More insurers feel bite of long-term sector watchdog

There has been an increase in instances where the ombudsman for long-term insurance has had to compel insurers to act in the interests of policyholders, the ombudsman’s 2019 annual report shows.

The 2019 annual report by the ombudsman for long-term insurance, which was released on Wednesday, shows that nine final determinations were issued against insurers during the year under review. This is three more than were issued in 2018, and three times as many that were issued in 2017.

Deputy ombudsman Jennifer Preiss says it may be that, for some insurers, having their names published in a final determination is not a big deal, possibly because there isn’t a backlash from their policyholders or intermediaries in their market. “Other insurers, in the higher LSMs, get a backlash if there is a final determination. They therefore try to avoid them.” 

In the year under review, the ombud issued final determinations against BrightRock Life, Centriq Life, Clientèle Assurance, Momentum Life, Nedgroup Life, Sanlam Life, Safrican Insurance, and Sanlam Developing Markets (in two cases).

The “repeat offender”, Sanlam Developing Markets, has had final determinations handed down against it every year since 2017.

A final determination is issued after attempts at settlement between a consumer and an insurer fail. The ombudsman first issues a provisional ruling, setting out a preliminary view and asking the parties if they have any further facts or contentions to submit before the matter is reconsidered for a final determination.

Usually, when a provisional ruling is made against an insurer, the insurer accepts the provisional ruling, according to the ombudsman. If the insurer challenges the provisional ruling against it, a final determination is made at a meeting of the adjudicators in the office of the ombudsman.

If the final determination is made against the insurer, particulars of the case, including the name of the insurer, are published in the ombudsman’s annual report and online (www.ombud.co.za, under “Useful Information”).

“It takes a while to get to a final determination,” Preiss says. “Bigger insurers with experienced complaints handlers possibly have a better appreciation of the fact that if the [ombudsman’s] office has gone through the whole process, the insurer would have to submit compelling evidence or arguments to change the decision at final determination stage.”

Systemic issues

In his latest annual report, ombudsman judge Ron McLaren says there were numerous instances during the year when he had to liaise with the Financial Sector Conduct Authority (FSCA) regarding “systemic issues”.

These included the failure of insurer 3Sixty Life to respond to correspondence from the ombudsman’s office. “The substantial number of second reminders demonstrates the difficulties our office, and, so, our complainants, experienced in this regard,” the report says

The ombudsman’s office also alerted the FSCA to the increase in complaints about universal life policies.

“These complaints are about increased premiums, following premium reviews and delayed premium reviews, and about poor maturity values. This issue has been raised previously, but despite these policies decreasing in number over the years, the problems have not decreased. We are aware that it is a problem not unique to SA,” the report says.

Universal life policies

A universal life policy is made up of two components: a risk component and an investment component.

The risk component is life assurance in which premiums are levied on an ongoing basis relative to your age at the inception of the policy. The risk premiums increase every year but cost less in the early years of the contract than in the later years, when you’re older. But by the time you reach your late 50s or early 60s these premiums start increasing significantly.

Part of your premium goes towards an investment value. In the early years, when your risk of death is low, a significant portion of the premium is steered towards the investment account.

An earlier ombudsman’s report explains that after a few years, “at least in theory, the investment account would have reached a level equalling the sum assured. At this stage, no more risk premiums to cater for the mortality risk would have to be paid. In point of fact, this did not always happen.”

Owing to poor market returns over time, the investment account doesn’t always grow as anticipated and the expectations of policyholders have not been met.

The majority of these policies feature review dates, which are intended to provide you with an opportunity to compare the value of the contract with the benefits it is intended to provide.

“Here, too, there were problems as in many cases the policy wording relating to review dates was ambiguous. Some companies appear to take the view that it is not necessary to alert the policyholder to the status of their contract until the investment account shows a nil balance,” the ombudsman’s 2006 annual report says.

“Because there have been so many misunderstandings regarding the operation of universal life policies, insurance companies may be well advised, regardless of the actual wording of the contract regarding the review date, to investigate all contracts that are still on their books with a view to keeping all elderly policyholders informed of their choices on an annual basis.”

The ombudsman has previously advised that elderly clients with universal policies will have the following options:

• Continue paying premiums until death (your state of health may be a deciding factor);
• Surrender the policy; or
• Make the policy paid-up, which means you stop paying premiums. The death benefit will fall away and the paid-up fund value will be paid to the beneficiaries on the death of the life assured.

Universal life policies are not as popular as they used to be. New generation policies tend to separate risk and investment.

In the 2019 annual report, the last category of systemic issues relates to some new products on the market that generated complaints either because of unusual policy structures or the insurer’s practices, the report says.

Preiss says some of the problems with the new products are as follows: 

• Policies are marketed and sold with no advice, only information. The information is limited and does not explain important exclusions/waiting periods.
• The relationships of the members allowed to be covered are not explained at the sales stage — while detailed in the policy, this is not brought to the applicant’s attention.
• Broad terms are used at the application stage, while in essence these broad terms are limited by the fine print in the policy.
• With some policies, the policy documents are drafted in a convoluted manner that is difficult for the policyholder to interpret/understand, especially when the target market for these products is the lower income market.
• In many instances, the insurer only uses SMSs as the communication method for unpaid premiums notices.