Following various complaints about universal life policies over the last few months, the Financial Sector Conduct Authority (FSCA) has begun consultations with industry to “develop solutions to achieve fair customer outcomes,” in addition to existing policy interventions it has made in the past few years.
The office of the Ombudsman for Long-term Insurance (OLTI) alerted the FSCA of complaints received over the last few months, including high premium increases, a lack of suitable alternative policy cover options, premiums being deducted from the savings portion of the policies without policyholders’ permission and policies becoming unaffordable, especially for the elderly policyholders after the guaranteed periods.
According to the FSCA, universal life policies are life insurance policies with two components to the total premium payment: the risk premium and a payment towards an investment or savings component of the policy. “The cost of the risk premium component covers the cost of providing the death benefit and administrative fees, and that is typically the minimum premium amount needed to keep the policy in effect. Any amount which forms part of the premium payable 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 says complaints from the ombud relate to substantial premium increases in these policies, that often follow a guaranteed period allowing for a fixed premium.
This isn’t the first time the authority has tried to intervene in this regard. It says that following engagements with the four main life insurers that offer these policies, certain additional requirements were introduced into the insurance legislation to address some concerns.
“The additional requirements were included in the Regulations and Policyholder Protection Rules (PPRs), issued in terms of the Longterm Insurance Act, No. 52 of 1998 (LTIA). The additional requirements are aimed at ensuring that insurers focus on the value the products provide to a policyholder, during the lifetime of the product.
However, despite the introduction of these requirements, the OLTI notes these types of policies may still result in unfair outcomes to policyholders. The FSCA says further consideration of these policies has been undertaken and it has also engaged with various industry bodies and insurers to obtain a better understanding of current concerns.
The authority will also collaborate with the Life Market Conduct Committee of the Actuarial Society of South Africa to conduct a further review of these policies.
The topic was covered extensively in a presentation (download here) made at the Actuarial Society of South Africa’s (ASSA’s) 2020 Virtual Convention in October 2020, by ASSA CEO Mike McDougall and the society’s former president Paul Truyens.
According to the duo, universal life policies were introduced to South Africa in the 1980s and designed to give customers increased flexibility, replacing traditional with-profit reversionary bonus style products. However, due to the leveraged effect of investment returns on the risk charges, these policies have become unsustainable during a period of low nominal investment returns.
“While universal life policies introduced transparency and flexibility, they also transferred more of the risk of investment under-performance from the insurer to the policyholder,” McDougall and Truyens write. “The products were introduced during a period of sustained double-digit inflation and nominal yields. With risk policies being sold in an increasingly price sensitive and highly competitive market, insurers combined aggressive pricing with shortened guarantee periods, the guarantee period being the term during which the insurer could not increase premiums to offset deteriorating investment performance. Any shortfall in performance would be carried forward to after the expiry of the guarantee period, with the premium being increased via the policy or premium review process.
“However, with declining inflation, economic and political challenges and the increased exposure to global markets, nominal yields fell to levels where policies were no longer earning the returns required to sustain themselves for the full policy term.
“After the completion of the guarantee period and at regular intervals thereafter, insurers were able to review the policies and recommend and, after the premium guarantee period, insist on premium or cover changes to ensure the policies remained sustainable and solvent. In practice few companies conducted these reviews until the investment account started decreasing or went negative. At this point the level of premium increase required to sustain the policy would be substantial.”