Credit life insurance may be the first type of insurance that many low-income consumers encounter. As such, it can offer an opportunity for introducing consumers to the concept of insurance and, if it offers value to them, can lead to uptake of other insurance products in future– a phenomenon that can be termed positive market discovery. However, credit life insurance can also lead to consumer protection concerns if consumers are not aware that they have insurance, or if the fact that a captive market is created leads to exorbitant pricing. Such practices may lead to disillusioned customers, thereby disincentivising uptake of other insurance products.
South African legislation, through the National Credit Act of 2005, mitigates the potential negative implications of credit life insurance by requiring that consumers be allowed a choice of insurance provider when required to take out mandatory insurance, and that financiers should inform applicants of such right and may not charge any surcharge or fee on the insurance offering. It is however not clear to what extent consumers are aware of and exercise this right in practice.
In 2011, the government formed a Consumer Credit Insurance Task Team, jointly led by National Treasury and the Financial Services Board, to investigate the state of the consumer credit insurance industry in South Africa. To complement the work of the Task Team, Cenfri on behalf of FinMark Trust, commissioned a study to offer the demand-side perspective on how consumers experience the purchase of credit life insurance, particularly in the low income space. The purpose of the research was to investigate dynamics and trends in the credit life insurance market in South Africa. Through a mystery shopping exercise and consumer interviews, it sought to determine whether customers in practice have a choice of insurance provider and whether the terms and conditions are clearly explained to them. The findings suggest not.
This research served as input for a recently published document by National Treasury and the Financial Services Board to consider the policy options for consumer credit insurance in South Africa.
This may be the first time you hear about credit life, but if you have ever purchased anything on credit, chances are; you have bought credit life.
Credit life is the insurance you pay on your loan; whether it is a personal loan or even car finance.
Credit life on its own is not bad or illegal, but it is how it is administered to the consumer that becomes a problem.
Some companies, especially micro-lending companies that offer credit to consumers, may use credit life to rip off customers by telling them that it is compulsory and then charge rates that are above the industry norm.
This is one way for lenders to circumvent the interest rate and fee limits on credit imposed by the National Credit Act.
According to the National Credit Regulator, credit life insurance is cover “payable in the event of a consumer’s death, disability, terminal illness, unemployment or other insurable risk that is likely to impair the consumer’s ability to earn an income or meet the obligations under the credit agreement”.
In terms of the act, a credit provider is entitled to require a consumer to maintain credit life insurance during the time of the agreement so that the loan will be paid should something happen to the customer.
A consumer cannot elect to not include credit life insurance as part of the credit agreement if required.
In some cases the credit provider will offer to provide credit insurance, but insurance can only be provided by an insurance company so the credit provider will have a contract in place with that insurer.
If the customer takes out credit life insurance through the credit provider then the credit provider needs to provide the consumer with the full details and may not add any surcharge, fee or additional premiums above the actual cost of the insurance.
A consumer is entitled to shop around for his or her own insurance and provided the policy has the same cover as the one proposed by the credit provider.
The credit provider cannot deny credit if the consumer takes out their own policy should he not be satisfied with the cover presented by the credit provider.
A consumer can also cede existing life cover to the credit provider as long as it meets requirements in terms of cover.
However, one needs to be cautious in this regard. Phumelele Ndumo says in her book From Debt to Riches: “When you cede your life policy to a creditor, you give the creditor the first right to the payout.
“Unfortunately, the creditor could get the money from your life policy even if you have paid off the debt.
So, as soon as you have paid off your debt, you must cancel the cession and name your beneficiaries to ensure that the money is paid out to your beneficiaries”.
Although many credit providers and micro-lenders such as African Bank may charge for credit life, Capitec Bank says it does not sell credit life cover to its clients.
Life and retrenchment cover are automatically included at no additional fee to our clients who take credit for longer than a six-month term.
“We took insurance cover on our outstanding book from Channel Life, now Sanlam. This book cover policy has been in place for more than two years and is renewed yearly. We also do not charge policy premiums,” says Charl Nel, head of strategic communications.
The following article was first published on News24-See the original article here
AMID mounting pressure to root out bad credit practices, retailer Lewis Group says it will refund R67.1m to pensioners and self-employed customers for “mistakenly” selling them unemployment insurance.
The group laid the blame on “human error”.
Like peers JD Group and Shoprite, Lewis had drawn the ire of the National Credit Regulator, which after a probe earlier this year, referred the retailers to the Consumer Tribunal for reckless lending and breaches of the National Credit Act.
Lewis Group CEO Johan Enslin said the repayment followed an internal investigation by the company, triggered by the regulator bringing to attention three instances of such sales of insurance.
Loss of employment insurance cover is used to settle customers’ outstanding balances on their credit agreements in the event of retrenchment or redundancy. Pensioners and self-employed people cannot be retrenched, and are obviously not eligible for such cover.
Like JD Group, Lewis’s business model has come under the spotlight due to the greater quantum of revenue from ancillary products such as credit life insurance, extended warranties on goods and compulsory delivery fees — rather than the sale of furniture. Lewis is adamant that it has not contravened the National Credit Act and denies allegations that it does not undertake adequate affordability checks on customers. The retail group also dismisses claims that it has failed to provide sufficiently for bad debts and that its accounting for insurance income is inappropriate.
