This week, the department of trade and industry issued the final credit life insurance regulations, which will come into force in August and will limit the monthly premium a credit provider can charge for credit life insurance to a maximum of R4.50 per R1 000 of credit.
Credit insurance is usually required when taking out a loan, and the policy assists in the repayment of the loan if you die, are retrenched or become disabled.
For several years, City Press has raised the issue of excessive rates charged for credit insurance, which adds significantly to the total cost of credit. We reported on a case where a client was paying R288 a month for credit insurance on a R5 000 loan – this worked out to a rate of R56/R1 000 of credit and made up 40% of the total cost of the loan.
In the past two years, the National Credit Regulator has referred several large credit providers, including JD Trading and Lewis, to the National Consumer Tribunal for the misselling of credit insurance policies.
In 2014, Treasury issued a technical review of the consumer credit insurance market in South Africa to investigate the costs and selling practices around credit insurance. One of the concerns raised in the review was that the claims ratios on credit insurance products were less than half that experienced in stand-alone life insurance products, which suggested that few people actually understood that they had taken out credit insurance. Credit insurance appeared to be sold, in many cases, not for the benefit of the customer, but rather for the benefit of the credit provider.
While a review and regulation around this insurance has been necessary, some argue that the rate at which the limit has been set is far too low and we could see a situation where credit life insurance can no longer be provided to higher-risk customers.
For larger credit providers such as the banks, the proposed rates should fall in line with what they already charge. The real effect will be felt by microlenders, who tend to take on higher-risk customers and whose client base has a higher risk of retrenchment, illness and death.
Hennie Ferreira, CEO of MicroFinance SA, says: “The published rates, from the perspective of the providers of small, unsecured loans, is that the products will in all likelihood disappear from the market and will negatively affect the sustainability of small providers.”
He says that the cost of origination for smaller loans is high and the R4.50/R1 000 fee will not be a viable product.
Guardrisk Insurance, a product provider of credit insurance for credit providers, says it will be business as usual.
Richard Eales, the managing director of Guardrisk, says: “The company has a deeply embedded culture of compliance and is currently busy incorporating the new regulations into its compliance framework.”
He says that, over the past year, the company has done a lot of work with its clients that provide credit life insurance to customers, such as microlenders, in preparation for the premium caps and treating customers fairly regulations.
“We welcome the clarity that the regulations now give, specifically regarding definitions and as to whether premium caps apply monthly or annually, as there was previously a great deal of confusion in the industry in this regard,” says Eales.
Ferreira argues, however, that because microlenders may not be able to properly mitigate their risks, many of these loans will no longer be available.
“The downstream effect on the overall supply of small amounts to consumers who are not able to access credit from banks is that they will satisfy their need in the informal or illegal market.”
Technically, what this means for the borrower is that, the cost of borrowing should come down. Although these rates are already in line with the premiums charged by banks, for customers who borrow through microlenders, or take finance via a retailer, the cost of credit insurance could come down for new contracts.
For example, if you take a R10 000 loan with a premium of R10/R1 000, you will be paying R100 a month extra on your repayments for credit insurance. The new rates will mean that if you take that loan after the implementation in August, you will only be paying R45 for insurance, a saving of R55 a month.
It is important to note that the new rates will only affect new loans.
The new rules
. A maximum of R2 per R1 000 of credit may be charged for mortgages.
. For affordable mortgages of R450 000 or less, the same R2/R1 000 will apply, except for customers older than 55, who can be charged up to R2.50.
. All other credit facilities, credit cards, store cards or loans can only charge a maximum monthly premium of R4.50/R1 000 of credit. However, if the cover provides for the full payment of the loan on temporary disability, an additional R1/R1 000 premium may be added.
Death or disability: The credit insurance must pay out the outstanding balance in a case of death or permanent disability. In a case of temporary disability, the insurance should cover the monthly instalments up to a maximum of 12 months unless the person is able to work before then.
Retrenchment: If the consumer is retrenched, the insurance should cover instalments up to a maximum of 12 months, assuming that the customer has not found employment in that period or that the loan has not been repaid by then.
Only charge for actual risks: If the customer is already disabled, the cost of disability cover may not be included in the premium. If a customer is a pensioner, the cost of unemployment cover may also not be included in the premium.
Matching risks: If the credit provider charges the maximum allowable rate, the credit provider must be able to demonstrate that the premium is in line with the actual risk presented by the customer. For example, a loan repaid over three months would not carry the same risks as a loan repaid over 12 months.
Exclusions: Certain exclusions will be allowed. For example, the cover may exclude events such as suicide and death or injury due to drug or alcohol abuse. Cover may also exclude certain pre-existing conditions. The policy will also only pay out for formal retrenchment and not voluntary retrenchment or resignation.
Choice: Although a credit provider can make credit insurance a requirement of the issuing of the loan, the customer can purchase their own separate credit insurance. However, the details must be provided to the credit provider within five days of the loan being issued.