April 17, 2010
 By Bruce Cameron
It is amazing how the life assurance industry simply refuses to treat its customers as customers. All too often, it treats you with contempt while relying on its perversely incentivised product- floggers to go out there and sell you poorly designed, expensive investment (endowment and retirement annuity) products that are not necessarily in your best interests.
And when you complain, you are often beaten into the ground by the industry's armies of lawyers.
Further evidence of this behaviour is found in the 2009 annual report of Judge Brian Galgut, the Ombudsman for Long-term Insurance, who is critical of how the life industry treats you, its customer.
The industry's arrogant resistance to treating its customers fairly is underscored by a reference Galgut makes to the annual report of the first ombudsman, 25 years ago.
Judge Piet Wessels, the ombudsman at the time, wrote about a complaint where a policyholder, who had paid premiums of R338 (which was a fair amount of money back then), received only R1 when he surrendered the policy before the date of maturity.
Wessels said: "This case represents the plight of many thousands of employees who have been persuaded to take out such cover, almost certainly without properly understanding what the policy means, and with the almost certain expectation that they will personally benefit at the end of the day.
"We therefore ask you (the life assurance industry body) to initiate a crusade to implore the insurance firms to make quite certain that careful education is undertaken whenever policies are sold."
And here we are 25 years later, and policyholders are still being taken to the cleaners by the life assurance industry.
Some changes have taken place, but only after the intervention of former Pension Funds Adjudicator Vuyani Ngalwana and former Finance Minister Trevor Manuel. Their intervention resulted in a limit being placed on how much life companies can simply deduct from your savings in the form of penalties, because you either stop paying or reduce your premiums on an investment product, including a retirement annuity (RA).
All too often, this confiscation of your savings occurs when you are already in the midst of a financial crisis, such as losing your job or facing a big medical bill.
Industry puts itself first
But the life industry proves time and again that it does not give a hoot. And it has not been giving a hoot for the past 25 years.
The industry continues to sell products that do not take account of the possibility that you could lose your job, or face a huge medical bill or some other financial emergency that makes the premiums on your investment policy unaffordable.
And it is the very structure of the products - with upfront commissions being paid to product-floggers on premiums you will pay only years from now - that is the main cause of the problem.
The payment of upfront commissions encourages the mis-selling of what Galgut, in his annual report, labels as high-cost products.
Galgut's example in his report of just how high these costs can be is absolutely shocking - almost one-third of an investment disappearing in costs is the reason comparative unit trust portfolios provide you with better value for money than most portfolios wrapped in a life assurance investment policy.
Manuel's intervention has only limited the confiscatory penalties. Before his intervention, the life companies would take up to 100 percent of your accumulated savings in order to disgracefully cover even their future profits. Manuel's intervention limited the penalty to 30 percent for RAs or 40 percent for endowment policies. This has now been reduced to a maximum of 15 percent on all policies and RAs sold since January 1 last year.
But beware: a penalty of even 15 percent can make a huge difference to your long-term savings.
Quite how much the life industry confiscates each year is a mystery. I suspect assurers are coy about this figure because it totals many tens of millions of rands.
The industry does provide a total figure for the value of all policies, both risk and investment, that are surrendered. (Changing the premiums on a pure risk policy does not result in a penalty; the penalty applies only if you alter your premiums on an investment policy.)
Last year, the value of surrendered policies was about R30 billion. In 2008, at the height of the recession, the surrender value was some R40 billion.
If you assume that R10 billion (25 percent) of the R40 billion came from investment policies and then apply a conservative average penalty of 10 percent, it means that R1 billion was confiscated.
What is perturbing is that assurers are applying the confiscatory penalties more than once if you reduce your premiums more than once. Consequently, it is quite possible you could be paying more than the maximum allowable penalty.
The life industry has made no effort to agree on a joint approach on how to deal with what it calls multiple causal events that spark the penalties. It is time it did.
Old Mutual comes up short with arbitrary cost increase
Old Mutual, which over the years has shown an inclination to use bully-boy lawyers to pulverise complaining policyholders into submission, recently came up with a bloody nose when it took on the wrong person.
Last year, Old Mutual increased the minimum fees on one of its products to R50 a month and informed its clients after the fact.
The increase affected staff at Cape Union Mart, a company that, with its various benefit schemes, shows that it cares for its employees more than most. For example, while most companies are seeking to reduce their post-retirement medical benefits, Cape Union Mart has looked at ways to improve them.
So the arbitrary increase went straight up the nose of chief executive Philip Krawitz, who objected immediately, saying that Old Mutual should have given Cape Union Mart at least one month's notice so that it could have considered taking its business to another product provider.
At first, Old Mutual did not respond, and then, in a delayed response, it had this to say: "Michelle (an Old Mutual staff member) took this matter up with our legal advisers, actuarial team and communications specialists, and the feedback is unanimous, this being that the Investment Frontiers Platform, due to it falling under a life wrapper and governed by the Long Term Insurance Act, does not specify a time standard for communications relating to fee adjustments."
But Old Mutual did point out that it had another product that "does have a legal requirement that communication be sent out three months prior to any amendments". Then followed the old heave-ho: "While I understand this situation is not ideal, and can definitely understand the source of your discontent, we will unfortunately not be in a position to accommodate your request of delaying the fee increases to February 2010."
Personal Finance then took up the issue at a more senior level.
Old Mutual changed its stance, saying: "Unfortunately, the communication was delayed, which resulted in a notice period of less than one month for some products before the adjustment took effect. This was an error on Old Mutual's side, caused by delays in the communication process. This should have been picked up earlier, and the implementation delayed. The products impacted have been identified, and we are in the process of putting clients affected in the same position had the adjusted minimum fee not been applied - to allow for sufficient notice of the new minimum fee. Clients who benefited will not be adjusted.
"The previous response to Mr Krawitz (legally sound though it may be) simply has no bearing on what we intended in this case, nor our practice with such changes.
"Simply stated, there were some administrative issues that unfortunately resulted in the communications being sent late to some of our customers, including Mr Krawitz. This did result in these customers receiving a lesser notice period of the fee change than we intended."
That makes a bit more sense. But it is a pity that Old Mutual did not get it right the first time. And why did it keep referring to the legal fine print?
  
 
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