Rotten to the Core – Inside the Consumer Credit Insurance Industry
Caught Infringing the Act
So far, in 2015 alone, the National Credit Regulator (NCR) has referred the following big-name corporate giants to the National Consumer Tribunal (NCT):
- Finbond Mutual Bank – for charging extortionate credit life insurance premiums;
- Lewis Stores and Monarch Insurance – for selling loss-of-employment and disability credit insurance to pensioners and self-employed consumers; and
- DG Trading and JDG Micro Life – for selling disability and retrenchment credit insurance to pensioners and social grant beneficiaries.
For many years now, the manipulative antics of the credit insurance industry at large have set media headlines ablaze. The obstinate endurance of abusive practices indicates that, despite concentrated awareness on these issues, the credit insurance industry remains rotten to the core.
Though, it’s no wonder credit insurance companies are so resistant to changing their well-tried, crooked ways, in an industry that yields about R16 billion a year in premiums.
In 2005, the National Credit Act (NCA) put a stop to the addition of credit insurance premiums to principal loans. In spite of this, slippery microlenders side-stepped the NCA-imposed interest cap, by misusing credit insurance policies to bypass interest limits.
Probing The Underbelly
In 2008, the South African Insurance Association (SAIA) and the Life Offices’ Association (LOA) conducted an investigation into credit insurance policies, leading to the discovery that these companies made the greater part of their income, not from goods sales, but from insurance premiums or by financing premiums and charging interest on them.
Moreover, SAIA and LOA found out that insurers were remunerating motor dealerships and furniture retailers with percentage cuts well above the commission cap – imposed by the long-term and short-term and insurance acts. On the whole, the investigation uncovered the rife, festering scale of unethical tactics and disproportionate remuneration, with regard to credit insurance.
FinMark Trust’s study on access to financial products showed that typical credit insurance charges made up 50% of the original credit taken out and 20% of the outstanding balance owed.
An Incriminating Review
In September 2014, the Treasury released a technical review of our country’s consumer credit insurance industry. The review exhibited that credit insurance rates were 10x higher than those charged for individual life insurance policies, i.e. funeral cover. In addition, commissions received by sales consultants represented as much as 40% of the premiums charged.
What’s more, the review demonstrated that lenders were compelling consumers to take out insurance with them, thereby preventing consumers from taking out cover with companies offering more reasonable rates. In this way, lenders would limit consumers’ options by requiring them to take out an unreasonably specific kind of cover, which they ‘exclusively’ offered.
The Illusion of Choice
As a rule, it would appear that corporations make their real money out of credit life insurance. As such, we can expect nothing less of these companies, than to vehemently defend their corrupt business models, when confronted with a referral to the tribunal.
All of these cases are blatantly part of a wider system of abuse, fuelled by consumer desperation and financial illiteracy. Without an understanding of what credit insurance actually is, how to claim benefits and the like, these vulnerable consumers are essentially denied freedom of choice.