A new set of credit life insurance regulations that will protect consumers from abusive practices by credit providers came into effect in mid-August 2017. The regulations have been hailed as a positive step to prevent consumers from being exploited when they take out credit facilities.
When a consumer applies for credit, credit life insurance is often added to their finance agreement, as the credit provider wants the assurance that their money will be repaid in the event of a client’s death, disability or unemployment. While credit interest and fees are strictly regulated by the National Credit Act (NCA), bundled credit life insurance products were not, and some credit providers have been using this loophole to overcharge vulnerable consumers who were desperate for credit.
African Unity Life (AUL) CEO Sonja Visser explains that the regulations will protect consumers in two ways.
“Up until now, consumers were often offered credit life insurance that was unsuitable or did not appropriately meet their needs. In some cases, credit providers charged exorbitant fees or premiums for credit life insurance. However, under the new regulations, these practices will not be allowed for any credit life agreement signed from 10 August 2017.”
The regulations set a monthly credit life insurance limit of R4.50 for every R1 000 owed on all credit agreements other than mortgages. Ordinary mortgage agreements have a R2 limit for every R1 000 owed. So, for example, a R1 million mortgage should carry a maximum monthly credit life premium of R2 000, while a R10 000 loan would have a maximum monthly credit life premium of R45.
The new regulations also require credit life insurance policies to now cover death, permanent disability, and, in certain circumstances, disability and unemployment. Although a credit provider can compel a consumer to take out credit life insurance, they cannot prescribe a specific policy.
“The consumer now has far greater freedom of choice,” says Visser. “They can also use an already active policy that they might have in place to cover the new credit. All of this contributes to making it a very positive change for consumers – who will also find that any new credit life insurance policies taken out are generally more affordable.”
Unfortunately, the regulations cannot be backdated, and the same restrictions will not apply to existing policies which were taken out before 10 August 2017.
She adds that there will be some fall out for companies with a business model that was dependent on the higher premiums charged. “In some cases, it might not be viable for some of these credit providers to continue to sell credit life insurance, depending on the cost structure of their business. This could in some cases be negative for the consumers who need the protection and who may not be advised to contact alternative providers to assist them.”
“We are fully aware that consumers taking out loans are vulnerable and do not necessarily intend to enter into insurance agreements when they apply for credit,” she shares. “We believe that the new regulations will protect these vulnerable consumers from abusive practises and will support the ‘Treat Your Customers Fairly [TCF]’ principles in South Africa.”
As an underwriter of life insurance, AUL provides intermediaries with underwriting quotations. While the business has always attempted to apply TCF principles, it was possible that intermediaries could opt to sell the credit life insurance policies at higher premiums that was quoted by AUL. The new regulations will restrict this practice.