ABUSES IN THE FUNERAL BENEFITS INDUSTRY
The Portfolio Committee on Finance held hearings on the abuses taking place in the Funeral Service Benefits Industry. The Committee heard from a number of key role-players, namely:
Teboho Motebela of the Wits AIDS Law Project
Isobel Frye of the Black Sash
Chris Shone of Goodall and Bourne Assurance (Pty) Ltd
André Swanepoel of the Financial Services Board (FSB)
Anna Rosenberg of the Life Offices Association (LOA)
The Committee is not in a position to make final recommendations on the way forward based on the evidence it has heard, but recommends that more research be conducted by the National Treasury and the FSB into specific recommendations that are enumerated below.
The following information should form the basis of the further necessary research.
Most of the problems in the funeral insurance market are due to a growth in the number of voluntary group funeral schemes and the more active involvement of undertakers in the insurance transaction. The existence of these schemes can be identified through consumer complaints, and in relation to undertakers, through municipal cemetery boards, VAT returns and income tax returns (if registered).
In the insurance industry, the funeral benefits industry falls under the category of assistance insurance. Assistance insurance is defined in the Long-Term Insurance Act, 52 of 1998, as "a life policy in respect of which the aggregate of (a) the value of the policy benefits, other than an annuity, to be provided (not taking into account any bonuses to be determined in the discretion of the long-term insurer); (b) the amount of the premium in return for which an annuity is to be provided, does not exceed R10 000, or another maximum amount prescribed by the Minister, and includes a reinsurance policy in respect of such a policy."
There has been a substantial change in the way insurers participate in the assistance insurance (funeral insurance) market. Faced with increasing costs of administering this type of business, specifically cash collections, insurers implemented alternative collection methods and linked the business to a related trade, namely undertaking.
In time, as undertakers secured larger volumes of business and controlled the new business flow and premium collections, insurers saw an opportunity to underwrite business on the basis of voluntary group schemes. Under this regime, insurance is offered to a group as a whole and individual members sign up. Risk is assessed on the whole portfolio rather than on an individual basis. No medicals or individual assessments are done. Therefore this is much cheaper to administer.
The LOA explained that the voluntary group scheme regime provides affordable funeral insurance to virtually all the population and especially to the poor on an efficient and cost effective basis where individual full insurer administered contracts would otherwise be uneconomic.
The way in which these schemes operate is by centralising premium collection, claims settlement and administration. As undertakers became more knowledgeable about the insurance aspect, policies were designed to eliminate cash benefits and risk cover was gradually taken away from the insurer and carried by the undertaker directly.
However, we then began to see the emergence of undertakers offering group schemes, but which schemes are not underwritten. Scheme members are then not protected financially and are subject to a wide range of abuses including underpayment, over charging, payment in kind etc. Unregistered schemes are common among small undertakers since they often know their clients, can assess the risk and can manage the claim payment. However there is no security that benefits will be paid, because these illegal operators often commit fraud and disappear, having left no real contractual rights and there is therefore weak enforcement.
The meaning of being underwritten:
Underwriting means accepting a risk and agreeing to provide a benefit on the occurrence of a certain defined event, for example, death. At least one of the parties to an assistance policy must be a registered insurer (underwriter) as only a registered insurer may assume a risk to provide policy benefits under a long-term policy.
Administrators/intermediaries (ie. Funeral undertakers) may not assume risk in relation to a life event, as defined, and undertake to pay policy benefits. That is the task of the underwriter. The undertaker may however assist with sales, premium collections, claim settlement and other administrative functions on behalf of a registered insurer. But that is the full extent of their permitted activity. Anything further, if it involves accepting a risk, oversteps into the insurance arena.
The problem presently is that some funeral undertakers are not underwritten by insurers and therefore they are taking the risk onto themselves. Furthermore, once such an unregistered insurer starts to provide policy benefits they automatically fall under the regulatory authority of the Financial Services Board in terms of the Long-Term Insurance Act.
