Treasury, FSB examines credit insurance sector

Ismail Mononiat of the National Treasury says there are a lot of abuses in the credit insurance sector and regulations to prevent abuses are being considered. Image: GCIS

New regulations for the pricing of insurance could cut the margins of unsecured lenders and retailers who abuse the system by charging excessively for credit insurance.

In a paper entitled 'Technical Report on the Consumer Credit Insurance Market in SA', the Treasury and the FSB highlighted a series of abuses in the consumer credit insurance market.

They called for submissions and data from businesses offering consumer credit insurance with a view to ending abuses.

Proposed action includes capping the cost of credit; placing a cap on premium rates for different consumer credit insurance cover; prescribing product standards to improve comparability and drive competition, improving disclosure and addressing low claims.

Lot of abuses through credit insurance

"Some business models offer policy benefits that many in the target market might not actually be eligible for and by implication can never claim against," the paper said. "An example is retrenchment cover benefits offered to customers who are social grant beneficiaries."

Treasury Deputy Director-General Ismail Momoniat said there were a lot of abuses. These were not just with regard to price and the government and regulators had already taken steps to deal with the problems.

Andre du Plessis of Capitec says the bank doesn't charge customers for credit insurance. Image:CFO

These included amendments to the National Credit Amendment Act Number 19 of 2014, which allows the relevant ministers to introduce limits on the cost of credit insurance.

"We are aware that there are more abuses, which include lack of disclosures, resulting in low claims ratios, and these abuses need to be dealt with comprehensively," Momoniat said.

"This whole thing is designed to make sure that we protect consumers better," he said.

Capitec, SA's second-largest unsecured lender, said it would not be affected if insurance caps were introduced because it did not charge for insurance.

"We have always said we want to make credit available in the least expensive and simplistic way for our clients," said Capitec Financial Director Andre du Plessis.

"All the additional things you add on, including credit insurance, make it difficult for clients to understand," he said.

SA's largest unsecured lender, African Bank, said it needed to study the report.

The Managing Director of the Banking Association of SA Cas Coovadia said that aspects contributing to the cost of loans needed to be examined.

"In the unsecured lending environment you do need some security instruments but these must be transparent, efficiently priced and equitable," Coovadia said.

Source: Business Day via I-Net Bridge