The dubious world of credit insurance

Chickens are coming home to roost for the credit insurance industry.

insurance claim formLast month the National Credit Regulator (NCR) referred the financial services arm of JD Group to the National Consumer Tribunal for the mis-selling of credit life policies, highlighting the type of unethical practices that have long plagued the consumer credit insurance industry.

This follows the NCR’s decision in July to refer Lewis Group and Monarch Insurance Company to the Tribunal for similar practices including selling retrenchment and disability cover to pensioners and self-employed clients – basically cover that these individuals could not claim for. In June, microlender FinBond was referred by the NCR to the Tribunal for excessive credit insurance premiums after an investigation by City Press.

In issuing the statement with regards to JDG Trading, the National Credit Regulator stated that “the NCR will continue to conduct industry-wide investigations on credit insurance practices to protect vulnerable consumers such as pensioners and the disabled.”

Lewis has already strongly defended its practices in an affidavit issued to the National Consumer Tribunal, as has FinBond. The reality, however, is that unethical practices within the consumer credit insurance industry, which is worth around R16 billion a year in premiums, have been under the spotlight for many years.

Irregular selling practices

Prior to the National Credit Act in 2006, it was common practice for car dealerships to sell single, upfront premium credit insurance policies for the term of the vehicle-financing period. These single premiums ran into the tens of thousands of rands and were included in the principle debt, effectively incurring interest charges. The insurer received the money upfront, the dealer received their commission and the consumer was left paying interest on their policy. Investigations at the time found irregular selling practices where dealerships would claim that the credit insurance policy was a condition of finance approval.

Once the National Credit Act came into effect, credit insurance premiums could no longer be included in the principle loan. However, by introducing a cap on the interest charged by micro lenders, the Act inadvertently opened the door for credit insurance policies to be used to circumvent the interest limits.

An investigation in 2008 into credit insurance policies by the then Life Offices’ Association and the South African Insurance Association found that in many cases the retailer or dealership made their money not out of the goods they were selling but from the insurance premiums and interest earned by financing these premiums.

They also found that remuneration by some insurers to motor dealerships and furniture retailers was in excess of the capped commissions stipulated in both the Short Term and Long Term Insurance Acts. At the heart of these allegations was that Regent Insurance was paying excessive commissions to dealerships within the Imperial Group which also owns Regent Life, though the practice of excessive remuneration and undesirable selling tactics was found to be widespread in the industry.

The report concluded that while credit insurance is necessary in order to maintain a viable credit industry and is in many ways an appropriate product in meeting specific needs, some of the practices in selling the products and remuneration structures had to be challenged.

Unfortunately not much has changed since then and in September 2014 National Treasury issued its Technical review of the consumer credit insurance market South Africa where it found that in general the rates charged for credit insurance were around ten times higher than for stand-alone life covers such as funeral cover with commissions paid to sales consultants as high as 40% of the total premium paid.

The report also found that lenders would often place restrictions on the type of cover they would accept, thereby limiting the customer’s options, forcing them to take the insurance through the credit provider.

An example of the type of loan under investigation by the NCR includes a R5 000 loan issued by a microlender which was repayable over four months; between interest, credit life and service fees, the client would pay R2 840 in costs – more than half of what was borrowed – in just four months. Of those costs the highest by far was the credit life insurance at a massive R1 155, payable as a premium of R288 per month. That represented around 40% of the cost of the loan.

A study conducted by FinMark Trust, which conducts research on access to financial products, found that credit insurance costs typically made up 50% of the initial credit value and 20% of total repayable amount.

Free to choose?

Credit insurance is where the real money is being made. There is no doubt that the companies will defend their business models vigorously. They will point to the fact that that these are “isolated” cases and that customers are “free to choose”.

The reality is that the marketplace that these companies operate in allows unscrupulous lenders to take advantage of both a lack of financial education as well as simple desperation.

National Treasury’s research found that claims made on credit insurance policies were less than half of those made in stand-alone life insurance products, which suggests that few people actually understand that they have taken out credit insurance or how to claim.

When interviewing people who had just taken out loans, FinMark Trust researchers found that the customer had little awareness around credit insurance and saw it simply as “just another finance charge”. Researchers found that most consumers are more focused on buying the item they wanted, and whether their loan would be approved, than to ask questions about the total cost.

The fact that over 200 000 people have fallen victim to the loan scam where fraudsters convinced them to pay over thousands of rands in order to secure a loan is evidence enough that high levels of desperation create a perfect environment to make money out of excessive fees.

Current investigations into credit insurance

  • In June, the NCR announced that it had referred Finbond Mutual Bank to the National Consumer Tribunal for charging excessive credit life premiums. The NCR is requesting the Tribunal to, among others, order Finbond to refund all affected consumers and pay an administrative fine. FinBond has denied the allegations.
  • In July, The NCR referred Lewis Stores and Monarch Insurance Company to the National Consumer Tribunal for selling loss of employment cover and disability cover as part of credit insurance to pensioners and self-employed consumers. The sale of loss of employment cover to pensioners and self-employed consumers is unreasonable as they are not employed and cannot claim benefits under this cover. The same applies to the sale of occupational disability cover to pensioners where they no longer have an occupation. The NCR has asked the Tribunal to order a refund to the pensioners and self-employed customers as well as an administration fine. Lewis and Monarch have issued an affidavit to the Tribunal denying the allegations.
  • In August, The NCR referred JDG Trading and JDG Micro Life to the National Consumer Tribunal for selling retrenchment and occupational disability covers to pensioners and consumers receiving government social grants such as old age, disability, foster care and child support grants and charged most of these consumers a club fee. The NCR also found that some consumers receiving disability grants from the government on account of their permanent disability were sold occupational disability cover at a time when they were already certified permanently disabled. The NCR is asking the Tribunal to order JDG Trading and JDG Micro Life to refund the affected consumers the retrenchment and occupational disability premium and club fees charged from 2007, to issue an interdict to discontinue the unlawful conduct, and to impose a fine.

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