In Part I, we discussed the product provider’s response to a client’s questioning of how a causal event penalty of nearly R10 000 can accrue where there were no premium payments, commission, marketing or other costs as claimed by the provider.
The original Discussion Document on Contractual Savings, published in 2006, envisaged the following:
- a sharing of the risk of early termination between the parties to the contract, namely the policyholder, insurer and intermediary, aligning as far as possible the interests of all parties, and that
- the basis for the calculation of minimum early termination values should take into account differences in product types.
Using the information provided, the client contacted the insurer’s internal arbitrator, and received the following response:
After conducting a thorough investigation I report as follows:
1) The method of payment on this retirement annuity is a single premium and the application was introduced without an intermediary;
2) I requested our actuarial department to relook at the charges, as the method of payment was a single premium with no commission applicable; and
3) Actuarial advised that the charges were based on a single premium with no commission and no further discount is applicable.
Having evaluated our earlier response, I confirm that the charges that were communicated were correct. However, the information provided did not adequately explain the said charges.
The charges are formulated taking the following factors into account:
1) Charges are levied against a policy to cover expenses incurred at entry – which include inter alia, expenses associated with marketing, selling, underwriting and administering the group of policies;
2) Since, this is a single premium policy, the expenses incurred can only be recovered against the fund value; and
3) Should a retirement annuity be withdrawn early, these expenses would no longer be paid and are then discounted and deducted from the fund value of the policy.
I confirm that I am satisfied with the quantum of the causal event charges.
As per the regulations under the Long Term Insurance Act Part 5A, if a retirement annuity is surrendered for the purpose of a transfer from one fund to another in terms of a section 14 Transfer of the Pension Funds Act, the erstwhile insurer is entitled to a maximum of 30% of the value of the investment which is payable before the causal event charge is levied.
The causal event charges of R9 839.50 is equivalent to 3.5% (R255,385.60 * 3.5%), which is 26.5% less than the maximum percentage the insurer is entitled to levy as per the Long Term Insurance Act.
Whilst the causal event charges may appear excessive, the said charges are aligned with the regulations as per the Long Term Insurance Act.
The client found it hard to understand how a “senior administrator” of a leading life office could make such contradictory statements, and wrote back:
You state that “Charges are levied against a policy to cover expenses incurred at entry – which include inter alia, expenses associated with marketing, selling, underwriting and administering the group of policies”.
In this case, there was no commission, marketing, selling or underwriting, and the costs associated with issuing and administering the contract would have been negligible, and possibly deducted at the time of issuing the contract. It is therefore hard to understand why, after 26 years, there could still be close on R10 000 outstanding in terms of costs for actions which were never performed.
It seems to me that this is rather a sum arrived at by calculating how much the life office stands to lose in investment income via the loss of assets under management. This would also explain how you can arrive at a specific sum, but state that you are unable to explain to me how you arrived at it. Is it not rather a case of not wanting to disclose the calculation?
Alternatively, it is used as a scare tactic to dissuade clients from withdrawing their funds.
I am fully aware that the maximum causal event charges are 30%. It is also a fact that this amount reduces incrementally over time, which explains the figure of 3.5%, rather than the inference that it was an act of benevolence from the assurer.
In view of the relatively short remaining term, the client was hesitant to proceed with the transfer, as it meant that he would first have to recoup the penalty before, hopefully, getting a better return on his funds.
In desperation to try and improve investment returns, and reduce costs, the client enquired about possibly transferring the investment to a unit trust linked one with the same insurer, only to be told: “Mid-term transfers for the old conventional range is not allowed.”
It is quite possibly not allowed as the insurer will not be able to charge the same fees as on the conventional contract.
From the insurer’s perspective if is a case of: “Heads I win, tails you lose.”
In Part III, we discuss an “admission of guilt” by another insurer which provides a better perspective on the real rationale behind causal event penalties.
