Consumer Credit Insurance

CCI under review

Consumer Credit Insurance (CCI) has become a huge market within the financial services industry. After an in-depth review of the CCI market, National Treasury released a report highlighting certain issues including:

  • Lack of transparency in total cost of credit: CCI is usually bundled with the credit offering and the inclusion of add-ons such as warranties and ‘club’ membership fees which makes full disclosure and price comparison difficult.
  • High premiums and different pricing: premiums are generally higher when a risk is insured under a CCI policy.
  • Product comparison is difficult: product features vary vastly on CCI which makes it extremely difficult to adequately compare products.
  • CCI cover does not meet the needs of the target market: certain product models offer benefits that not all customers qualify for and therefore cannot claim against (retrenchment benefit for self-employed clients)

The fact that credit providers are permitted to insist on CCI cover being purchased as a mandatory pre-requisite for granting credit, means that CCI customers are essentially “captive” clients. The bundled, ancillary nature of CCI (as discussed below) implies that consumers do not “shop” for CCI. Where consumers do shop around, this is typically with a view to identifying the lowest available overall credit repayment instalment. Usually, having selected a credit offering, the customer then simply enters into the related CCI product offered by the credit provider.

Despite the fact that the NCA requires customers to be given freedom of choice regarding the CCI product they enter into there is little evidence of this freedom of choice being exercised. Furthermore, the NCA allows credit providers to offer optional CCI cover, either in addition to or as an alternative to the mandatory CCI cover required as a condition for granting credit. Evidence suggests that, in certain business models, a substantial majority of customers opt for the more expensive optional offering. This raises questions as to how informed such a product selection actually is.

Conduct of Business Reporting

Information Requests (3/2015) and (2/2016) have been issued under the Long Term and Short Term Insurance Acts which direct all insurers (except reinsurers or captive insurers[i]), to furnish information to the Registrars of Long and Short Term Insurance regarding CCI products currently being underwritten:

  1. Credit life insurance
  2. Cover against damage or loss of any moveable property (that is, any property other than property covered by a mortgage agreement.

This information must be provided in the form of a Conduct of Business Returns (CBR) Report.

Commission cap for credit life insurance and removal of ‘administrative work’

Phase 1 of RDR (implementation July 2016) includes commission cap for credit life insurance schemes with ‘administrative work’ removed. The initial implementation of this proposal looks to align remuneration for existing credit agreements with the RDR activity based approach by a clear distinction between commission and outsourcing fees.

This means that all existing credit life group schemes will be capped at 7.5% of each premium, regardless of whether any administrative work is done. Advisors will only be able to earn remuneration in relation to credit life policy administration if this forms part of a Binder agreement or through an outsourcing agreement.

As part of consultation on revised insurance law Regulations (March/ April 2016 with implementation July 2016), the FSB will consult on removing the specific 22.5% commission fee cap for existing credit life group schemes with administrative work. Insurers and advisors who currently have these 22.5% commissions in place have been urged by the FSB to review and revise their business models.

Meeting TCF outcome 6 – No post-sale barriers

Going forward, emphasis will be placed on ongoing servicing of both Long and Short Term products.  There is a concern that due to the nature of long term risk policies, post-sale servicing will not be easy to standardise as a result of differing products and distribution models. For example, in the case of products sold on a ‘non-advice/ single need’ basis (credit life, travel or cell phone insurance, it has been put forward that there is no need for ongoing post-sale service.  This will be addressed in a RDR proposals relating to outsourcing.  There is the feeling that premium collection may be necessary in the case of non-traditional bundled products such as travel or credit insurance, where the premium is collected together with payment for the primary transaction.

[i] Captive insurer only issues first party risks. For example, operational risk for i) a group of companies of which the insurer is part; ii) an associate of the group of companies referred to in i) or iii) a joint arrangement that a company which is part of the group of companies referred to above is a participant of.
Consumer Credit Insurance