‘Little value’ in credit card repayment insurance – review

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A review has found credit card repayment insurance is of poor value for customers, with providers making big profits and paying out little in claims.

Photo: 123rf

Credit card repayment insurance is a form of insurance which covers some, or all, of a customer’s outstanding credit card repayments in certain circumstances.

They include bankruptcy, redundancy, injury, illness or death.

But a Financial Markets Authority review, released today, has found it is of little value for the estimated 200,000 New Zealanders that hold policies, and urged people to check if they still need it.

Factors include the limited level of underwriting completed by providers when they issue a policy.

The underwriting process involves an assessment and calculation of the amount of risk the insurer is taking on for the person buying insurance.

But with the credit card insurance, the FMA said providers do not assess a customer’s medical and occupational circumstances.

These factors mean numerous exclusions and prescriptive conditions were being applied when someone made a claim on the policy, so customers may not receive the benefits they expect.

Because claims were being declined due to numerous exclusions or customers simply not making claims, it meant providers were experiencing low claims loss ratios and accruing significant profits.

The loss ratio for credit card repayment insurance was reported as low as 10 percent, meaning around 10 cents are paid in claims for every dollar received in premiums, the FMA said.

This compared on average to loss ratios of 80 percent for health insurers and 47 percent for life insurers.

Providers treated credit card insurance as a low-touch product, with customers receiving little communication or engagement, meaning many did not make claims, the FMA said.

$20 million received in premiums

Providers had stopped selling credit card insurance to new customers since a joint Reserve Bank and FMA report into conduct and culture of the life insurance industry highlighted concerns about credit card repayment insurance in 2019.

The FMA said it remained focused on the product given the number of people that still hold in-force policies, with insurers earning around $20 million in premiums annually.

The FMA’s director of supervision James Greig said people should review their policies.

“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.”

Greig said new legislation 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 said its inquiries are ongoing, and some providers are helping customers affected by any of the issues.

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