Turning the screws on insurance sharks

2014-07-06 15:00

Government gets ready to clamp down on the R16?billion-a-year industry hidden in the fine print

South Africa’s approximately 70 active consumer credit insurers (CCIs) just had a giant target painted on their foreheads.

These are the companies that add insurance fees to the loans consumers take out when buying anything from a house, a car and a ­TV set to a cellphone on credit.

Hypothetically, CCI contracts protect the buyer by covering their debt in case of death and unemployment?–?or if the product gets damaged or ­stolen. In practice, people often get saddled with overpriced insurance they might never claim on nor even know about.

A joint technical report by National Treasury and the Financial Services Board was released on Thursday.

It paves the way for the regulation of these often shadowy insurance products that push up the debt burden of millions of low-income consumers.

The headline finding is that premiums for CCIs amounted to R16?billion in 2012.

The biggest effect is on furniture purchases. On average, the cost of credit (interest) amounts to 33.6% of the price of the furniture. But the cost of CCIs add another 15.6%.

Despite all this money being paid for insurance, there are few claims, indicating there is probably no need for the insurance.

The “claims ratio” is worryingly low when it comes to movable property like furniture.

Some insurers pay out literally no claims while the industry average is 12%.

The CCI that covers debts in case of death or unemployment pay out, on average, 20% of the premiums they collect.

The average for CCIs on immovable property like houses is far higher at 61%.

Although the report warns that more data over a longer term are needed, the mere fact the claims ratios in the other two categories are below 25% is “unreasonable”.

It means that people are being saddled with insurance they largely do not use.

The research was commissioned from True South Actuaries & Consultants and the FinMark Trust, which went on “mystery shopper” trips to retailers to see how CCIs are marketed to the public at major providers. A “typical” quote they got involved R1?218 in CCI for a product that cost R2?500 in cash.

If it is bought on credit, the item would ultimately cost R6?296 due to interest, CCI and other charges, according to the report.

Other abuses include mandatory CCI for possible unemployment?–?for customers who are retired or self-employed, meaning they could ­never use the insurance they are paying for.

At 30% of the furniture retailers, the mystery shoppers were offered credit ­without any detailed assessment of their ability to ­afford it.

Half of the microlenders visited offered loans without requiring any financial information at all.

Although everyone has the right to refuse to use a credit provider’s in-house insurer, there are practically no other options and few customers ever get told this, creating a “captive market”.

“The combined effect is that the value proposition of CCI is called into question with apparently high prices and inadequate benefit realisation,” concludes the report.

It is not that all providers are unscrupulous, the report adds. But enough of them are to warrant action. The industry is set up for minimal competition, meaning there is little reason to lower premiums or improve the offering.

Among the companies likely to face new regulations are major furniture retailers Ellerines, JD Group, Lewis and OK Furniture, and microlenders. By and large, they own their own credit providers?–?and their own insurers.

The results are “highly concentrated value chains” and conflicts of interest because a single ­company is charging itself commission.

The limit on commissions from property insurance is supposed to be 20%, but the study found that providers earn up to 40% on immovable ­property insurance through disguised fees.

The laundry list of “potential regulatory responses” is generally aimed at forcing CCI providers into more transparency?–?and making it difficult to just include the product with credit at the store.

But the report also suggests setting maximum limits to fees.

It also takes aim at microlenders that offer ­“unsecured” loans at the maximum interest rate –?and then add insurance fees to these loans.

If the risk of default is insured, it is not really unsecured lending, but credit providers “are having their cake and eating it”, says the report.

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