High surrender rates : Credit houses to blame?

Business News May - 10 - 2016 , 14:18

In recent years, life insurance companies in Ghana in the past few years, have had to grapple with the challenge of policy surrenders, as the rate keeps increasing to unprecedented levels by the day, in spite of the increasing education and awareness to boost the insurance penetration rate, which is currently below two per cent.

Staggering data available indicate that for the period of January to December, 2013, partial and full surrenders/cancellations were in the region of 73 per cent, with outflow surging around 80 per cent; thus, from GH¢37million in 2012 to GH¢67 million in 2013. This is only the tip of the iceberg, as data for 2014 and 2015, are yet to be accessed.

On the face of it, one could easily attribute the upsurge in surrenders and cancellations to recent economic challenges, particularly in the last four years. While this attribution may be true, in part, it must also be understood that other inherent operational issues such as inappropriate underwriting, a not-so-strong regulated reinsurance regime, mis-selling on the part of sales agents, public misconception and the inimical activities of some credit institutions are part-causatives to this phenomenon.

What is policy surrender?

Policy surrender arises when the policyholder decides to discontinue with the life insurance policy and tender in the policy to enable him/her claim from what s/he has contributed so far, mid-term. Indeed, there are several reasons that could cause a policyholder to decide to discontinue with premium contributions towards the “rainy day.”

The standard practice is that since insurance is supposed to be a long term financial planning instrument, life insurers invariably try to discourage their policyholders from surrendering within the first 24 months of the policy.

Even in situations where policyholders request surrender after the 24th month, certain penalties are imposed on the policyholder for abrogating the contract prematurely. This practice of surrendering is normally associated with investment-linked insurance products and not pure risk policies.

This is because only investment-linked policies can be surrendered for value, pure risk policies do not, under normal circumstances, attract surrender values, since they operate on the basis of “No loss No gain.”

Access to loan facilities

It is a truism that the amount of personal loans one is entitled to depends, largely, on his or her available disposable income. In this regard, some policyholders would simply want to surrender because they want to free the deductions on their pay slips; and thus, reducing their financial commitment and increasing the value of unusable income on their pay slips in order to be attractive for bigger loan amounts.

Unfortunately, in contemplating on what discretionary items to discontinue in order to free an individual’s pay slip, credit officers and other advisors are often quick to first recommend the seizure of life insurance policy deductions.

From practice and experience, there is very little or no amount of conviction or persuasion that would make a client, who urgently needs a loan amount bigger than his/her insurance fund value at a time, to change his/her mind and rather opt for a partial withdrawal or partial surrender or even a policy loan, which are often smaller.

Activities of some credit institutions

The inimical activities of some lending institutions, particularly some microfinance and savings and loans banks, are quite conspicuous. Very often, some of these institutions ‘unscrupulously’ (word used with reservation) encourage their unsuspecting prospective debtors, who have various insurance policies, to surrender or cancel their policies, as a way of freeing their pay slips in order to qualify for bigger loan amounts.

Indeed, it is reported that some even go to the extent of secretly engaging some of the sales people from various life insurance companies; enticing them with mouthwatering rewards like client enticement fee and up to 50 per cent commission, to ‘mine’ their own life insurance clients’ data in order to court some of them into taking loans from those credit houses.

Perhaps, these giveaways, partly, accounts for the inability of some of these credit houses to sustain their business.

What I found from some policyholders

In a discrete interview with some policyholders on this worrying phenomenon, I gathered that many of them were ill advised by credit officers; and thus, reluctantly accepted the offer.

Indeed, most of them also regret their decision to surrender or cancel their policies later on; giving credence to the speculation that some credit officers with these Micro Finance and Savings and Loans institutions often exploit the ignorance of the public for their selfish gain.

While I always maintain that taking loans is not in itself bad; it however, becomes worrying and problematic if such loans are taken at the expense of a life time financial plan, as this could cause ‘harsher’ personal economic life for the individual in the event of a mishap or when s/he is on retirement.

Effects of surrenders

Surrendering in any form takes away the full or part of the expected ‘pie’ one is entitled to at maturity; hence should not be encouraged. Perhaps, when we reflect on how our pensionable income is determined by the Social Security and National Insurance Trust (SSNIT), then we will come to the realization that it is necessary to make extra savings by tightening our wallets a bit more now, in preparation for the “rainy day.”

Moreover, when policyholders surrender their policies, all other stakeholders are affected. First, the insurer loses a client and ultimately future premiums. The Agent loses commission and is unable to pay tax on those commissions; hence the State loses revenue.

Clients may not receive the best of service, as the Sales Agent may fall out of work for want of new business; creating unemployment in the process with its attendant multiplier effect. Simply put, the devastating consequence of surrendering or cancelling a policy is cyclical!

The way forward

Without prejudice, the regulatory authorities, the Central Bank and The National Insurance Commission, must collaborate to ensure that standard financial practices are strictly adhered to, particularly, in relation to the activities of some Micro Finance and Savings and Loans Institutions.

In this regard, deviant institutions could be made to pay penalty or have their license revoked altogether, as these unacceptable practices would not only impede the growth of the life insurance sector, but have a devastating effect on the entire financial sector of Ghana, and this must not be allowed.

Besides, the two sectors are not in direct competition; hence their respective regulations must be enforced to ensure that each operates within their acceptable boundary devoid of mudslinging and mischief.

Insurers must endeavor to intensify public education on the need for life insurance. In this way, clients would be in a better position to refuse ill-advices from unscrupulous credit officers in relation to surrendering or cancelling their policies.

After all, what is the purpose of taking out a policy and enduring with premium payment overtime only to surrender or cancel it and be paid a paltry amount? With regard to agents selling in both sectors, insurers must take a ruthless stance in dealing with life insurance sales agents who have also been contracted by credit houses to sell loans.

At the outset, such behaviour must be incorporated or enforced in the agents’ code of conduct as a misconduct with severe sanctions associated with it.

Moreover, both insurers and credit houses must always ensure that appropriate reference checks are done on prospective agents before engaging them.

In contemplating some of these life threatening financial decisions, it is imperative for policyholders to always mirror themselves and reflect on the next five, 10, 15 or 25 years, and ascertain whether they would prefer to continue to service personal loans at the expense of a lifetime insurance policy, with a guaranteed appreciable future returns.

Akin to the ground rules of SSNIT, policyholders should avoid being coerced into even contemplating partial surrenders or policy loans, notwithstanding their present circumstances, as they may end up depleting their own investments, and therefore become vulnerable to future daunting financial challenges.

Until next week, ‘This is Insurance from the eyes of my mind.’