FSCA will take further action to address ‘unfair outcomes’ on universal life policies

The FSCA says it has begun consultations with the life insurance industry to develop solutions aimed at achieving “fair customer outcomes” for universal life policyholders.

The authority said in a statement that the Ombudsman for Long-term Insurance (OLTI) has alerted it to the complaints the office has received over the past few months about universal life policies. The complaints include high premium increases, a lack of suitable alternative policy cover options, premiums being deducted from the savings portion of the policies without the permission of policyholders, and policies becoming unaffordable, particularly for elderly policyholders, after the guaranteed periods.

The premium on a universal life policy has two components: the risk premium and a payment towards the investment/savings component of the policy. The risk premium covers the cost of providing the death benefit and administrative fees, and it is typically the minimum premium required to keep the policy in effect. Any amount over and above the risk premium adds to the policy’s investment or savings component. This is also known as the cash value, subject to the limits in the policy.

The FSCA is particularly concerned about what it called substantial premium increases, which often followed a guaranteed fixed premium.

The authority said that following engagements with the “four main life insurers”, legislation was amended to address some of the concerns raised by the OLTI. The additional requirements were included in the regulations and Policyholder Protection Rules issued in terms of the Long-term Insurance Act. These requirements were:

• Rule 2 – product design;
• Rule 6 – determining premiums;
• Rule 11 – disclosures;
• Rule 14 – Ongoing review of product performance;
• Rule 15 – premium reviews; and
• Regulation 5.8 – amendments to actuarial basis and values.

Despite the introduction of these requirements, the OLTI said universal policies might still result in unfair outcomes to policyholders, according to the FSCA.

The authority said it has engaged with various industry bodies and insurers to obtain a better understanding of the current concerns. It has also decided to collaborate with the Life Market Conduct Committee of the Actuarial Society of South Africa to conduct a further review of universal policies.