However, it is the contention of some role-players that the FSB is not exercising its authority in this regard. Effective regulation and enforcement was strongly called for by all the presenters. They asked that existing regulations in the Long-Term Insurance Act and The Financial Advisory and Intermediary Services Act (FAIS) must actually be energetically enforced.
Up until recently, the Long-Term Insurance Act, which dealt purely with prudential regulation, was the only tool which the FSB had at its disposal to regulate this industry. The FAIS Act now deals with market-conduct regulation. With both of these Acts in place, the FSB will be in a better position to enforce its regulations. Part of the problem up to now was that the FAIS regulations were not finalised. The FSB has now also set up the Group Administrators Forum (GAF) to act on its behalf in regulating this part of the industry.
PROBLEMS AND ABUSES IN THE INDUSTRY
The following evidence was put before the Committee by the Wits Legal Aids Clinic, the Black Sash and Chris Shone of Goodall and Bourne:
1. Lack of information to clients
The Black Sash reported that many clients query why their policies have lapsed and they are unable to claim benefits. On investigation it often transpires that clients have stopped paying their premiums either because they did not realise it was an ongoing obligation, or because they cannot afford to pay the premium on an ongoing basis. It is often the case that individuals did not realise that they would risk forfeiting their premiums paid if they sopped paying premiums. Many poorer people believe that the policies they purchase are a type of savings club, and therefore believe that they will get their contributions back on some future date.
Recommendation: The Black Sash recommends that given the fundamental contracting imbalance between the broker and the potential insured there is wide scope for abuse. Accordingly there needs to be very high sanctions to ensure that intermediaries do not sell policies that people cannot afford, merely for the sake of immediate commissions. Stricter sanctions need to be imposed for the reckless selling of policies and this should be investigated by the FSB.
1.2 The Pre-paid funeral
As previously stated, there is a perception amongst many consumers that they are prepaying their future funeral in instalments rather than taking out an insurance policy. This belief is reinforced by the fact that an undertaker has issued the policy and the benefit is defined with reference to a funeral benefit rather than a cash amount.
1.3 Replacement policies
Many policyholders insured by unregistered insurers will not cancel the policy even if informed that the insurer is unregistered because they believe that they have been contributing to a savings fund for a funeral, rather than for a contract of insurance.
Recommendation: While a pre-paid funeral can be issued, this would be somewhat different from the terms of the usual funeral policy available and in any event if issued, as a policy would still need to be underwritten. In the United States, this is an issue that is receiving wide spread attention and the regulatory basis for the issue of pre-paid plans is onerous, but protective of the consumer.
The Committee recommends that the National Treasury urgently investigate the viability of pre-paid funeral schemes.
Also based on this understanding of a pre-paid funeral, the disclosure of existing medical conditions seldom occurs (even if asked for) because it is regarded as unnecessary.
In addition, few indigent people understand the concept of "uberrimae fides" (utmost good faith in contracting). The need for disclosure, and the implications of non-disclosure need to be thoroughly explained by brokers to potential policyholders, and the relevant questions need to be asked to ascertain if there is the need to disclose any relevant information. Few informed people would fail to disclose relevant information if aware of the consequences of non-disclosure.
Recommendation: The Black Sash recommends that the obligations on brokers should be rigorously enforced. There should be very high penalties for breach of the relevant codes of conduct and other consumer protection provisions. However, since the insured is usually deceased at the time of repudiation of the claim it is very difficult for his or her family to prove that the broker failed to advise the deceased of the necessary disclosures and exemptions.
Few clients ever see a formal contract, or have them read or explained to them. Many funeral insurance clients are old, illiterate and non-English speaking. Where contracts are shown to clients, they are usually in English and in very small print. Few clients ever see a completed copy of their contract. Contracts are often signed in blank, and requests for copies of their signed contracts or even standard terms and conditions are usually ignored.
Recommendation: All intermediaries and/or representatives must ensure that a signed copy of the contract is handed to the insured. These contracts should be available in a number of languages in the country. People also need to be educated about the dangers of signing a blank contract as well as the right not to have to do so.
