Credit life insurance claims are starting to pour in as more consumers are losing their incomes because of the coronavirus lockdown.
Banks, which count among those that sell credit life insurance - alongside retailers and insurers - are projecting that they'll likely cough up hundreds of millions of rands for these claims, which consumers expect to cover their debt repayments when they've lost their jobs.
Credit life usually pays the monthly instalment for unsecured debt like personal loans, credit cards and store purchases when consumers have been retrenched or can no longer work because of an illness, disability, or death. But the current lockdown, which is entering its ninth week, has thrown a different spanner in the works due to mass layoffs and retrenchments, which some models predict could rise to as much as 7 million.
Retrenchment claims soar
FNB says it is expecting to approve R100 million in credit life claims related to Covid-19. The bank has around 1.2 million customers with active credit life policies at FNB. Around 650 000 of those have polices with a retrenchment or inability to earn an income benefit attached to it.
"Due to the Covid-19 crisis, the number of claims paid out has increased substantially and we are happy that we can play our part," said FNB Life CEO, Lee Bromfield.
Bromfield said FNB is now processing between 2 000 and 3 000 claims a day. Between February and May, the value of credit life claims that the bank has paid out increased by 180% because of increased retrenchments.
"We have approved more or less 8 000 valid retrenchment and inability claims as a result of Covid-19 and have another 7 000 in our queues in various stages of processing," added Bromfield.
For now, roughly 90% of claims received are for temporary loss of income, but Bromfield said the bank is yet to see if these will become indefinite.
At Absa, the managing executive of Absa Life, Eugene Strauss, said at the beginning of the lockdown, the bank was receiving between 200 and 300 credit life claims a day. Now, that has increased to between 500 and 600.
Absa has 2.3 million clients with Covid-19 related benefits. About 1.2 million of those are active credit life clients. The bank has now adjusted its credit life benefit. Whereas in the past, only formally retrenched people could claim, now consumers who have been laid off, contractors and those who have been forced to take unpaid leave qualify.
As more consumers approached the bank for debt repayment holidays, the insurance division picked up people who qualify for the insurance payout instead and has been texting its clients to alert them about their benefit. Of the customers who were offered payment relief, 60% have credit life. All these factors also boosted claim numbers.
"So far, it's not always crystal clear when we get a retrenchment claim whether it was Covid-19 that pushed it over the edge because there were already some strains in the economy before that. But about 85% of our claims are formal retrenchments," said Strauss.
Nedbank said since the end of March its insurance division has received just under 2 500 retrenchment and loss of income claims. While this is lower than that of Absa and FNB, the bank said it is higher than the comparable period last year.
"We are seeing a mixture of partial and full loss of income as well as retrenchment claims. Approximately half of the claims received are for loss of income. As many clients are still not working due to the lockdown, it is hard to determine the exact period benefits will be paid for and we are reassessing claims on a monthly basis for these clients," said the bank in a written response.
How will this affect banks?
Nolwandle Mthombeni, analyst at Mergence Investment Managers, said because consumers usually buy credit life insurance for unsecured credit, debt that is smaller in value. So, even for banks that have their internal insurance unit to pay these claims, their liability is small.
"One bank that would have a bigger personal loan book is Capitec, but they reinsure their entire credit life book. They pass on the risk completely to the reinsurer. So, they don't have to worry about it impacting their numbers," said Mthombeni.
Richard Cheesman, senior analyst at Protea Capital Management said the biggest risk that banks face because of Covid-19 is potential loan write-offs, especially due to corporate failures. As for these claims, banks will be insulated by the fact that their insurance businesses have reserves, and potentially reinsurers to pass these claims on to.
"Some have questioned if the policies are applicable in the case of a pandemic. Then there is also the context. For instance, FNB made R9.2bn in the first half of its financial year so R100m in credit life claims will hardly be a blip on the screen for them."
UPDATE: This story was amended at 9:45am to reflect that of Absa Life's 2.3 million customers who qualify for with Covid-19 related benefits, only 1.2 million have credit life insurance.