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Consumer Credit Insurance

Consumer Credit Insurance. Presentation for: Portfolio Committee on Trade and Industry Jonathan Dixon Deputy Executive Officer: Insurance FSB. 13 May 2016. Agenda. The consumer credit insurance landscape TCF and consumer credit insurance Identified market structure concerns

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Consumer Credit Insurance

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  1. Consumer Credit Insurance Presentation for: Portfolio Committee on Trade and Industry Jonathan Dixon Deputy Executive Officer: Insurance FSB 13 May 2016

  2. Agenda • The consumer credit insurance landscape • TCF and consumer credit insurance • Identified market structure concerns • Actions to date • Regulatory frameworks – current and future • Planned interventions

  3. The CCI landscape • The consumer credit insurance (CCI) market is not homogenous – elements include: • Long-term insurance (credit life) vs. short-term insurance (either credit life or asset insurance) • Different commission models • Mandatory cover (s106(1) of NCA) vs. optional cover (s106(3) of NCA) • Individual vs. group basis underwriting • Target markets with different levels of sophistication • Different distribution models for different types of credit and credit insurance. • All result in different pricing, different benefit offerings, and often different regulatory treatment.

  4. Supervision of CCI • CCI market is subject to supervision in terms of: • Long-term Insurance Act (life insurance) or Short-term Insurance Act (non-life insurance), by the FSB, in relation to both prudential regulation (financial soundness) and market conduct regulation (Policyholder Protection Rules) of insurers • Note, currently no product regulation powers • Financial Advisory and Intermediary Services (FAIS) Act, by the FSB, in terms of intermediary services & advice by insurers/intermediaries • National Credit Act (NCA), by the NCR, in terms of costs of CCI charged by credit providers • Insurance supervision guided by international standards set by the International Association of Insurance Supervisors (IAIS) • Solvency Assessment and Management (SAM) • TCF • Subject to IMF/World Bank review through FSAP

  5. Treating Customers Fairly (TCF) and CCI • TCF is an approach to market conduct regulation and supervision that aims to deliver six fairness outcomes: • Customers can be confident they are dealing with firms where TCF is central to corporate culture • Products and services are designed to meet the needs of identified customer groups and targeted accordingly • Customers are provided with clear information and kept informed before, during and after point of sale • Where advice is given, it is suitable and takes account of customer circumstances • Products perform as firms have led customers to expect and service is of an acceptable standard as customers have been led to expect • Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.

  6. TCF and CCI cont. • In too many cases, the CCI market falls short of delivering the desired TCF outcomes: • Product features are not always suitable to the target market – a notable example is sale of retrenchment and occupational disability cover to the unemployed – no real freedom of choice • Information provided to customers does not adequately take the target market into account – costs in particular are not transparent • Most distribution models do not offer advice, although it may be needed – sometimes coupled with aggressive selling practices • Little or no post sale service or ongoing communication • Little or no substitutability of products • Submitting claims or complaints / queries is difficult.

  7. Identified market structure concerns • The TCF failings in the previous slide are not only indicative of a poor TCF culture, but are also effects of the structure of the CCI market (not all business models): • The value chain is highly interconnected – the same entity (or parts of its group) can be credit provider, insurer, intermediary and even policy owner. This poses conflict of interest and makes meaningful analysis of costs vs. profits difficult • Risk that availability of insurance profits compromises quality of credit risk assessment by these groups • A captive market and ancillary, bundled offering undermines competition benefits by inhibiting choice and substitutability • Prices are comparatively higher than equivalent stand-alone cover (which is not practically available) • There are practical obstacles to providing advice or post sale services – including obstacles to claiming.

  8. Actions to date • The 2014 “Technical Report on the Consumer Credit Insurance Market in SA” (NT and FSB, July 2014) confirmed the TCF and market structure failings in the previous slides, and put forward the following proposals for public consideration: • Regulating the pricing of credit insurance – options included regulating premium rates, interest rates, and / or the total cost of credit • Regulating market conduct non-pricing practices – including measures i.r.o - product standards, disclosure standards, claims practices and ratios, and promoting competition at point of sale • Protecting consumers through insurance cover for credit providers themselves – as a possible alternative to mandatory cover purchased by the consumer. • National Treasury is expected to publish a response to the public comment on these proposals shortly.

  9. Actions to date (cont.) • Since publication of the 2014 Technical Report: • FSB & NT commissioned independent actuarial review of what would constitute a reasonable credit life insurance premium, focusing on identified concerns – findings have been shared with dti and the NCR • The FSB issued an information request to all credit insurers requiring detailed statistical information on various aspects of CCI including but not limited to pricing – this is a follow-up to the data that informed the Technical Report as there have been market shifts since then. Responses are being analysed. • The dti & NCR have published draft credit life insurance premium capping regulations for comment – FSB & NT have commented and continue to engage • Engagements with specific insurers brought before the Tribunal by the NCR to confirm remedial actions pending the Tribunal findings

  10. Actions to date (cont.) • Thematic reviews conducted on insurance complaints handling and claims handling – not only for CCI, but findings will inform future CCI standards • Retail Distribution Review and updates published – comprehensive reform of financial product distribution framework, includes proposals that will address conflicted distribution models used in the CCI market • Consultation and pilot studies underway on comprehensive new Conduct of Business statutory returns – for all insurers, but including specific data on CCI practices and products • Consultation underway on new FAIS Conduct of Business returns for intermediaries – will include improved detail on business model structures, product types sold • Some insurers – including within banking groups – have proactively reduced premiums on credit life to below draft premium cap

  11. Actions to date (cont.) • Specific interventions: • Negotiated an “enforceable undertaking” with a major life insurer resulting in a review of all credit life group scheme arrangements - issues included poor oversight, lack of data to support customer risk insights and inappropriate/conflicted remuneration structures • Ongoing engagement with insurers referred to National Consumer Tribunal to monitor and track remedial action, including: • Insurer 1 – referral of associated FSP for enforcement action & tracking of remedial action by insurer to redress financial loss to customers and prevent recurrence of poor practices • Insurer 2 – concerns picked up during on-site visit relating to organisation & cultural weaknesses potentially leading to poor customer outcomes • Insurer 3 – ongoing robust engagements regarding potentially inappropriate/excessive remuneration structures to distribution channels

  12. Regulatory framework – current and future

  13. Regulatory framework – current and future (cont.)

  14. Regulatory framework – current and future (cont.)

  15. Planned interventions • To be implemented in phases in the course of 2017 (consultation phases in June 2016 and early 2017 – dependencies on Insurance Bill and FSR Bill timetables): • Complement NCA credit life premium capping regulations for credit providers (for mandatory credit life), by imposing corresponding standards on insurers (premium caps and product standards for mandatory credit life insurance) • Additional conduct standards for all types of credit insurance on: differences between mandatory & optional cover; claims and complaints handling (including limits on “underwriting at claim stage”) • Improved up-front and ongoing disclosure standards, including Key Information Documents, to be developed in consultation with the NCR

  16. Planned interventions (cont.) • Further conduct standards to be considered once findings of FSB Information Request are analysed – could include: pricing guidance on other types of CCI besides mandatory credit life; guidance on reasonable claim ratios; enhanced substitutability • Engagement with NCR to agree co-ordinated data collection and structured information gathering – to enhance holistic and complementary conduct monitoring and risk assessment

  17. Thank you

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