1.6 Lack of consistency in documentation
There is often an inconsistency between the terms of the master underwriting policy and the member’s policy book. When underwriters change, the policyholder’s book does not reflect this change. This may result in exclusions and other terms being applied which are not applicable. (Chris Shone)
Recommendation: In many other jurisdictions, master policy contracts must be registered so that the regulator can control terms and conditions. We do not have this arrangement in South Africa. The suggestion has also been made that standard contract terms be introduced to protect the interests of consumers in certain markets.
2. Problematic clauses in contracts
2.1 Aids exclusion clauses
The Wits AIDS Law Project told the Committee that the value of funeral insurance policies is very low (R20 000 and less). And as such, HIV testing is not required for these group schemes. Big insurance companies actually advertise the fact that a medical examination is not a pre-requisite for cover. However, they do not say that these policies then exclude liability for HIV/AIDS related death.
The following AIDS exclusion clauses exist in the industry:
These products are specifically targeted at the poor, less educated/informed and most vulnerable communities. The rate of HIV infection in these communities is very high. Individuals are lured by the fact that HIV testing is not required, and assume that HIV is not an issue for this type of cover. It is only when a loved one dies that they realise what the exclusion clauses mean.
2.2 Breach of the rights to equality, dignity and privacy:
The Wits Aids Law Project pointed out a further abuse in the questions that are required to be answered on medical questionnaires when applying for a funeral policy, which are designed to exclude people with HIV/AIDS. For example, questions about height and weight; individuals are also required to waive their rights to privacy which means that brokers have knowledge about whether someone has Aids. This amounts to a breach of our fundamental constitutional rights to equality, dignity and privacy and is therefore illegal.
2.3 Package deal
The Wits Aids Law project further informed the Committee that these products are made even more attractive because the company promises to take care of the funeral arrangements on behalf of the family. The result is that before the claim is processed, the body of the deceased is taken to a mortuary working closely with the insurer and the body is kept there until the funeral.
The claim is then processed and due to the exclusions, is repudiated. The family is then responsible for the costs incurred in keeping the body. In many instances, the insurer/mortuary refuses to release the body for burial until the family has paid.
In other cases, only after the funeral is the family informed that their claim has been repudiated and that they have to pay back the cost incurred by the insurer on their behalf.
2.4 Linking of schemes to funeral parlours
In many cases experienced by the Black Sash, funeral cover schemes are only paid out to families if the family uses the services of a specific undertaker. One of their clients who lived in Knysna but had to bury her partner in the Transkei could not recover money from the scheme because there was no branch of the relevant funeral parlour in the Transkei.
Recommendation: The Black Sash recommends that the practices in 2.3 and 2.4 should be declared undesirable business practices in terms of section 34 of the FAIS Act.
2.5 Benefits are not paid in cash
Chris Shone informed the Committee that policyholders often do not have an election to obtain a cash benefit, despite the provisions of Section 53 of the Long-Term Insurance Act, which provides as follows: "Option for payment of policy benefits in money.--Notwithstanding the terms of an assistance policy, either party thereto may request that a policy benefit which is expressed otherwise than in a sum of money shall be provided as a sum of money equal in value to the cost that would have been incurred by the long-term insurer had the non-monetary benefit been provided."
Rather, undertakers enforce contractual agreements that only they may conduct the funeral, without the option of a cash payout. Policyholders are not able to elect whether to obtain a cash benefit. If the funeral costs less than the sum assured, the difference is not paid to the beneficiaries. This limits the consumer’s right of choice and often the consumer receives an inferior service at a high price.
2.6 Entitlement to benefits – no beneficiary nominations
Chris Shone further pointed out that policies very seldom make provision for beneficiary nominations. Benefits are then legally payable to the estate of the deceased, which is seldom attended to because poor people often don’t know how to wind up a deceased estate or who to approach to do this for them. In this case, the money goes to the State and the family does not ever see this money.
