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Ten common ‘misconducts’ in credit life industry – Part II

09 May 2008 Gareth Stokes

About three weeks ago an independent panel established by the Life Offices’ Association (LOA) and the South African Insurance Association (SAIA) released their long awaited report on Consumer Credit Insurance in South Africa. The report offers a detailed

1. Lack of proper disclosure

2. Pre-sale miss-selling by intermediaries

3. Lack of awareness of consumer of the existence of a credit insurance policy

4. Failure to explain the terms of the policy, including limitations and exclusions

5. Foisting policies on consumer

6. Use of ambiguous and obscure policy language

We weren’t too surprised that this concern made the panel’s list. Ambiguous language (in policy documents and other contracts) is a problem in almost every sphere of the financial services industry. And it quickly expands when we consider the life industry, particularly where disability claims are concerned. For years there have been pleas for the industry to standardise clauses and medical terminology to no avail. There are arguments for and against such standardisation; but the feeling from the ground is that the large assurance companies would rather prevent direct comparison of their policies than simplify definitions.

Most policies reviewed by the panel contained clear, simple and concise language. However, the panel noted that the various Ombudsman provided many examples where this was not the case. This area required further attention from the LOA and SAIA.

7. Excessively wide limitations and exclusion clauses

The panel begins this section by stating “it is one issue whether the consumer is aware of terms in the policy that would limit or exclude a claim; it is another matter whether the terms concerned, viewed objectively, are always reasonable.” After all, an insurer could provide insurance at virtually no cost if enough exclusions and limitations were in place. It’s ironic that the life insurance industry has been trying to move away from exclusions, while they remain rife in the credit insurance industry. Insurers contend that wide exclusions are essential in the lower end of the market, particularly where credit insurance is concerned.

But exclusion clauses that neutralize cover in policies would, “in the panel’s view, be tantamount to cynical abuse by the insurer of the more powerful position it occupies vis-à-vis the consumer.” To eliminate such abuses in the future the panel determined that the LOA and SAIA establish a dedicated sub-committee to “create a series of standardised clauses dealing with waiting periods and exclusions in the consumer credit industry.” The panel suggested that the industry ombudsman be approached for assistance in this regards and that said clauses be included in the industry codes.

8. Time barring clauses might be too tight

The panel noted that “the requirement that a claim be made on the policy within a given timeframe, and the problems that arise when the requirement is not complied with, are not unique to the consumer credit industry.” They conclude that while the practice of time barring is acceptable certain limits should apply. The panel raised two concerns in this area: the first being that the time period allowed may be unreasonable and the second that “the life assured, beneficiary or potential claimant under the policy may not be aware of the existence of the policy and hence of the time restraint.”

The insurers who responded to panel questions all agreed that the second issued identified here would have to be addressed through more efficient disclosure practices. But the first aspect presents more difficulties. For the most part insurers believe it is essential to establish a reasonable time limit within which grievances should be presented. A failure to implement a time barring period could result in “serious reserving issues.” Most insurers seem in favour of an extension of time barring in the event of death or total disablement. Time barring in such cases might be extended to 12 months from the more common 90 to 120 days.

9. Too much opportunity for conflict of interest

The existence of serious conflict of interest in the insurance industry has been a concern of the Long-Term Insurance Ombudsman for some time. In its written submission to the panel it noted: “An added complication can be a multiplicity of parties to the transaction. There could be a credit provider, an insurer, an administrator and the seller of the item for which the credit was granted. This causes confusion for the complainant and complications for our office.”

Although the panel completed a detailed investigation into business models in another chapter of the report they believe a solution to the conflict of interest problem will have to be thrashed out by a dedicated committee. They believe this committee should “implement a practice that the policy or the accompanying documentation should make it plain to the consumer who the parties in the distribution chain are, and what the capacity of each is.”

10. The ‘terrible’ single-premium malpractice

One of the alarming practices that led to the panel inquiry is the “capitalising of monthly premiums upfront in a single amount as part of the principle debt.” This results in the consumer having to pay interest on value of the capitalised premiums. The panel is satisfied that the National Credit Act has dealt with this practice which is now illegal. In evidence given to the panel it emerged that certain retailers were making use of a new practice called “factoring commission” over a period of 30 months to compensate the dealer for decreases in commissions. The panel suggested this practice be investigated by the National Credit Regulator.

And those, in a nutshell, are the main concerns highlighted by the panel in their report. There will always be those who push the boundaries of the law to maximise profit; but guidelines for a fair and equitable industry are in place. It’s up to individual insurers to do the right thing!

Editors’ thoughts:
If you’ve ever purchased furniture or a motor vehicle on credit you’ve not doubt had first hand experience of how credit insurance products are sold. We’d love to hear from you if you’ve recently purchased any ‘big-ticket’ item on credit. Do you think the agent who sold you your credit insurance policy acted in good faith? Add your comments below, or send them to

Click here to read our previous article re the recomendations

Click here to read Part 1


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