Credit Life Insurance – South Africa

World-wide, credit life insurance is one of the most widely available insurance products aimed at the low-income market. For most of these low-income consumers, these products are also often their first ever encounter with insurance.

Credit life insurance: Close encounters of the first kind

If credit life insurance is marketed and sold ethically and transparently and it adds value to the consumer, it presents an opportunity to introduce them to the concept of insurance, which could lead to them potentially taking up other insurance products in the future. On the other hand, disillusioned consumers (borrowers or customers) are more likely to be the end result if consumers are not aware of the fact that they have insurance or if the fact that they represent a captive market leads to exorbitant pricing. It follows from this that disillusioned customers are unlikely to purchase other insurance products.

What exactly is credit life insurance?

According to the National Credit Act (NCA), credit life insurance includes: “...Cover that is payable in the event of a consumer’s death, disability, terminal illness, unemployment, or other insurable risk that is likely to impair the consumer’s ability to earn an income or meet the obligations under a credit agreement…” A credit life insurance product pays off the loan in the case of one or more of the above. As the pay-out decreases in correlation to the repayment, credit life insurance can be called a ‘decreasing sum assured product.

In research done by Cenfri on behalf of FinMark Trust, the following credit life insurance products are identified as existing in the South African market.

The first form of credit life insurance takes the form of policies that will as indicated above - in the event of the insured life’s death or permanent disability - pay a lump sum equal to the value of the outstanding debt in terms of a credit agreement.

Another form of credit life insurance is policies that offer a benefit covering either a proportion of the outstanding debt, or that covers a proportion of the monthly instalment (up to 100%) for a specified period of time (the time period can be as little as three months). Pay-outs from the latter types of policies are made if the insured life becomes temporarily disabled or in the case of retrenchment.

Credit life insurance can also include dread disease cover. In this form of credit life insurance, a consumer is covered for an amount equal to the death benefit in the case of the insured being diagnosed with a dread disease such as renal failure, paraplegia, heart attacks or loss of speech.

Credit life insurance can also be combined with asset protection cover. Such a product provides cover for accidental damage or destruction of goods, fire or theft from the premises, as well as riot cover. The NCA makes it possible for credit providers to insist on credit life insurance as well as product protection insurance. Claims in respect of the latter must be submitted within 30 days in case of the asset being stolen, destroyed or damaged. The insurance provider then pays the insured for the loss, in so doing the provider is relieved of the liability of continuing to pay for an asset they no longer have access to.

Credit life insurance has a bad reputation

In South Africa, the question if consumers are getting a fair deal and one that adds value when purchasing credit life insurance is by no means an ‘open and shut case’ and it remains the topic of on-going debate.

This follows a report released in 2008 by the Nienaber panel, which was appointed to “identify and eradicate undesirable practices prevalent in the consumer credit insurance (CCI) (which by definition includes credit life insurance) market impacting negatively on consumers”. According to the report, there was a definite need for consumer credit insurance in the market, which it successfully fills. However, the report highlighted that these insurance products are in the first instance designed to serve the interests of the credit provider. Deficiencies in the system, the Nienaber panel’s report found, left the industry open for exploitation by unscrupulous providers.

The report highlights that all forms of consumer credit insurance’s bad reputation is not limited to South Africa and that consumer credit insurance also has a bad name in other countries of the world. While the report indicated that various factors can be blamed for consumer credit insurance products’ bad reputation among consumers, it cautioned against such generalisation at the same time, saying that such generalisation is difficult as a variety of insurers issue various forms of consumer credit insurance.

Lenders and ‘big bucks’ from credit life insurance

To ensure that the loan will be paid should something happen to the consumer before it is paid off, a credit provider may require a consumer to maintain credit life insurance during the life of the agreement. While many credit life insurance products consist of only a life insurance component, it can also be structured to be a ‘hybrid’ product of some sorts with components that could include both life and general insurance components.

While credit life insurance is in theory aimed at protecting and providing security for both the insured and the credit provider, in practice, it is more likely to reduce the risk for the lender. It also provides the lender with an additional source of income from the insurance sale. It is this benefit to the lender that leaves a gap for lenders to potentially generate huge amounts of revenue from consumers when they sell these products with loans (they can’t earn so much from loans as tighter rules apply), that has put it centre stage in proposed new regulation of unsecured credit.

Another way that lenders can earn so-called ‘big bucks’ from selling credit life insurance, is by making it compulsory for a loan. This leads to the effective cost of credit life insurance to the borrower being much higher than the 31% cap that is proposed by the National Credit Act.

