An investigation into the consumer credit insurance industry has 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. It also found that there have been undesirable practices by intermediaries selling credit policies.
Although there are legal loopholes that may see the insurers get off the hook, the panel of inquiry argued that there were serious problems within the industry and that the consumer does not always get a fair deal. The report concluded that although credit insurance is necessary in order to maintain a viable credit industry and is in many ways an excellent product in meeting specific needs, some of the practices in selling the products and remuneration structures have to be challenged.
The panel of inquiry, chaired by Judge Peet Nienaber, was appointed by the Life Offices Association and the South African Insurance Association last year after reports of undesirable practices in the credit insurance industry. 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.
The practice of excessive remuneration and undesirable selling tactics was found to be widespread in the industry. 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 as part of the loan, such as credit life polices and motor warranties.
The report found that although commissions and remuneration structures need to be more transparent, commissions are ultimately reflected in the premium paid and if customers are allowed to shop around, those insurers paying high commissions will lose business. A survey by FinMark Trust found that lower income individuals did not even know they had taken out insurance on their purchases as this had been built into the monthly instalments without any disclosure.
The investigation also showed that 48% of claims were turned down, which suggests that policies were not sold correctly and customers did not fully understand the level of the cover and when it would apply. The report argues that current legislation under both the National Credit Act (NCA) and Financial Advisers and Intermediary Services is adequate to address these issues and that the problem lies with the monitoring and investigation of instances of non-compliance.
For example, the NCA now requires that all instalment advertising shows the total monthly charges including all add-on charges such as insurance. The panel recommended that market conduct should be the responsibility of the National Credit Regulator (NCR) rather than the insurance industry as credit insurance only occurs when credit is taken out and is therefore linked to the credit provider.
André Dreyer, business development actuary at RGA Reinsurance Company of South Africa, says that the overall findings are in line with suspicions that certain insurers and retailers were non-compliant. Dreyer says that the fundamental problem in South Africa is that the industry operates in an environment of regulatory compliance rather than on the basis of principle as is the case in the United Kingdom.
“More legislation just sees more boxes to tick,” says Dreyer. He argues that increased competition in the industry will benefit consumers, especially in regard to direct marketing. As most of these policies are sold to a captive audience at the point of purchase, consumers should be encouraged to question their policy premiums if they receive calls from direct marketing insurers asking them to compare their quotes. Dreyer says the recommendation that the NCR oversees the industry will be a challenge as the regulator already has its hands full with implementing the credit side of the industry.
Remuneration loophole
The legal loophole that has allowed some insurers to pay up to 40% commission, well above the maximum 22,5%, has to do with the issue of outsourced administration. Over and above the commission paid as an intermediary, the insurer recognised the dealership or retailer as a supplier of outsourced administration. This allowed the insurer to pay an additional administration fee over and above the intermediary commission.
An interpretation note sent out by the Financial Services Board in 1998 appears to support the idea that an additional fee for administration can be paid as these entities did administration functions rather than intermediary services. However, the panel disagrees and has argued that an intermediary is defined as “anyone rendering services as intermediary”. Under this interpretation the retailer selling these polices would be regulated under the capped commission and no additional administration fee should be paid.