The Long-term Ombud recently published two examples of excessive charges on endowment policies which confirmed the view that a revision of product provider costs is possibly a bigger problem than advisor fees.
This was already pointed out in the LT Ombud’s 2009 Annual Report, and is still a problem today.
The Ombud recognises that the two examples posted are “…part of the so-called ‘legacy business’ and that insurers may now do business on a different basis. However, insurers cannot simply disregard these old policies; they may need further attention especially where the initial product design was not appropriate for the target market.”
The recent action taken when abuses in causal event charges came to the fore may just have to be replicated in instances such as these.
We copy below the information published by the LT Ombud
CASE 1
The policyholder contributed to a pure endowment policy (no risk cover) which commenced 1 February 2007. The details are as follows:
- Term 5 years
- Premiums of R550 per month
- Annual premium increase: 10%
- Total premiums paid over the 5 year term amounted to R37 877
- The guaranteed maturity value was R30 300
- The illustrative maturity value was R46300
- The insurer stated that the average bonus rate was 6, 98% over the term
The actual maturity value paid on 11 January 2012 amounted to R36 465.
The charges of R5 410 amount to 13,4% of expected premiums and 14,2 % of the actual premiums received.
DISCUSSION
The chance of the policyholder getting a real return (i.e. a return after inflation) was remote, given the high charges on the policy.
This case study demonstrates that disclosure of this kind does not always alert a policyholder to the impact of high charges. It is unlikely that the policyholder would have entered into the contract had he fully understood the implications of the disclosures. The quotation disclosed what the Reduction in Yield was and disclosed that even at a gross return of 10% the net return would only be 0,7% and yet the policyholder purchased the policy. These products were also marketed to unsophisticated investors.
The question does arise why anyone would purchase this policy. The converse question is why any insurer would develop and sell such a product as it does not seem to provide real value to policyholders.
This case study also demonstrates that disclosure by itself is not a panacea for all ills, particularly in an unsophisticated market. If a product is inherently flawed in its design can it ever be sufficient that the insurer has made the necessary disclosures?
RESOLUTION OF THE CASE
After a provisional determination from our office, the insurer agreed to increase the maturity value in line with complainant’s expectations as to what the maturity value would be, based on the marketing material. The complainant accepted the offer of an additional R7419 and the file was closed.
The insurer advised us that they had undertaken a review of the product with a view to improving other policyholders’ benefits.
CASE 2
Two policies were issued in June 1992 for the complainant’s two children (both policies were on the same basis). The policies were marketed under a name that indicated that it was an education policy. The details are as follows:
- Term of 30 years (not elected in the application form but all policies were issued with this term)
- Premiums of R30 per month increasing over the term
Total premiums of R32 127 per policy were paid over the period of 19 years the policy was in force
| There were small risk components: | Death and disability waiver of premiums Funeral benefit of R11 500 |
| The premium split was as follows: | |
| Premium allocated to investment | R15 731 |
| Death & Disability Waiver Charge | R4 947 |
| Costs of Risk Benefits cover | R833 |
| Commission and Administration charges | R10 614 |
| Charges amounted to 40% of the premium (after deducting risk costs) or 33% of the full premium. | |
| The surrender value on 19 August 2011 was | R36 252 |
There was no recoupment of costs on surrender. The insurer had restructured the product so that there was no such recoupment after 10 years.
DISCUSSION
A question arose as to the term of the policy – it did not make sense for a policy marketed as useful for education purposes to have a term of 30 years. The term impacted on the cost. The extent of the charges seemed disproportionate.
RESOLUTION
The case was delayed after we made a provisional determination in favour of the complainant because the insurer advised us that some of the information on which we based the determination had been incorrectly supplied to us. We then involved the CEO who advised us that the insurer had decided to undertake a review of the whole portfolio to see whether benefits for policyholders could be improved. This would take some time. To resolve this particular complaint, as the complainant had already suffered delays, an offer was made, which was accepted by the complainant, and the values of each of the two policies were increased by R<55. A compensatory amount of R3000 was also paid for the poor handling of the complaint.
CONCLUSION
It is encouraging that in these two instances the insurers undertook reviews of the portfolios as a whole and did not only resolve the complaints in question. In both these cases the current insurer had taken over the business of another insurer and had not issued the products.
The question that sticks in my mind is why this was only rectified after being exposed?
The soon to be introduced “Key Information Documents” will hopefully contribute to prevention of this practice, but how many other hands in the cookie jar are still undetected?
