Abil’s insurer ups jobs cover

Johannesburg – While high-level consultations go on behind the scenes about the fate of credit life insurance, the insurance division of African Bank Investments Limited (Abil) said on Friday that it would offer higher insurance protection for its retrenched customers.

In addition to paying instalments for retrenched personal loan customers, The Standard General Insurance Company (Stangen) said that in order to prevent bad credit records for retrenched individuals it would pay the full outstanding balance if they did not find alternative employment within three to six months, depending on their terms of cover.

Stangen’s instalment cover also provides for other involuntary reductions in income, such as compulsory unpaid leave or short time.

We haven’t changed our product as a result of the expected regulatory changes said Marius Botha, the managing director of Stangen.

We’ve always had a very comprehensive credit life proposition [for] customers. It’s just that we never really marketed it But if we look at the current debate about credit life there clearly are abusive practices in the market.

The Treasury instituted an investigation into credit life insurance, working with regulatory bodies including the National Credit Regulator (NCR) and the Financial Services Board.

Its impact assessment report last year detailed abusive practices in that market and looked at possible regulatory interventions to stamp them out.

When the National Credit Act was reviewed earlier this year, the NCR inserted a clause in the amendment bill about the possibility of regulating the price of credit life insurance.

Botha said Stangen’s understanding was that consultations were going on behind the scenes between the NCR and the Treasury regarding this price regulation.

Some credit providers do not offer credit life insurance but ensure their interest rates price in the risk of non-payment and also make provision for bad debts. But Abil makes a split between insurance and loan interest when calculating its cost of credit yield.

Botha said less than a quarter of loan interest went to insurance.

In the 2013 financial year, Abil generated R4.86 billion in insurance income, of which R4.4bn related to the banking unit. It paid out R1.6bn in credit life insurance claims.

We basically look at [a] historic 8 percent [insurance] yield for the premium and we target a 3 percent claims outgo on that yield, Botha said.

Most of Abil’s personal loan customers are salaried individuals who represent a theoretical risk of retrenchment. So Abil models its retrenchment risk profile every year, projecting which industries are likely to have retrenchments and how many job losses are expected in all economic sectors.

It then sets aside capital and insurance claims reserves according to those expectations.

Based on this modelling, new customers employed in the mining sector are likely to get higher insurance premiums because Stangen prices each policy according to an individual’s risk profile.

If in a particular calendar year we expect more retrenchments to come through, we will either manage our risk to take less of that particular industry’s business or we will increase the premium for that particular class of customer, Botha said.

But even if Stangen has to write off more loans for customers who cannot find alternative employment, Botha said the risk around the insurance business would not have any impact on the banking unit as the two divisions managed their balance sheets separately.

Abil shares on the JSE lost 5.35 percent on Friday to close at the day’s low of R6.72, off a session high of R7.23. – Business Report

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