Retrenchments are causing a spike in claims on insurance policies covering outstanding debt. Some insurers are raising the cost of this insurance. Picture: 123RF/Vadim Kluchnik
Retrenchments are causing a spike in claims on insurance policies covering outstanding debt. Some insurers are raising the cost of this insurance. Picture: 123RF/Vadim Kluchnik

Cash-strapped consumers, many of whom are struggling to pay their debts, will have to shell out more for credit life insurance due to a spike in retrenchment claims.

Capitec, SA's biggest unsecured lender, has notified customers that it is increasing the cost of insurance that covers its customers' debts in the event of death, disability and retrenchment.

The bank's letter to customers says the increase is due to the impact of the Covid-19 pandemic on the cost of providing benefits relating to death, disability, retrenchment, unemployment and inability to earn an income.

From next month, Capitec customers will go from paying a premium of R4.21 per R1,000 of the outstanding balance per month to R4.50 per R1,000, which is the maximum an insurer may charge for this type of cover.

Capitec says that if you're dissatisfied with the increase, you have the right to cancel your policy.

The bank advises that if you decide to cancel its policy on a product where credit insurance is mandatory, you must replace it with a policy of your choice and cede the alternative policy to Capitec. Remember that the alternative policy must have at least the same benefits as per the regulations under the National Credit Act, and the policy must be acceptable to Capitec.

The letter says that when considering whether to replace your Capitec policy, bear in mind that should you become retrenched, its policy provides for the settlement of the full outstanding balance of your Capitec credit. "Many alternative policies only provide for the repayment of instalments up to 12 months from the date of retrenchment," the bank says.

Capitec's premium is calculated on the outstanding balance of the loan, so it reduces every month as you repay your loan.

"The premiums on many alternative credit insurance policies are calculated on the opening balance and do not decrease as you repay the loan. Where two policies are priced at R4.50 per R1,000 per month, the total cost of credit insurance on the policy calculated on the opening balance may be up to 76% more expensive than the policy where the premium is calculated on the reducing outstanding balance," the bank says.

Nkazi Sokhulu, CEO of credit insurer Yalu, says Yalu does not plan to increase its premium due to the Covid-19 pandemic.

Yalu charges between R3.49 and R3.99 per R1,000 borrowed, depending on the underlying credit product. Yalu's premium also reduces as you repay your debt.

He says Capitec is joining an increasing list of insurers that charge the maximum of R4.50 per R1,000 borrowed, "which cannot be good for competition or for the pockets of struggling South Africans".

Absa's managing executive for insurance, Dushen Naidoo, says the bank hasn't yet seen a spike in death, disability or critical illness claims related to Covid-19, but there has been a significant rise in claims for retrenchment and the loss-of-income benefits. If this trend persists, it is expected to affect the price of credit life insurance, he says.

"Having said that, prices should also be sustainable and appropriate over the lifetime of a customer's policy, and a short-term increase in claims will probably not result in increases . Our aim is to ensure that we limit increases as far as we can."

Absa has seen its claims ratio increase significantly, partly due to an increase in retrenchment claims. "We now receive between 500 and 600 claims daily compared to around 200 to 300 daily claims previously. However, our claims ratios are at levels where we are comfortable that we provide good value."

For unsecured loans, Absa's premium ranges between R1.70 and R3.50 per R1,000 cover. Naidoo says premiums on unsecured loans are determined by the benefits that are covered, the benefit amount, the scale of the pool of risks and the risk associated with a particular pool of loans.

"On secured loans and where it pertains to high-value home loans, we typically
conduct individual underwriting to determine the price based on the risk assessment of the customer. We have found that for higher-value loans this enables a more competitive and tailored premium."

Credit insurance on vehicle finance with Absa ranges between R1.20 and R2.20 per R1,000 cover, Naidoo says.

Lee Bromfield, CEO of FNB Life, says the bank's pricing differs depending on whether the loan is secured or unsecured, and ranges from less than R2 per R1,000 to R4.50 per R1,000.

He says the pandemic has resulted in a marked increase in the claims ratio, which has increased "by over 180% from
pre-Covid-19 times".

Anton Davies, the head of client solutions at Nedbank Insurance, says the insurer offers three rates on unsecured loans. Depending on your risk profile, you will pay R2.50, R3.50 or R4.50 per R1,000 of cover.

Nedbank Insurance is expecting an increase in claims from people without income, but if economic activity picks up, this should be temporary. Davies says these claims are expected to be offset by the fact that lockdown should result in fewer accidental death claims.

He says the unable-to-earn-an-income benefit, which was introduced in 2017, will test the mettle of all insurers, "mostly the new insurers that may have played a premium game, which at best relied on relatively scant data for these new benefits".

Capitec did not respond to requests for an interview.

On credit life insurance, waiting periods apply to cover for suicide, disability and retrenchment. There is a 12-month waiting period for suicide and disability, and a three-month waiting period for retrenchment. If you switch providers, these waiting periods start running afresh. Sokhulu says Yalu is the only provider that recognises prior waiting periods.

Before switching your insurer ... 

If you're considering switching your credit life insurance, Nkazi Sokhulu, CEO of credit insurer Yalu, says you should ask:

• Does the new policy ensure that you do not lose out on any benefits you previously enjoyed?

• Does the premium of the new policy reduce as your debt's outstanding balance reduces?

• Does the new policy reward you for not claiming, given that so many people never claim on their credit life insurance policies?

• Does the new policy lessen the administrative hassle of needing to claim from different credit providers?

Dushen Naidoo, managing executive: insurance at Absa, says don't make a decision based on price alone, though "as a general rule, providers with large books are able to spread the risk and cost across a larger pool of customers and have the benefit of scale . These providers tend to be more affordable."

Anton Davies, the head of client solutions at Nedbank Insurance, says be careful that you don't end up serving an extended waiting period all over again.

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