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? Continue reading “Credit Life regulations and reactions (3)”

Credit Life regulations and reactions (2)

In part 1 I discussed the implications of basing premiums on initial balance or declining balance for profitability and the threat of substitute policies.

In this post I want to discuss substitute policies again, talk about cover for self-employed persons and definitions of waiting periods.

What is a substitute policy

Substitute policies are one of the few drivers of real potential competition and therefore competitive markets for credit life in South Africa. That’s probably not the definition you were expecting but nevertheless it is true.

With some exceptions, credit life is not sold in a competitive or symmetrical environment and customers have little or no bargaining power.


A substitute policy is a policy from another insurer (not connected to the lender) that covers the same or similar benefits and legally must be accepted as a substitute for the cover required by the lender under the terms of the loan.

Historically, the rate of substitute policies was tiny. Often less than 1%. Lenders and their associated insurers weren’t exactly incentivised to make it an easy process. For smaller loans and therefore smaller policies, the incremental acquisition costs can be prohibitive.

Substitute policies are gaining momentum

I am aware of several players specifically targeting existing credit life customers and aiming to switch these customers to their own products.

This has been enabled through:

  • standardising of credit life policies
  • bulking of many different small credit life policies into a larger one that is more cost effective to acquire and administer
  • technology (digital / online especially but also call centres) that can moderate costs
  • the growing awareness of how profitable these policies often are for a standalone insurer, even at the various caps imposed.

Lenders may need to supplement revenue on high risk customers because interest rate caps apply, but the stand alone insurer is focussed on a reasonable underwriting result, not the level necessary to offset costs elsewhere.

What counts as a substitute policy / minimum prescribed benefits

A substitute policy simply needs to cover the minimum benefits from section 3 of the credit life regulations. This covers death, permanent disability, temporary disability and unemployment or loss of income.

These regulations can be difficult to interpret, but ultimately are clear: Continue reading “Credit Life regulations and reactions (2)”

Credit Life regulations and reactions (1)

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. Continue reading “Credit Life regulations and reactions (1)”

Medical Schemes, discrimination and the CPA

The Consumer Protection Act (CPA) protects consumers from abuse by enforcing fair practices, improved disclosure and added minimum warranties etc,

It’s a good piece of legislation, even if at times some aspects of it may result in greater costs than benefits.

TimesLive has a story about the alleged noncompliance of medical schemes with the CPA.

Some of the issues may have merit, but this struck me as particularly troubling:

According to the act, it is unfair when a consumer is discriminated against on the grounds of age.

Our constitution explicitly allows discrimination on actuarially sound rating factors that have both a statistical and causal link. This is how insurance is South Africa still uses underwriting to select homogenous groups of risks and to limit anti-selection by policyholders. If widespread anti-selection were to occur, then life insurance would not be viable.

Medical Schemes in South Africa have only very limited underwriting options in order to provide as many citizens as possible with fair health coverage. “Late joiners” are charged a premium since they haven’t contributed to the societal risk pool since they were most healthy and therefore haven’t paid “their fair share”. This has to do with a specifically identified risk rather than general discrimination based on age. These restrictions are important to maintain the solvency and viability of medical schemes.

Some schemes prevent women who fall pregnant within nine months of joining the scheme from claiming for the pregnancy even though they pay full premiums

This point is more tricky, but it does again reflect a misunderstanding. “Full premiums” on an actuarial sound basis have probably not been paid, since the fair premium for a member who joins just to get pregnancy benefits and hasn’t contributed at other times would be much higher than the premium that is charged. This one is a little more grey and while I feel the rules are entirely fair, they may not be viewed that way by a particular judge on a particular day.

Some schemes require that members give three months’ notice when terminating their membership, whereas the act deems 20 business days to be reasonable

This might reflect the desire to not have members leave a scheme immediately after having utilized the maximum benefit available to them before joining another scheme. I don’t know how much of this behavior would ever happen, so this might also ultimately be changed.

Many schemes don’t enforce the allowed waiting periods for members joining. If some of these other changes were to be made, I would expect these provisions would be more regularly used. Of course, that is another of the problems cited with medical schemes arising from the CPA.

All in all, we may see some changes, but by and large these comments reflect a lack of appreciation for the actuarial realities of managing a health scheme with community rating.

Skype Employee Share Options That Weren’t

I deal with employee share options frequently. Mostly from a valuation perspective, but also from structuring performance and vesting conditions to retain an incentivise key staff. Now I can’t say these decisions are never controversial, but without fail the intention of the employer is to provide a fair deal to staff.

That is until I heard about Skype’s apparent shenanigans. Not only does it appear they may have fired several executives prior to the purchase by Microsoft (allegedly to escape paying on unvested options as part of typical corporate takeover provisions in Employee Share Option agreements), but if you read this article about Skype employees who left and received no value for in-the-money, vested options, you start to wonder whether anyone will ever work for or with Silver Lake again. Continue reading “Skype Employee Share Options That Weren’t”

Regulations creating operational risk (and how it relates to POPI)

Ok, so that is an unfair title. But you’ll understand what I mean:

Zurich Financial Services has just been fined £2.3m for a data loss event incurred in 2008 in South Africa.

Zurich joins HSBC, Nationwide and Norwich Union in the club of companies fined by the FSA now.

In fairness, the fine wasn’t so much for losing the data, but rather for:

  • losing
  • unencrypted data
  • and not having monitoring and controls in place
  • so that it was only discovered and reported to regulators a year later

The South African perspective

The FSA’s seriousness about these issues is mirrored in our looming Protection of Personal Information Bill. This is not the same as the disturbing proposals for a Protection of Information Bill which covers public or government information. Continue reading “Regulations creating operational risk (and how it relates to POPI)”