1. Consumer Credit Insurance
Presentation for:
Portfolio Committee on
Trade and Industry
Jonathan Dixon
Deputy Executive Officer: Insurance
FSB
13 May 2016

2. Agenda The consumer credit insurance landscape
TCF and consumer credit insurance
Identified market structure concerns
Actions to date
Regulatory frameworks – current and future
Planned interventions

3. The CCI landscape
The consumer credit insurance (CCI) market is not homogenous – elements include:
Long-term insurance (credit life) vs. short-term insurance (either credit life or asset insurance)
Different commission models
Mandatory cover (s106(1) of NCA) vs. optional cover (s106(3) of NCA)
Individual vs. group basis underwriting
Target markets with different levels of sophistication
Different distribution models for different types of credit and credit insurance.
All result in different pricing, different benefit offerings, and often different regulatory treatment.

4. Supervision of CCI CCI market is subject to supervision in terms of:
Long-term Insurance Act (life insurance) or Short-term Insurance Act (non-life insurance), by the FSB, in relation to both prudential regulation (financial soundness) and market conduct regulation (Policyholder Protection Rules) of insurers
Note, currently no product regulation powers
Financial Advisory and Intermediary Services (FAIS) Act, by the FSB, in terms of intermediary services & advice by insurers/intermediaries
National Credit Act (NCA), by the NCR, in terms of costs of CCI charged by credit providers
Insurance supervision guided by international standards set by the International Association of Insurance Supervisors (IAIS)
Solvency Assessment and Management (SAM)
TCF
Subject to IMF/World Bank review through FSAP

5. Treating Customers Fairly (TCF) and CCI
TCF is an approach to market conduct regulation and supervision that aims to deliver six fairness outcomes:
Customers can be confident they are dealing with firms where TCF is central to corporate culture
Products and services are designed to meet the needs of identified customer groups and targeted accordingly
Customers are provided with clear information and kept informed before, during and after point of sale
Where advice is given, it is suitable and takes account of customer circumstances
Products perform as firms have led customers to expect and service is of an acceptable standard as customers have been led to expect
Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.

6. TCF and CCI cont.
In too many cases, the CCI market falls short of delivering the desired TCF outcomes:
Product features are not always suitable to the target market – a notable example is sale of retrenchment and occupational disability cover to the unemployed – no real freedom of choice
Information provided to customers does not adequately take the target market into account – costs in particular are not transparent
Most distribution models do not offer advice, although it may be needed – sometimes coupled with aggressive selling practices
Little or no post sale service or ongoing communication
Little or no substitutability of products
Submitting claims or complaints / queries is difficult.

7. Identified market structure concerns
The TCF failings in the previous slide are not only indicative of a poor TCF culture, but are also effects of the structure of the CCI market (not all business models):
The value chain is highly interconnected – the same entity (or parts of its group) can be credit provider, insurer, intermediary and even policy owner. This poses conflict of interest and makes meaningful analysis of costs vs. profits difficult
Risk that availability of insurance profits compromises quality of credit risk assessment by these groups
A captive market and ancillary, bundled offering undermines competition benefits by inhibiting choice and substitutability
Prices are comparatively higher than equivalent stand-alone cover (which is not practically available)
There are practical obstacles to providing advice or post sale services – including obstacles to claiming.

8. Actions to date
The 2014 “Technical Report on the Consumer Credit Insurance Market in SA” (NT and FSB, July 2014) confirmed the TCF and market structure failings in the previous slides, and put forward the following proposals for public consideration:
Regulating the pricing of credit insurance – options included regulating premium rates, interest rates, and / or the total cost of credit
Regulating market conduct non-pricing practices – including measures i.r.o - product standards, disclosure standards, claims practices and ratios, and promoting competition at point of sale
Protecting consumers through insurance cover for credit providers themselves – as a possible alternative to mandatory cover purchased by the consumer.
National Treasury is expected to publish a response to the public comment on these proposals shortly.

