Credit Life regulations have been live for long enough now that insurers are starting to feel the impact and the shake-up of amongst industry players is starting to emerge.
There have been plenty of debate around the regulations, in part because of the dramatic financial and operational impact they will have, and partly because of how imperfectly worded they are and the scope for interpretation.
I’ll be posting about this more in the coming days.
Basing the premium on initial or outstanding balance
First, a real anomaly is the ability for insurers to charge the capped premium rate either on initial loan balance or on the declining outstanding balance.
There are good practical reasons to want to charge a single, known amount to policyholders. It is easier to administer and policyholders have greater clarity on what they are paying.
The actual premium charged over the lifetime of a loan can be substantially higher where it is based on the initial balance rather than the declining balance, particularly for longer term loans. How a cap designed to moderate profits and improve value for money can allow such disparity is bizarre.
There is an interesting quirk here, which I hope is exploited to drive value for money and increased competition in the market. The credit life regulations require lenders to permit substitute policies where the policy meets the minimum regulatory required benefits. Where an insurer (or in practical terms, usually the lender) is charging a premium based on the initial loan balance, it becomes easier for a third party insurance company to offer a substitute policy at a cheaper rate, based on the lower actual sum assured partway through the loan or policy term.
I am not a fan of outright caps, although I recognise there are times when it might be the least bad regulatory intervention. The holy grail is a competitive market where consumers have access to information and providers compete for the business. This will drive profit margins down to reasonable returns for the risk and capital required, and drive business into the arms of the operational cost (and distribution cost) competitive providers.
Those entities still charging on initial balance will actually help to drive this competitive market.
As much as I believe in the right of businesses to make money and make good money, value for money will be driven by competition and more of it is still needed.