Last week we commented on a request for public response to a “Technical Report on the Consumer Credit Insurance Market in South Africa”.
One of the proposals concerns regulating the pricing of CCI. The thinking is to allow credit providers to “…continue to require CCI cover as a condition of granting credit, but within a framework where there is explicit regulation of credit and/or CCI pricing.”
Three further sub-options are considered under this approach, namely:
- Regulating the CCI premium rate. Prescribe a “band” of recommended reasonable risk premium rates for different CCI cover types, or place a regulated cap on premium rates for different CCI cover types.
- Regulating the interest rate. Introduce a maximum interest cap set at a lower level than the “unsecured loan” interest rate cap, for loans where the credit provider insists on mandatory CCI.
- Placing a regulated cap on the total cost of credit, including interest, CCI premiums and other charges.
The practical impact hereof is illustrated in an article in Business Day on the potential effect on African Bank:
The regulations to be imposed are likely to include a standard set of benefits that policies must include, and a cap as a function of the amount of cover. The National Credit Regulator has previously suggested a cap of R4 per R1 000 of cover, though this seems extreme. African Bank’s ratios imply it earns premiums of R10 per R1 000 of loans on its book, so that level of cap would almost wipe out its profits from credit life. While the regulations are still to be drawn up, they could be in effect by the end of this year.
This is yet another instance where the industry needs to engage with government to avoid serious financial hardship in the future.