9. Actions to date (cont.)
Since publication of the 2014 Technical Report:
FSB & NT commissioned independent actuarial review of what would constitute a reasonable credit life insurance premium, focusing on identified concerns – findings have been shared with dti and the NCR
The FSB issued an information request to all credit insurers requiring detailed statistical information on various aspects of CCI including but not limited to pricing – this is a follow-up to the data that informed the Technical Report as there have been market shifts since then. Responses are being analysed.
The dti & NCR have published draft credit life insurance premium capping regulations for comment – FSB & NT have commented and continue to engage
Engagements with specific insurers brought before the Tribunal by the NCR to confirm remedial actions pending the Tribunal findings

10. Actions to date (cont.)
Thematic reviews conducted on insurance complaints handling and claims handling – not only for CCI, but findings will inform future CCI standards
Retail Distribution Review and updates published – comprehensive reform of financial product distribution framework, includes proposals that will address conflicted distribution models used in the CCI market
Consultation and pilot studies underway on comprehensive new Conduct of Business statutory returns – for all insurers, but including specific data on CCI practices and products
Consultation underway on new FAIS Conduct of Business returns for intermediaries – will include improved detail on business model structures, product types sold
Some insurers – including within banking groups – have proactively reduced premiums on credit life to below draft premium cap

11. Actions to date (cont.) Specific interventions:
Negotiated an “enforceable undertaking” with a major life insurer resulting in a review of all credit life group scheme arrangements - issues included poor oversight, lack of data to support customer risk insights and inappropriate/conflicted remuneration structures
Ongoing engagement with insurers referred to National Consumer Tribunal to monitor and track remedial action, including:
Insurer 1 – referral of associated FSP for enforcement action & tracking of remedial action by insurer to redress financial loss to customers and prevent recurrence of poor practices
Insurer 2 – concerns picked up during on-site visit relating to organisation & cultural weaknesses potentially leading to poor customer outcomes
Insurer 3 – ongoing robust engagements regarding potentially inappropriate/excessive remuneration structures to distribution channels

12. Regulatory framework – current and future
Current framework
Future framework (through pending Insurance Bill and Financial Sector Regulation Bill)
Credit insurance not a separate class of insurance – compromises ongoing data analysis and targeted regulation
Both credit life insurance and consumer credit insurance (asset cover) recognised as classes
No clear enabling power to set product or pricing standards (differs from NCA which grants this in respect of credit life charges by credit providers)
Explicit product standard setting powers
Credit life insurance sold through either long-term or short-term insurance licences – regulatory arbitrage due to different commission levels
Short-term insurers ability to offer “life” type cover restricted

13. Regulatory framework – current and future (cont.)
Current framework
Future framework (through pending Insurance Bill and Financial Sector Regulation Bill)
Non-advice intermediaries regulated under FAIS for “intermediary services” – but powers to specifically regulate “selling” practices are limited.
Specific standards to be set for non-advice selling practices.
FAIS framework can be exploited to create conflicted, overly complex distribution models
Retail Distribution Review (RDR) proposals will significantly simplify the framework and mitigate conflicts

14. Regulatory framework – current and future (cont.)
Current framework
Future framework (through pending Insurance Bill and Financial Sector Regulation Bill)
Higher commission caps (up to 22%) for credit life sold as a “group scheme”
Differentiated commission levels removed, and limits on types of credit life that may be sold through group schemes
FSB regulates sales and advice re CCI, but not i.r.o the credit offering itself – makes oversight difficult when they are bundled
FSR Bill envisages future FSCA also having jurisdiction over advice and other services related to credit (as opposed to the credit agreement itself)
No oversight powers over conglomerates – compromises holistic assessment of group wide risks in interconnected structures
Conglomerate and group supervision explicitly provided for through Insurance Bill and FSR Bill

15. Planned interventions
To be implemented in phases in the course of 2017 (consultation phases in June 2016 and early 2017 – dependencies on Insurance Bill and FSR Bill timetables):
Complement NCA credit life premium capping regulations for credit providers (for mandatory credit life), by imposing corresponding standards on insurers (premium caps and product standards for mandatory credit life insurance)
Additional conduct standards for all types of credit insurance on: differences between mandatory & optional cover; claims and complaints handling (including limits on “underwriting at claim stage”)
Improved up-front and ongoing disclosure standards, including Key Information Documents, to be developed in consultation with the NCR

16. Planned interventions (cont.)
Further conduct standards to be considered once findings of FSB Information Request are analysed – could include: pricing guidance on other types of CCI besides mandatory credit life; guidance on reasonable claim ratios; enhanced substitutability
Engagement with NCR to agree co-ordinated data collection and structured information gathering – to enhance holistic and complementary conduct monitoring and risk assessment

17. Thank you