3. Policyholder contact details
Many group arrangements are designed by administrators/intermediaries in a way that avoids a direct relationship between the insurer and the policyholder. It is therefore virtually impossible for the insurer to advise policyholders of changes in cover, premium increases or termination of cover. (Chris Shone)
Recommendation: It should be mandatory for group schemes to notify members of any changes and this should be strictly enforced.
4. Delayed payments
Many clients give up trying to get payment out of companies due to the costs of having to do so.
Recommendation: The newly appointed ombud provided for in the FAIS Act should ensure that its services are free and accessible and these services must be widely advertised across the country. In order to provide a legitimate and valid service, such services must be able to address the concerns of illiterate, non-English speaking, rural dwellers.
5. Fraudulent practices:
5.1 Fraudulent policies
The Black Sash informed the Committee that many fraudulent policies are written up allegedly on behalf of indigent clients. This type of practice affects the reputation of the whole industry and harms relations between authorised financial services providers and the general public as well as the affected clients. This practice must be actively dealt with and eliminated by all role players.
Recommendation: The Black Sash recommends high profile prosecutions of intermediaries/representatives as well as the authorised financial service provider. The provider is the only body that can call the intermediary to account, and so should bear the risk.
5.2 Incorrectly repudiated claims
The Black Sash has clients whose claims have been repudiated by funeral cover providers, only to have their paralegals discover that there was no valid reason for the repudiation. The Black Sash sees only a small fraction of people in their advice offices. Thousands of people have no affordable recourse in the event that they believe their rights have been violated and so never receive the benefit of their contributions.
Recommendation: Free and accessible services of an ombud as set out above.
5.3 Fraudulent practices by intermediaries
In some instances, intermediaries fail to pay over the collected premiums to the insurance principles and abscond with the payments, leaving the client with no claim against the insurer, and little hope of locating the absconded broker. In other instances the fraudulent intermediaries do not pay claims to beneficiaries or they withhold a portion. (Black Sash)
Recommendation: The Black Sash recommends that if an intermediary issues a receipt for payment of any amount on an authorised receipt which could be provided by the authorised financial service provider, this should bind the authorised financial service provider because the provider is the only body that can call the intermediary to account, and so should bear the risk.
5.4 Failure to give effect to the cancellation of policies and the continued deduction of unaffordable premiums
Despite cancellation of a master policy and termination of the underwriting arrangements, premiums continue to be collected and policyholders are not advised of the termination. In other instances, clients cancel policies, however, premiums continue to be deducted.
(Chris Shone and the Black Sash)
Recommendation: Free and accessible services of an ombud as set out above.
5.5 The extent of underwriting
Even when a policy is underwritten, problems can occur:
Recommendation: The FSB must ensure that the regulations of the FAIS Act are strictly enforced.
6. Further regulatory problems
6.1 Organizational, record keeping and accounting problems are often the cause of claims being repudiated
Premiums are not necessarily actuarially sound, especially where commission is considered. Premiums are averaged for family benefits, again possibly making them actuarially unsound for some age categories, and premiums are seldom reduced following the death of one of the insured under the policy.
Premiums are frequently increased although there is no provision for this in the policy.
6.3 Commission regulation
There is no limitation on the commission that may be paid in respect of an assistance policy. In many cases, excessive commission is paid. Commission can amount to as much as 50% of the gross monthly premium and the extent of commission is seldom disclosed to the policyholder.
6.4 Nature and extent of cover
Cover is typically whole life and premiums are payable until death. However, this exposes policyholders to the risk of having to continue with premium payments after retirement. This increases the chance of lapse. Policies of this nature generally attract no paid up or non-forfeiture value and cessation of premiums results in termination of cover. Where individuals buy based on affordability, they select the policy with the lowest initial premium, not understanding that this will increase over time. (Chris Shone)
6.5 Insurable interest
Insurable interest requirements are not considered or complied with in many group and individual arrangements. Proof of interest is problematic and failure to disclose an interest can result in a claim being rejected. (Chris Shone)
Recommendation: Consumer education is essential in this regard. The possibility of "premium setting" has been raised by the FSB as a means to protect consumers and this should be fully considered. Similar measures have been introduced in the United States.
