CR318 Values- Poor maturity values – systemic problems
Poor maturity values – systemic problems – two cases, with different insurers, where the office’s intervention led to increased benefits not only for individual complainants, but also other policyholders who had not complained.
The following two cases were finalised by the office in 2008, and were dealt with briefly in our 2008 Annual Report (at pages 22-23).
A policyholder complained about the maturity value of a policy which he took out for his domestic worker in 1987. The policy had a term of 20 years and a small amount of life cover.
The policyholder paid R15 597 in premiums over the term but the maturity value in 2007 was only R13 762. The amount allocated to the investment in a smooth bonus portfolio was only R9 844, which reflected the high cost structure of the policy type. There was a profit allocation charge of over 25%, and high initial costs which took almost four years of premiums to neutralise.
The insurer explained that the reason why the investment portfolio was very conservative was in order to provide guarantees in the policy. The bonus rates declared were extremely low, especially since 2003 when returns from other smooth bonus funds were far greater.
The insurer confirmed that the product, which had been launched by an insurer that it took over thereafter, was no longer being sold.
After the office wrote to its CEO, the insurer offered to increase the maturity value of the complainant’s policy to R17 000, which the complainant accepted.
The office then asked the insurer to consider what could be done for all other policyholders in this portfolio. The insurer later advised that its board had approved a transfer of the portfolio (some 30 000 policyholders) to one more equity-based, while still providing the protection of a smooth bonus portfolio. The bonuses for the 2008 year had also been increased. The shareholders had agreed to stand good for the reduced effect that this would have on the stabilisation fund.
In a similar case with another insurer a policyholder had taken out a 10-year pure endowment policy, with an initial R37 per month premium (escalating by 10% annually), invested in a smooth bonus portfolio. Over the term he paid R7 260 in premiums and eventually received R6 386 as a maturity value. He complained to our office because of the lack of return.
It was interesting to note that at inception the policyholder had been given an illustrative value statement, which did not disclose the total amount of premiums that would be paid over the term of the policy, but which showed an illustrative value at 5% growth of R6 455 (less than the total premiums), and at 10% of R6 686 (R300 more than the total premiums).
When we asked the insurer in what way this was a value proposition for the client, the insurer answered: “It appears that the client did not calculate the total premiums that he would pay over the term of the contract compared to the illustrative values quoted at the commencement of the contract”.
It appeared that as much as 32% of premiums had been absorbed by expenses. The insurer confirmed that this was in line with the product design.
Once again the poor overall return on the policy was a combination of the high cost structure and rather poor performance in the portfolio, which had been an average of 6,72% per annum. The insurer explained that the small premium policies in the portfolio had been badly affected by the cost structure.
After a request by the office to reconsider the case the insurer offered to pay an additional R2 974 to the complainant.
The insurer also undertook to reduce the maintenance charge on the small premium policies in the portfolio by injecting approximately R4.2 million into it, and by also injecting R9.23 million into the portfolios of other similarly structured plans.