Consumer credit insurance in SA has a bad name and is seen by many as a scam or a rip-off, Judge Peet Nienaber noted in a report on an inquiry into the industry.

However, not all the reasons for this were necessarily valid, and it was always necessary to distinguish between different insurers and different insurance products, he continued.

While the industry fulfilled a definite need, its potential deficiencies lent themselves to the exploitation of consumers by practitioners more intent on profit than service, the inquiry found in its final report released on Tuesday.

"Such deficiencies, if not neutralised, will substantially detract from the value proposition of consumer credit insurance.

"Therefore, what is needed is not an outright and self-righteous condemnation of consumer credit insurance, but the elimination of its potential abuses."

The inquiry was appointed in July last year after some insurance companies active in the consumer credit insurance market were accused of engaging in undesirable practices, the Life Offices' Association (LOA) said in a statement.

Should the panel's recommendations on various "undesirable practices" and "potential abuses" be left unattended by the industry and its regulators, the industry's unsavoury reputation would persist and would operate to the detriment of at least some consumers, Nienaber's panel found.

It was also important that consumers realise that they were not passive parties to consumer credit insurance policies, it added.

"The consumer has a duty to be vigilant as to how the policy affects his or her interests. This includes reading the contract.

"While consumers must be placed in the position where they can make informed decisions, they must then take responsibility for these decisions."

The inquiry suggested, among other things, that the servicing fee be deregulated, as should the introduction fee - if not in its entirety, in all but the upper income end of the market - as it was the "only effective measure to combat improper incentive payments".

At the lower income end of the market, it advised that there be no commission capping.

In its report, the inquiry noted that while the regulation of market conduct in South Africa was comparable to elsewhere in the world, the problem lay with the monitoring and investigation of non-compliance.

Lack of disclosure was the main problem brought to its attention in this area.

The panel recommended proper disclosure to consumers of remuneration and any other payments to any third party, and of the insurer and premium as this kind of insurance usually formed part of a package.

"In addition, consumers should be advised to inform their families of the existence of the cover and its importance."

It suggested that terminology used in documentation be standardised and consumers alerted to exclusion clauses and other limitations in cover, and the consequences of the non-payment of premiums.

On monitoring and control, the panel found that consumer credit insurance was different from other forms of insurance.

"It cannot be separated from credit. Its principal beneficiary is often not the consumer but the credit provider."

Accordingly, it advised that it be treated as a category separate and distinct from other forms of insurance, and that "whoever controls credit should also control consumer credit insurance".

It believed the National Credit Regulator should assume control of market conduct of consumer credit insurance and of intermediary remuneration where it was regulated.

If accepted and implemented, the recommendations would considerably impact on how the credit life insurance industry functioned in the future, said LOA chief executive Gerhard Joubert.

He said proposals on the recommendations would be made to the LOA Board for discussion at the end of May.

"Some of the recommendations, especially on intermediary remuneration, already form part of our discussions with National Treasury and the Financial Services Board (FSB) on changing the way that commission structures work to the benefit of consumers," he said.

South African Insurance Association (SAIA) chief executive Barry Scott was pleased that incidents of non-compliance were found to have arisen largely from difficulties interpreting the Short-term Insurance Act.

"The inquiry recommended that no action be taken against insurers, since some of the irregularities regarding remuneration for outsourcing administrative work occurred because the Long-term and Short-term Insurance Acts are unclear and inconsistent on this point and in need of review and revision."

Noting that the report also focused on the need for consumer education, Scott said SAIA had, in the past four years developed consumer education initiatives with the FSB and LOA and had spent more than R27-million on consumer education.

Sapa

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Sapa