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)”