Freedom of choice is essential

Even when insurance is compulsory, the National Credit Act (NCA) requires that consumers must be allowed to choose which insurance provider they would like to make use of for such insurance. The Act also requires that lenders should inform their customers (consumers, borrowers) that they have this choice and that the lenders may not charge any surcharge or a fee on the insurance product they are offering. However, it is unclear if consumers are aware that they have this right and exercise it.

The above so-called ‘perverse incentives’ for lenders when it comes to credit life insurance, which as part of unsecured lending probably also played a role in the near demise of African Bank has resulted in a task team being appointed in 2011, consisting of the National Treasury, the Financial Services Board (FSB) and the National Credit Regulator (NCR) with the assistance of the Competition Commission and Society of Actuaries to look into credit life insurance and to propose improved regulation for this type of insurance as provided by both the banks and the retail sector.

The African Bank story

According to a November 2013 article in Business Day Live, titled Credit life insurance bonanza one of targets in new lending regulations, columnist Stuart Theobald, credit life (in November 2013) reported that in their 2013 financial results, African Bank’s insurance business posted a healthy gross profit against a very low claims ratio, which stood in stark contrast to the big loss from its lending and retailing businesses. And the rest, as they say, is history.

A ‘healthier’ alternative

A different and also a safer ‘model’ of providing consumers with credit life insurance, Stuart says in the same article, is that of Capitec Bank, who does not charge insurance premiums. Instead, its clients get credit life insurance free with their loans through an insurance policy with Sanlam covering all the bank’s clients.

FinMark Trust research confirms consumers are not informed; cannot choose

Research done by Cenfri on behalf of FinMark Trust, looking at how especially low-income consumers experience purchasing credit life insurance and to determine of consumers do indeed have a choice of insurance providers and whether the terms and conditions associated with this insurance are clearly explained when they purchase such insurance, found that the above is not the case when low-income consumers purchase credit life insurance.

The small print: Typical Terms and conditions that apply to credit life insurance

According to the above-mentioned research, typical terms and conditions that apply to credit life insurance – and that consumers should be informed about at the point of them purchasing such insurance are as follows:

With regard to retrenchment benefits, these are not paid in the case of a person being self-employed. Also, retrenchment benefits will not be paid out if the insured is retrenched within 30 days (this waiting period can be up to three months in some instances) of the insurance cover commencing.

In terms of cover being provided for monthly credit instalment cover, such instalments are only paid to the credit provider for a maximum of 12 months (this could vary, with some insurers paying the full amount owed).

Credit life insurance is not underwritten, which means there is no need for the insurer to ask the insured any health-related questions when the latter applies for credit life insurance. However, it is worthwhile to note that despite the above, pre-existing conditions are excluded for only 12 months after the policy commenced. Such conditions are limited to those existing 24 months before the cover commenced.

It is worthwhile to note that some insurers specify that their liability does not extend beyond a person’s 65th birthday.

The conclusion of the study done by Cenfri on behalf of FinMark Trust, is significant and confirms why (rightfully so) question marks are put behind the true value that credit life insurance adds to the lives of its low-income consumers, the primary target market of these products.

Customer value is questionable

Credit life insurance seems to be more expensive than the life policies that are available on the market. When combined with low claims ratios and high expense ratios (could be due to no underwriting being required as alluded to earlier in the article) indicate that credit life insurance has low value for consumers.

In practice, consumers can’t exercise freedom of choice

Existing price difference between insurance providers for credit life insurance products indicate that consumers can find a cheaper option should they want to, but very few (if any) consumers ever compare quotes or shop around - they would rather use the credit provider’s options to speed up the process. Comparison quotes are not easy to find and there are no standardised forms that clearly indicate the credit life product. Where small life insurance amounts or individual assets come into play, there are only a handful of products that can be chosen from.

Not enough is being disclosed

Quotations that are simple, easy to obtain and readable is where it all starts for the consumer and with which he or she can start ‘shopping around’ for something better or more affordable. The study’s findings suggest that quotations are difficult to interpret and that policies include additional fees and components. While regulation and other interventions exist that protect consumers when it comes to disclosure practices, the study’s findings suggest that in some instances, sales staff intimidate actively discourage consumers from shopping around.

Sales staff members are not FAIS compliant and should focus on selling the product, not giving financial advice. The practice, of referring a consumer to a FAIS-compliant financial adviser after being given the facts of the credit life insurance product, is not adhered to and some sales staff that sell, advise and intimidate abound.

It is clear that some more regulation is required and needs to be monitored if low-income consumers in South Africa are to reap the true benefits of credit life insurance.


Credit Life Insurance – SA Insurance Providers (8)