THE STANDPOINT OF THE FSB
The FAIS Act will assist the FSB enormously in addressing many of the problems in the industry. The Long-Term Insurance Act dealt only with prudential regulation, but now that the FSB has the FAIS Act, which deals with market-conduct regulation, the FSB is in a much better position as far as regulation of the industry is concerned.
The FSB has set up an administrator body, called the Group Administrators Forum (GAF) to act on its behalf in regulating this part of the industry. The GAF is currently drafting regulations in relation to Voluntary Group Funeral Scheme Arrangements.
With regard to the formal market, i.e. Insurers, the FSB believes that the FAIS Act will bring the conduct of Administrators in line; intermediaries/funeral parlours will be brought into the FAIS net; There can be more controlled movement of schemes; disciplinary actions/removal from the industry; stricter enforcement of the Insurance Act. Better disclosure is now obligatory in terms of the FAIS Act.
With regard to the semi-formal market, namely friendly and burial societies, possible actions could be self-regulation (stokvel approach) for small mutuals and a possible revising of the Friendly Society Act together with strong enforcement. It is also necessary to educate on rights and responsibilities
With regard to the illegal operators, the FSB recommends education; naming and shaming; quick and cost effective enforcement with penalties. Rather bring them into the net than penalise them. The FSB believes that more research is necessary.
THE LOA HAS ALSO TAKEN A NUMBER OF STEPS:
Insurers to determine final ‘retail’ price
Insurer to account for final price
Payment to beneficiary or designated service provider
Insurer to hold bank account
3. The LOA committee feels that with the emergence of the GAF, the possibility exists of establishing a regulatory "micro regime" for voluntary group business along the lines of the Micro Finance Regulatory Council including:
Registration of sales people as FSP (Funeral Service Provider) representatives – cut out excessive sub-agenting
1. Standard regulatory requirements for assistance insurers
2. Standard code for administrators
3. Educate consumer about the need to deal only with licensed bodies
This will tidy up the "honest" side of the business and will reduce to a minimum the illegal operators because of increased customer awareness.
4. More effective regulation of unlicensed operators would help
5. Regulation of undertakers could usefully be reviewed
Some role-players in the industry felt that most consumer education undertaken by the FSB and the LOA is too complex for the average policyholder to understand. Further, that consumer education also requires visible "regulation" and enforcement.
General recommendations of the Committee:
The Committee has made a number of specific recommendations throughout this report, in relation to specific problems in the industry; however, the Committee wishes to highlight the following:
What to look out for if you are buying funeral insurance:
Is there an insurance company behind the seller?
Make sure that the seller (eg. funeral parlour) of the policy is registered with an insurer. You need to see proper papers as to where the policy will be placed. This is to check whether the policy is underwritten.
Is the insurance company a registered insurance company?
Make sure that this insurer is a registered insurance company. This information must be confirmed in writing by the insurance company.
If your policy is not underwritten by a registered insurer, it is invalid even though you may be paying money towards it every month.
Is the seller a registered seller?
You also need to make sure that the seller (eg. funeral parlour) is registered on the LOA Intermediary Register as a representative. The seller must show you documentation to prove this.
Do you have a summary of your policy?
Once the policy has been issued, you as the policyholder must get a summary of the conditions and requirements relating to the policy.
Do you have a policy certificate?
A policy certificate must be given to you the policyholder, with information about the person or persons who are covered in terms of the policy, the amount of cover, the net premium, the total amount to be paid out as well as a clear breakdown of the costs and the reasons for every one of those costs.
Do you receive a receipt for your cash premium payments every month?
You should receive a receipt for every cash payment you make towards the policy premium every month. The receipt must have the information of the insurance company that has underwritten your policy.