Cedric Stephens | The nexus between bank fees and creditor life insurance
Question: I saw a newspaper ad a few days ago about creditor life insurance. The insurer behind it is part of a group that owns a major commercial bank. What is this type of coverage all about? Is it necessary? I am thinking about getting a bank loan to buy a car. Will I have to pay for creditor life insurance?
- B.S., Kingston 8
INSURANCE HELPLINE: That advertisement also caught my eye. I read it at least three times after viewing a full-page (political?) ad about 'bank account raids' earlier that same day. The advertisers appeared to have been the Opposition party. They accused the Government of attempting to block that party's efforts "to deal with the outrageous fees charged by licenced financial institutions".
Regular readers will know from my February 2017 article, 'Insurance buyers need another Fitz Jackson in The House,' that I have been closely following the South St Catherine member of parliament's quixotic struggles to get banks to treat their customers fairly. I am a Fitz Jackson fan!
Creditor or credit life insurance is a North American term. It is called Payment Protection Insurance (PPI) in the United Kingdom. The UK's financial services regulator, the Financial Conduct Authority (FCA), says that PPI has been "mis-sold" (a big understatement) for over 20 years. This means that banks and other members of the UK's financial services industry have been doing what is politely refferred in Jamaica, 'taking advantage' of customers.
"More than £27 billion has already been paid back to people who complained about the sale of PPI," according to the FCA.
With the two decade-old history of the mis-selling of PPI in the UK, have any specific measures been implemented by Jamaica's insurance regulator, the Financial Services Commission, and The Consumer Affairs Commission, under the Consumer Protection Act, to ensure that the rip-offs that were associated with the selling of PPI in the UK are not repeated in Jamaica?
FCA says that "PPI was designed to cover repayments in certain circumstances where you couldn't make them yourself. These include if you were made redundant or couldn't work due to an accident, illness, disability, or death."
As many as 64 million PPI policies have been sold in the UK, mostly between 1990 and 2010. PPI is typically sold with credit products such as: "personal or business loans, credit cards, mortgages, home loans, overdrafts, car loans, and hire purchase loans".
I spoke with the insurer's contact person the following day and requested more details. It wasn't until after the conversation ended that I realised my naivete. The information was never sent. However, my trusted search engine came to the rescue. I found four pages of data written in legalese - two synonyms of which are gobbledygook and mumbo-jumbo - and fine print.
Here are some of the things that I learned about the terms of this creditor insurance:
The policyholder is the loan provider or the bank. In the event of a claim, policy benefits will be paid to the bank - not the borrower.
The enrolment/application form says the insurance "will be administered in accordance with the Insurance Act, insurance regulations, the Income Tax Act, and the laws of Jamaica generally."
By affixing their signatures to the application form, borrowers acknowledge "that the terms (of the contract) have been adequately explained."
Three plan options are offered, namely: death, critical illness, and death and critical illness.
The insurer "reserves the right to change the terms of the policy at any time, but at least 30 days' notice of any change will be given to insured borrowers."
It appears that coverage is 'married' to the loan. Borrowers do not appear to have the right to buy coverage elsewhere.
It is not clear what the cost of coverage is.
On the death or diagnosis of a critical illness of an insured borrower, claims will be paid as follows:
- Outstanding Balance: Insured loan amount x indebtedness at the date of death;
- Critical Illness: Loan schedule insured loan amount x indebtedness at the date of death or on the diagnosis of covered critical illness as set out in the loan schedule at the time of issuing of the loan.
Insurance contracts are usually written to protect the interests of insurance companies. However, this one is barefacedly one-sided. The borrower has absolutely no rights whatsoever.
PPI was, to call a spade a spade, a big racket in the UK. It led to a lawsuit that was heard in 2014 in its Supreme Court: Plevin v Personal Finance Limited. Paragraph 1 of the judgment read:
"PPI is sold to borrowers to cover the repayment of specified borrowings upon the occurrence of an insured event, generally sickness, accidental injury, or unemployment. In its report, Market Investi-gation into Payment Protection Insurance (29 January 2009), the Competition Commission recorded that PPI was commonly sold as part of a package with the loan itself, and in those cases usually provided for a single premium to be paid upfront at the time of the transaction and added to the amount borrowed.
"Commissions payable to intermediaries were high, typically between 50 and 80 per cent of the gross written premium for policies sold in connection with a personal loan. These levels of the commission were much higher than those payable for introducing the loan itself, which meant that a large proportion of the profits of loan brokers was derived from selling PPI policies.
"The Commission found that the market for PPI sold as a package with loans was characterised by limited competition and low levels of substitutability and that these factors resulted in high premiums relative to what would be expected in a well-functioning market. They made a number of recommendations, including a prohibition of selling PPI in a package with the loan and a prohibition on single premium policies. These recommendations have since been adopted."
Even though the enrolment form makes it crystal clear that the policyholder, the bank, is not an agent of the insurer, which is an affiliated company that operates from the same address, it is very evident that consumers have no choice in deciding where to get coverage when they are in the market for a loan.
With due respect to University of the West Indies economist Dr Damien King, some amount of state intervention is necessary. Jamaica's banking and insurance industries, like those in other countries, are connected. They operate solely to make money, whatever the cost to consumers.
Fitz Jackson is right. Banks have consistently shown by their actions that they cannot be trusted to regulate themselves.
- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: email@example.com