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TCF could change bond insurance ‘rules’

06 March 2013 Fiona Zerbst
Fiona Zerbst, FAnews Online Editor

Fiona Zerbst, FAnews Online Editor

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


Added by Craig, 06 Mar 2013
Shopping around is an absolute must. The first "deal" might not necessarily be the best deal to suit your needs. In my experience, the younger generation pursuing insurance are looking online, as this seems to be the easiest route to get cover. Most are completely overlooking the idea of working with a financial advisor. Only after getting stung following a claim would some consider looking for a FA. Hopefully TCF will stop the uninformed getting stung. Can I add to this that financial advisors need to somehow create a greater awareness of themselves and services online? (I suppose that that is a whole different discussion though?)
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Added by Liver Tshunga, 06 Mar 2013
Very interesting article and gives us food for thought as far as bonded properties insurance is concerned. The biggest problem the banks face is that customer csanel the bank insurance and take it elsewhere.A few months down the line they cancel that policy and the bank sits with an uninsured property.The other insurance companies or brokers hardly communicate to the banks that the policy has been cancelled despite that the bank`s interests will be noted on the policy. customers are always given a choice but fail to adhere to arranges,like providing the bank with proof of insurance on an annual basis. The banks are then forced to put insurance in place to protect their interests.
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Added by GOLDSTAR, 06 Mar 2013
While I have no problem with banks etc.covering the property/bond , I do have a problem with them charging ridiculous rates for the cover and then adding on extras without consultation,telling you they have the right to insure -as they please and then treating you like a criminal when you claim-you are not allowed to speak to the person handling the claim-only a call centre.They seem to think that they have a devine right to push you around !
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Added by Phyl , 06 Mar 2013
I have this exact problem with my bank. Granted a bond loan over a year ago and built into the paperwork in a remote part of the contract that an annual fee of R1000 would be charged as an admin fee if policy not taken through them. I did get a quote and it was way more expensive that what I could negotiate as a Broker on my own scheme. I was unable to get them to withdraw this clause and I noted with interest that the renewal came and went and I'm still waiting for their call or email to confirm cover is still in place. I did however note that the R1000 was added to my account.? Rip Off is the words I have in mind. I am sure the Bank Ombudsman should be doing something about this.
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Added by John, 06 Mar 2013
We are talking "bond" cover here. Not asset protection cover.Clients should in any case consult their financial adviser when they want to buy property, because any financial actions should be considered on a holistic basis because it affects the plan. And banks should stick to their core business, that of lending money and "borrowing" by virtue of the deposits they take. They bully gulliblre people into taking out their own products.
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Added by Peter, 06 Mar 2013
The problem is that there are so many people out there that are noy aware of this. They are bullied into the banks Life cover (bond cover) as well as Home owners cover (asset protection). Our experience has been that the rates the banks charge on Home owners cover are way higher than what we get for the clients. The consumer, bank client, is so happy that the bank was so good as to give them the bond that they are affraid that if the refuse the life and asset cover, the bank might change it's mind and not give them the bond. In short, the banks take advantage of the plight of the people for a homeloan as well as their ignorance on the matter
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