Credit insurance risks uncovered

Consumer credit insurance - marketed alongside credit cards and personal loans as a way to protect your ability to meet repayments - remains on the Australian Securities and Investments Commission's (ASIC) radar a year after the regulator found problems with selling practices and below-average success in claims.

In Britain, this sort of insurance has been the subject of a major mis-selling probe, with banks and insurers at last count being forced to return #12 billion ($18.34 billion) to people who bought what's known there as payment protection insurance. This insurance can no longer be sold at the same time as a credit card or loan, but only offered later.

In its report last year, ASIC found that, as in Britain, some Australian consumers had ended up with consumer credit insurance (CCI) without realising it. Others had been pressured into buying it or had bought it without understanding how it worked.

ASIC also found an unusually high proportion of claims were denied - 13 per cent compared with 2 per cent for general insurance overall. Only 34? in each dollar of premium went to paying pay claims, making CCI unusually profitable for the insurer.

Consumer groups also raised concerns about premiums being loaded into the loan up front, so that people ended up paying interest on the premiums.

ASIC commissioner Peter Kell says the regulator is now in the second-stage review of CCI.

This involves a surveillance project that will look more closely at claims and complaints handling, Kell says. It will also look at the relatively high number of denied claims and cancellations of CCI policies.

ASIC has also commissioned an independent researcher to look at the experience of consumers who make claims on their CCI policy.

Last year's review resulted in ASIC issuing 10 recommendations to improve the way CCI is sold. All participants in that review - 15 authorised deposit-taking institutions (banks and credit unions) - agreed to implement those recommendations, Kell says.

The chief executive of the Australian Banking Association, Steven Munchenberg, says the problems identified by ASIC are "minuscule" compared with those uncovered in Britain. "I fully admit that there have been concerns raised here in Australia, but we haven't seen ... more than a fraction of the issues in the UK," he says.

An investment manager with litigation funder IMF Australia, James Middleweek, who has been watching developments in Britain, says more than 850,000 CCI policies are sold to customers in Australia each year.

"Superficially, CCI looks quite attractive," Middleweek says. "For what appears a modest outlay, the customer gets a certain amount of life cover or monthly debt repayments upon job loss or disability."

But in his view, this type of insurance is "appalling value". He gives the example of a credit card repayment protection policy where the cost of covering an average card debt of $3000 is a premium of $15.60 a month - or 52? for every $100 of debt.

Stand-alone life insurance would be 30 to 100 times cheaper, Middleweek says. When customers lose their jobs, after a 30-day waiting period they qualify for double their required minimum repayment on the card, for a maximum of 90 days. But the minimum repayment is just 2 per cent of the card's outstanding balance. So on a $3000 balance, that would be $360 tops ($4 a day for a maximum of 90 days).

If you become unfit for work due to sickness, injury or disease, after the 30-day waiting period you receive double your minimum repayment until you're fit for work or the card is paid off. But Middleweek says CCI policies can set high hurdles. One customer who contacted IMF said he couldn't receive a payout under his policy if he could do just one hour of work a week.

According to data collected by the Financial Ombudsman Service, only one in 38 customers claimed on their CCI policy in 2010-11, and 10 per cent of those claims were rejected. By way of comparison, one in 16 home contents and building insurance policyholders made a claim, and only 3 per cent were rejected. In the past, little regard has been given to the suitability of the customer for the product, Middleweek says of CCI.

"The customer may already have alternative insurance in place."

Kell says: "We have seen CCI sold in circumstances where it was clearly inappropriate. For some people, CCI may be useful. But, as with any financial product, it's important to fully understand the features of a product and whether it's in your best interests."

Consumers need to remember that CCI is optional, he says. "A consumer can't be forced to have this insurance and in many cases they may not need it."

People offered CCI should consider what they would be able to claim for and what the policy would cost.

Consumers should also ask for a clear explanation of the policy's exclusions, such as pre-existing medical conditions and any clause relating to minimum hours of work, Kell says.

They should also check to see whether they already have insurance that would cover them in the same circumstances, such as income protection insurance and life cover - possibly default cover provided through their superannuation fund.

Munchenberg notes that the controversy over this form of insurance in Britain has evolved into a new crisis, where so-called "claims management" businesses are taking big cuts from the money earmarked for policyholders.

He says anyone who feels unhappy about the way they have been sold CCI should speak to their bank first and follow up with the FOS if they're not satisfied with the response.

Key points

- Mis-selling of consumer credit insurance (CCI) has resulted in huge payouts in Britain.

- Bankers say problems reported here are minuscule in comparison.

- There are question marks over whether CCI offers value for money.

- CCI is not compulsory when you take out credit or a loan.