April 17, 2010
 By Bruce Cameron
The Financial Services Board (FSB) may have to come to the rescue of life assurance policyholders to ensure that you are not misled when you take out a life assurance risk and/or investment policy, Judge Brian Galgut, the Ombudsman for Long-term Insurance, says.
In his annual report for last year, Galgut says that although life companies are providing you with what they are required to disclose in terms of the law, in effect you are not being told the real deal.
And, he says, because life companies are meeting the minimum legal requirements on disclosure, there is often nothing his office can do when you complain that you believe you have been misled.
He says the life assurance industry should heed the initiative by the FSB to introduce regulations based on principles of treating customers fairly. Galgut's office provided input on the regulations.
However, Galgut says, the life industry is "generally ready to consider claims of policyholders with greater understanding", and that it virtually always accepts the recommendations or provisional deter-minations of his office.
But he urged the life industry to "go the extra mile ... in spelling out with greater clarity, in the marketing and wording of their policies, the exact implications of the terms of their products".
Galgut's warning comes hard on the heels of the industry being taken to task by Finance Minister Pravin Gordhan at a recent conference hosted by the financial services industry body, the Association for Savings & Investment SA.
Gordhan said there are too many scoundrels in the industry who resort to the letter of the law, rather than the spirit of the law, when dealing with customers. He said this undermines a much-needed savings culture in South Africa.
Galgut says that in his three years in office "it has become apparent to me that many policyholders are not aware, when taking out a policy, of the exact limits of their cover or the implications thereof, or what the full implications of their investments may be". He cited the following to make his point:
Dread disease policies. Galgut says the diseases are defined in terms that many laymen do not understand, sometimes because the definitions are framed in medical terms. It is only when claiming that the real limits of the cover become apparent to policyholders.
Investment policies. Galgut says policyholders are not aware how much of the premiums they pay is taken in costs. He says the way that costs are declared is "only understandable to the initiated". Many policyholders and their financial advisers do not understand the extent of the costs.
He gave an example of a Mr C, who took out a policy with a term of eight years. Over this period, Mr C paid premiums totalling R21 221, from which the life assurance company (which Galgut did not name) deducted costs of R6 076. The maturity value of the policy was R22 421.
The life company claimed that the policy returned 5.91 percent a year, but its calculation was based on the premiums less the costs. Mr C calculated that he received a return of 1.54 percent a year based on his premiums.
Over the term of the policy, the average annual inflation rate was seven percent, and "most prudential equity (unit trust) funds achieved an annual 12-percent return", Galgut says. Eight different charges were disclosed to Mr C, with the company reserving the right to change the charges at any time.
Policy loans. Galgut warns that policyholders often do not realise the implications of the interest structure on some loans taken against a policy. The interest can exceed the value of the loan.
Galgut says "the truth is that assurance companies invariably provide for policy terms, and summaries accompanying the issue of the policy, which are legally sufficient but which unfortunately are nevertheless not necessarily helpful to the policyholder.
"These are matters in which the office is often unable to help the complainant. Problems of these kinds might require the attention of the regulator (the FSB)."
Galgut reminded the life industry that Deputy Finance Minister Nhlanhla Nene said in a speech last year that although companies can value their share price, they cannot count the satisfaction that customers derive from good service, nor can they fix a value on integrity.
Know what you will pay in costs
You must understand all the charges on a life assurance investment policy before you decide to invest or you "may well feel aggrieved" when your policy matures, Galgut says.
He says that it is not easy to understand the costs on life assurance investment policies. The life industry provides you with a long list of costs (some in percentages and some in rands) and a percentage, called a reduction in yield (RiY), by which the costs will reduce your returns on average each year.
Galgut says for policies with larger premiums (R500 plus) and longer maturity periods (10 years plus), the average RiY is about 3.5 percent, which is "still considerably higher than that of some other developed markets", where the average is about two percent in some cases.
He warns that the smaller the premium and the shorter the investment period, the less likely it is that you will receive an acceptable return, because most of the costs are taken upfront to pay commissions and marketing costs.
Note: You can better understand the effects of costs by demanding the RiY both as a percentage and as a rand amount, as well as demanding what is called the reduction in maturity value (RiMV), also as both a percentage and a rand amount.
The RiMV, which must be based on an assumed rate of return, will show exactly by how much the costs will reduce your potential return.
Life companies want to avoid being named
Life assurance companies have shown an increased tendency to settle complaints submitted to Galgut because they risk being named in his final determinations. Galgut named two life companies in his 2009 annual report: Hollard Life and the Professional Provident Society (PPS).
A Hollard employee was refused a disability benefit because Hollard claimed that it had discontinued paying the premiums on the policy when she went on unpaid leave due to an illness. Galgut found that the employee had not been properly informed that her premium payments had been discontinued.
PPS refused to pay out a woman who claimed a benefit in terms of a sickness benefit policy for a breast-reduction operation consequent to a child birth. PPS said that proper disclosure had not been made when the woman claimed.
But Galgut found against PPS.
PPS was also named in the report because it attempted to decline a claim from a 59-year-old dentist for a partial permanent incapacity award. The man said he had become "blind in one eye and had developed chronic ischaemic heart disease, resulting in two myocardial infarctions with extensive coronary calcification".
Galgut ruled that the dentist was entitled to a benefit based on a 60-percent incapacity.
Payback time
Dissatisfied life assurance policyholders were paid a total of R102.5 million last year as a result of the intervention of Galgut. Of that amount, R516 000 was paid out in compensation for the inconvenience policyholders suffered in dealing with otherwise life assurance companies. The balance was for disputed claims where the life companies had to make good.
Galgut received 9 088 complaints last year. Of these, 5 380 complaints were resolved, with 41 percent of the decisions favouring the complainants.
Tell all or lose everything
When you apply for a risk life assurance policy that should, for example, pay out on death or disability, you must ensure that you tell the life company everything that could affect your cover.
If you do not, you could land up in the same situation as a policyholder, Mr X, whose wife died in December 2006 as a result of systemic lupus erythematosus (SLE), an auto immune disease. Six months earlier, Mrs X had bought death cover of R2 million.
The life assurance company repudiated Mr X's claim on the grounds that a specialist physician, a specialist surgeon and a pathologist had conducted tests on Mrs X in December 2005 that indicated signs of SLE. The life company said it had not been informed of the tests and the unconfirmed results.
Mr X's complaint to Galgut was rejected on the grounds that a full disclosure had not been made.
Galgut says that when you apply for a risk life policy, you must:
Respond fully and honestly to all the questions.
Rather disclose too much information, including details concerning any undiagnosed symptoms, than too little.
Disclose something even if you are unsure whether the information should be disclosed. The insurer will ignore irrelevant information.
Refer to medical scheme records and medical practitioners' records when responding to medical questions. Having a bad memory is not an excuse.
Take time to complete the policy application form properly. Do not allow salespeople to rush you.
Galgut warns that your beneficiaries could face serious financial consequences if a policy is repudiated on death.
  
 
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