Credit Life regulations and reactions (3)

This is a short addition to parts 1 and 2.

The question as to whether the benefit payable under a credit life policy can or should include arrears payments.

The purpose of a credit life policy is to protect the policyholder, the lender, and the policyholder’s estate (not necessarily in that order) against death, disability or retrenchment. This is only effectively achieved if the entire amount owing under the credit agreement is paid off by the policy.

So as a starting point, it would make sense for arrears to be included. All the stakeholders in the arrangement want this.

Back to the legal stuff

What do the credit life regulations say?

for death cover: the outstanding balance of the consumer’s total obligations under the credit agreement;

While the term “total obligations” is not defined in the credit life regulations, I challenge anyone to argue with a straight face that this would not include arrears payments.

The National Credit Act itself says:

A credit provider may require a consumer to maintain during the term of their credit agreement—

(a) credit life insurance not exceeding, at any time during the life of the credit agreement, the total of the consumer’s outstanding obligations to the credit provider in terms of their agreement;

Again, I don’t see how the arrears payments don’t count as an obligation.

Is there something else here?

Arrears from when, might be the question.  For a third party insurer, one can understand the trepidation in paying the full outstanding balance plus arrears all accumulated at the contractual interest rate.

A lender could be quite happy to delay finding out about deaths and delay further in reporting them, safe in the knowledge that they are earning high interest rates with the credit risk of the insurer, rather than the original borrower, standing behind them.

This feels like a separate issue though. Agreeing to make payment as at date of claim or end of waiting period is one thing. An outright restriction on including arrears in the benefit is not correct.

What about for credit life insurance within a group?

Where the benefit is paid by one part of a group (the insurer) to another part of the group (the lender) there should be even less cause for concern about timing of claims and payments. Games can be played with claim ratios and profit recognised within the insurer vs the lender, and value for money measures being affected. Again though, that’s a separate issue all on its own.

 

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.