TCF could change bond insurance ‘rules’
Bond insurance is one of those grudge purchases that consumers often feel obliged to make to cover their debt on a bond. But consumers with life cover often feel they have sufficient cover so they are not overjoyed when their banks urge them to buy their
Banks can’t force you to take out in-house insurance
There are a couple of issues to focus on here. The first is that banks are trying to protect themselves and make income from off-balance-sheet products – this is a business decision on their part and it’s not hard to see why they push their own insurance products.
The second is that consumers have a right to choose their own insurance policies, which is not taken into account when banks try to pressure them into using in-house services. Peter Atkinson, technical portfolio manager at the Financial Intermediaries Association of Southern Africa (FIA), says that banks sometimes justify this by requiring some form of obscure or uncommon cover that is only included in their packages, which rules out ‘standard’ market policies. Banks sometimes impose an ‘administration fee’ on clients who choose to provide their own insurance policies, ostensibly so the lender can then undertake an annual check that the cover is still in force.
Atkinson concedes that what often happens is that consumers ditch their insurance when they’re stretched financially, which is a risk for the bank, especially if they don’t know consumers have cancelled third-party insurance.
“We have been dealing with banks through the Banking Association, but I think that Treating Customers Fairly (TCF) will hopefully make a difference when it comes into force some time next year, because banks will be brought into this,” says Atkinson. “In some cases, banks negotiate specific packages and give good terms, so consumers shouldn’t dismiss bank packages out of hand – what they should do is know their rights and shop around.”
What brokers need to know
Atkinson says that homeowners need suitable insurance policies to protect their own as well as the lender’s interest in the asset in question. But brokers can’t view such cover as an ‘isolated event’ – it has to be integrated within a client’s broader financial plan. Even if a client says he or she has bought a property and would like the broker to arrange cover, brokers need to consider what other policies a client already has in place.
Most credit life schemes are based on very limited underwriting (effectively two or three general questions backed up by a search on the life register). Bond cover schemes also take a similarly relaxed approach when it comes to underwriting calculations – Craig Young, managing executive of insurance at ooba bond originators, says some insurers demand a consumer has a medical or they ask limited medical underwriting questions; but others have almost no medical underwriting. It may be that there will be a pre-existing medical exclusion clause built into a particular product.
Atkinson says this in itself is a good reason why the average healthy person should think twice before opting for a structured product as the rates are loaded across the board for the slightly worse mortality experience that could arise due to relaxed underwriting. Going for a medical may in fact get a client better rates.
For the reasons mentioned above, it is difficult to put a single, straightforward cost on bond protection, so brokers need to be aware that this may necessitate quite a bit of to-ing and fro-ing to find out what best suits a client.
Editor’s thoughts:
TCF could well change the ‘rules’ of the game and see consumers’ best interests coming to the fore. Banks cannot force clients to buy their in-house policies, despite risks to the assets in question. But at the same time, bond insurance shouldn’t be viewed as a grudge purchase by consumers, because in a worst-case scenario the bank could repossess a property and the home-owner’s dependants may not have a home. The best possible scenario is having consumers shop around for a product that suits their needs. If cost is an issue, brokers should advise clients appropriately, according to affordability. Do you think TCF will be a game-changer when it comes into effect? Comment below or email [email protected].
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