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Credit Card Repayment Insurance A Poor Value Product, Customers Urged To Check Policies

The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko - is urging an estimated 200,000 New Zealanders who have credit card repayment insurance (CCRI) to check if they still need the product, after a review found it to be poor value.

CCRI is a form of insurance which covers some, or all, of a customer’s outstanding credit card repayments in certain circumstances, including in the event of a customer’s bankruptcy, redundancy, injury, illness or death.

The FMA review, published today, has confirmed that CCRI is a poor value product for customers. This is based on several factors including the limited level of underwriting completed by providers when they issue a CCRI policy. The underwriting process involves an assessment and calculation of the amount of risk the insurer is taking on for the person buying insurance. With the CCRI product, providers do not assess a customer’s medical and occupational circumstances. These factors mean numerous exclusions and prescriptive conditions are applied when someone makes a claim on the policy, so customers may not receive the benefits they expect.

The FMA report also found providers treated CCRI as a low-touch product, with customers receiving little communication or engagement. Therefore, many customers did not make claims. Because claims are being declined due to numerous exclusions or customers simply not making claims, this has resulted in providers experiencing low claims loss ratios and accruing significant profits. The amount paid out in claims to customers is low compared to the insurance premium collected by providers.

The loss ratio for CCRI was reported as low as 10%, meaning around 10c is paid in claims for every $1 received in premiums. This compares, on average, to loss ratios of 80% for health insurers and 47% for life insurers.

CCRI withdrawn but still earning $20 million

The Joint Reserve Bank of New Zealand and FMA report into conduct and culture of the life insurance industry highlighted concerns about CCRI in 2019 and since then insurers have stopped selling it to new customers. The FMA remained focused on this product given an estimated 200,000 New Zealanders still hold in-force policies, with insurers earning around $20 million in premiums annually.

“We found underwriters and distributors are not displaying sufficient levels of customer care in their suitability assessments and communications with customers,” the report said. Product suitability assessments are a critical part of customer care, where a customer’s personal circumstances should be checked to ensure the product meets their needs and financial position.

James Greig, FMA Director of Supervision, said: “New Zealanders should check if they have CCRI and ask themselves whether they still need it. We encourage customers to contact their provider to check if this product is still suitable for them. Some providers indicated their sales process for CCRI had involved customers ‘self-assessing’ whether the product was right for them, based on product terms and conditions, and disclosure documents. This is unacceptable.”

Mr Greig noted the Financial Markets (Conduct of Institutions) Amendment Bill before Parliament will introduce obligations and duties for insurers to put customers first. “Insurers need to focus on managing conduct risk to ensure customers’ interests are prioritised,” he said. “This is an essential requirement of the new legislation, so insurers need to invest in the systems and processes to meet these obligations and show they are putting customers’ first.”

The FMA found:

  • Providers’ insufficiently checked customers’ suitability for CCRI, failed to take account of individual circumstances and relied on customers ‘self-assessment’ of their suitability
  • Providers had poor communications with CCRI customers
  • Consumer understanding of CCRI’s features and benefits was poor, with some not realising it was optional
  • Providers revealed a number of processes, systems and administrative failings, including incorrect premium charging
  • CCRI benefits reduced significantly when a consumer reached age 65, with many of the benefits - the policy definitions which can trigger a claim - no longer applicable, yet consumers premiums were not decreased to reflect this.

Inquiries ongoing, remediation underway

The issues uncovered in this review are concerning and the FMA’s inquiries remain ongoing.

Some providers have remediated, or are remediating, customers affected by any of these issues. The FMA will continue to engage with providers to ensure this activity progresses and is prioritised.

The review was carried out to better understand the suitability of CCRI for consumers and followed the 2019 Life Insurer Conduct and Culture review, which found certain insurance products provided poor value.

Sixteen underwriters and distributors participated in the review, which involved gathering qualitative and quantitative data between October – December 2020. This included gross written premium, claims ratios, dates CCRI was offered, suitability of processes, product reviews and any known issues.

The FMA received 13 consolidated responses from underwriters and distributors, with some of them related entities or part of a parent organisation.

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