instance, homes and furniture, vehicles and other assets.

Without insurance, the consumer takes personal responsibility for making good any loss.

Industry experience is that the traditional client-base is normally well aware of the danger of cutting back on monthly premiums when rising interest rates put pressure on disposable income.

“However, this is a completely new situation for more recent insurance users,” says Debbie Donaldson. “We can’t assume that they are aware of the risk of cutting back their debit orders.

“In effect, they are opting for self-insurance and have to make good from their own pocket should disaster to strike in the shape of burglary, fire or storm damage.

“It would be a real setback for the families concerned – and our own industry – if they made false economies and suffered the consequences. Market education in this area is crucial.”

Major risks are run when a family simply stops a debit order or leaves insufficient funds in the bank to cover these commitments.

If a loss occurs, a family might find that cover had lapsed only a few weeks earlier because payments had not been maintained.

Another pitfall is unthinking policy amendments.

Debbie Donaldson explains: “Many short-term covers are quite flexible and can be adjusted by the policyholder. The simplest example is the excess portion of a policy.

“It is often possible to reduce the monthly premium by opting for a higher excess – perhaps moving the excess from R1 000 to R2 500. This means the policyholder takes responsibility for meeting an initial cost, up to R2 500 in this case, in the event of loss or damage – this is preferable to cancelling the cover altogether.

Issues like this require careful scrutiny.

“It’s at times like this that a consumer should call in a professional short-term insurance adviser,” says Debbie Donaldson. “A thorough review of risk exposure and insurance covers is always a good idea and can be especially important when the consumer is under pressure.”