Prohibition of Inducements

The article we published last week certainly elicited wide reaction.

What does the Act say? Section 44 on “Prohibition on inducements” reads:

No person shall provide, or offer to provide, directly or indirectly, any valuable consideration as an inducement to a person to enter into, continue, vary or cancel a short-term policy, other than a short-term reinsurance policy.

The following comments from Mike possibly sums up the reaction of readers.

Santam recently launched their free Value-added Risk Management offering which, on the face of it, would not contravene the Act since the offering is crafted as a risk management service aimed at reducing risk and therefore has a direct bearing on the cover sold. There are many such legitimate offerings which do indeed provide added value.

It’s other types of incentives which possibly go against the spirit of the legislation but do not technically contravene it. For example: why does the payment of an “out”-bonus not contravene the act? “Ah”, it is said, “the bonus is not paid for buying a policy but for not claiming”. So maybe this doesn’t contravene the act, but morally one is saying to the consumer I’ll give you a bonus if you don’t use what you bought from me…hello!!! Moreover it may encourage the very type of behaviour which the legislation seeks to discourage, that is, not to switch policies for frivolous reasons, but to carefully think about the purchase of financial services products.

Another example of where the law is inadequate, is the widely publicised offer of R400 if the insurer concerned cannot beat your motor premium. I think this practice, whilst clearly not a contravention of Sec 44 of the STIA, encourages the behaviour which Section 44 seeks to discourage. It contributes to the commoditisation of personal lines insurance and lulls the consumer into thinking that price is all that matters. I personally find it distasteful and think it cheapens the perception of the public, of financial services. But, it is not against the law.

We will draft an enquiry to the FSB, based on your input and examples, and try to clarify what is clearly a nebulous situation.

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