Dave Woollam, a partner at Summit Financial Partners, said “no way in a million years” was human error to blame for the insurance debacle.
“Sales people tell customers that it’s mandatory and that you have no choice but to take out the insurance,” he said.
“The vast majority of Lewis’ customers are financially and mathematically illiterate. Some are completely illiterate, so they sign with just an X.”
The regulator’s charges against Lewis and the other two retailers were based on results from in-depth investigations by Summit Financial Partners that seemed to indicate contravention of several sections of the National Credit Act.
“By the size of the fine, there are at least 50,000 cases. They deliberately and maliciously charged people for things that they didn’t need to maximise revenues through exploitation of part of the population who simply didn’t understand,” Mr Woollam said.
He had also conducted undercover shopping trips, that exposed other unsavoury practices. This included a store assistant entering R10 as a customer’s living expenses to let the customer qualify for greater credit.
Lewis said it had introduced a raft of preventative measures to ensure “human error did not happen again”. The tribunal is yet to set a date for its hearing. Apart from an audit and refund, the regulator requested in July that Lewis pay a fine of R10m.
An analyst, who could not be named, in line with company policy, said there had been a low level of compliance by the industry at large due to a relatively weak regulatory enforcement process in the past.
BY ZEENAT MOORAD, 28 OCTOBER 2015
The following article was first published on BDLive-See the original article here
Credit life insurance, or consumer credit insurance, is cover you take out on a loan or credit agreement in the event of your death, disability or retrenchment.
“We are currently exploring various pricing options,” Capitec spokesman Charl Nel says. “We will, however, be able to make a decision only once the interest rate caps are formally in place.”
Under the National Credit Act, a credit provider can insist that you take out this insurance, but it can’t force you to take its product.
The regulations that limit interest rates and fees charged on credit are “soon to be published by the DTI”, according to Lebogang Selibi, the spokeswoman at the National Credit Regulator (NCR), although no date is forthcoming. The regulations will not apply to existing agreements, only to new ones.
Comments on the draft regulations closed on July 24.
The proposals include capping the maximum interest rate for unsecured credit at 24.78 percent (down from the current 32.65 percent), and limiting the charge on credit facilities (overdrafts, credit card debt and store card debt) to 19.78 percent instead of 22.65 percent.
At the same time, proposals have been made to limit the premiums lenders can charge for credit insurance. At present, there is no cap, and lenders can charge at their discretion on unsecured loans. Abuse is rife, with some lenders, for example, charging pensioners retrenchment cover.
“We have finalised a regulation to cap credit life insurance premiums, and the regulation awaits publication by the DTI,” Selibi says.
The DTI has not indicated what the limit will be, although the NCR has suggested a cap of R4 per R1 000 borrowed per month.
Attorney Stephen Logan, chief executive of Fair Credit and co-author of The Credit Guide, points out that the National Credit Act stipulates only that premiums should be “reasonable and at a reasonable cost to the consumer”.
“This is what has enabled lenders, such as Finbond Mutual Bank, to charge as much as R90 per R1 000 borrowed per month. Unless caps on credit insurance premiums are put in place, the current maximum interest rates and fees are easily flouted,” he says.
The NCR figures show that the average cost of credit insurance is R7 per R1 000 per month.
It’s a profitable business: in 2012, consumers paid R16 billion in credit life insurance premiums.
In its “Technical Report on the Consumer Credit Insurance Market in South Africa”, the National Treasury found that rates charged for credit insurance were about 10 times those charged for stand-alone life covers, such as funeral cover. But claims made on credit insurance policies were less than half those made on stand-alone life cover.
The average loss ratio (claims paid by an insurer as a percentage of the premiums it collects) for credit insurance is less than 20 percent, says Lesiba Mashapa, the NCR’s company secretary. The average loss ratio on other short-term insurance products is about 60 percent.
Logan says that if a product’s loss ratio is very low, you know there is a problem with the product – either people are not claiming or claims are being denied. “What is not repaid in claims is raked off as profit by the lender,” he says.
“When the caps on credit life premiums come in, they will not be retrospective,” Logan says. “We are witnessing credit providers seeing a loophole and saying, let’s exploit it before the regulations come in … Making up income like this is total abuse. It undermines in a significant way the whole purpose of the National Credit Act.”
Logan is of the view that a number of credit providers will exploit the loophole.
In Capitec’s unaudited financial results for the six months to August 31, the bank reported that its gross loans and advances rose eight percent to R37.9 billion. Gross loan impairment expenses were up 11 percent to R2.51 billion, and loans in arrears fell eight percent to R1.8 billion. Capitec also raised its provision for doubtful debts by 13 percent to R4.2 billion. Headline earnings were up 25 percent to R1.469 billion.
The Treasury’s financial sector policy unit has been driving the consumer credit insurance roadmap, which will come out of Treasury’s technical report. The roadmap is expected to address legislation and abuses in the consumer credit insurance market.
Logan says that unless the government takes decisive action now, consumers are likely to pay as much or more for credit insurance than they do in fees and interest.
October 24 2015
By Lorraine Kearney
The following article was first published on IOL Personal Finance-See the original article here