Business

Inside the dubious world of credit insurance

2015-08-16 17:00
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Johannesburg - This 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.

Last month, the NCR decided 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 regarding JDG Trading, the NCR stated that “the NCR will continue to conduct industrywide 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 about R16 billion a year in premiums, have been in the spotlight for many years.

Before the National Credit Act came into force 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 principal debt, in effect incurring interest charges. The insurer received the money upfront, the dealer received its 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 principal loan. However, by introducing a cap on the interest charged by microlenders, 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 SA Insurance Association found that, in many cases, the retailer or dealership made their money not from 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 the allegations was that Regent Insurance was paying excessive commissions to dealerships within the Imperial Group, which also owns Regent Life. However, 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 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, the Treasury issued its technical review of the consumer credit insurance market in South Africa, where it found that, in general, the rates charged for credit insurance were about 10 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.

Over the years, City Press has frequently reported on the abuse within the system, which has included excessive premiums, the sale of inappropriate risk products and, in some cases, outright fraud where microlenders issued fake policies and collected the premiums.

An example of the type of loan under investigation by the NCR includes a R5 000 loan issued by a microlender that was repayable over four months.

Taking into account interest, credit life insurance 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 R288-a-month premium. That represented about 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.

Credit insurance is where the real money is being made, and there is no doubt that companies will defend their business models vigorously.

They will point to the fact that these are “isolated cases” and that customers are “free to choose”.

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

The Treasury’s research found that claims made on credit insurance policies were less than half that experienced in stand- alone life insurance products, which suggests that few people either understand that they have taken out credit insurance, or know 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 were more focused on buying the item they wanted, and whether their loan would be approved, than on asking questions about the total cost.

The fact that more than 200 000 people fell victim to the Wonga.com loan scam, where fraudsters convinced them to pay over thousands of rands to secure a loan, is evidence enough that the levels of desperation create a perfect environment to make money out of excessive fees.

SEPTEMBER 2014

The Treasury issues recommendations on a Consumer Credit Insurance Technical review of the consumer credit insurance market in South Africa. The industry and consumers await the release of the consumer credit insurance road map. Treasury confirmed with City Press that the road map was being considered internally and should be available for publication later this year.

JUNE 2015

The National Credit Regulator announced it had referred Finbond Mutual Bank to the National Consumer Tribunal for charging excessive credit life premiums. The regulator is requesting the tribunal to, among other things, order Finbond to refund all affected consumers and pay an administrative fine. Finbond has denied the allegations.

JULY 2015

The regulator 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 because they are not employed and cannot claim benefits under this cover. The same applies to the sale of occupational disability cover to pensioners because they no longer have an occupation. The regulator 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.

AUGUST 2015

The regulator referred JDG Trading and JDG Micro Life to the National Consumer Tribunal for selling retrenchment and occupational disability cover to pensioners and consumers receiving government social grants – including as old-age, disability, foster care and child support grants – and charged most of these consumers a club fee.

The regulator 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 as permanently disabled.

The regulator 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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June 17 2018