It has taken time, but a ruling handed down last week by Charles Pillai, the Financial Advisory and Intermediary Services (FAIS) Ombud, will hopefully put a stop to one of the worst rackets in the short-term insurance industry.
Over the years, too many short-term insurance policyholders have been exploited by both unscrupulous insurance companies and short-term insurance sales people, who have failed to adjust properly the values of motor vehicles.
This means that each year after buying a motor vehicle you may be paying an ever-increasing premium - because of inflation - on a value that is too high, instead of seeing your premium fall. And if you happen to claim after an accident or theft you will not be paid the insured value, only the actual market value of your vehicle.
This racket allows unscrupulous short-term insurance companies to make bigger profits, and their equally unscrupulous agents also gain because they are paid a commission based on a percentage of the premium you pay. The percentage is 12.5 percent of the premium. So the more you pay, the more they gain.
This nice, cosy little relationship has often been highlighted by Personal Finance in the past.
Now we have the Pillai ruling that it is an unacceptable practice. Pillai made the ruling after a client of Absa Brokers complained to him about the increasing pre-miums on his car, which was, in fact, depreciating in value. He ordered the brokers to repay their client the overpaid portion of the premiums, with interest. (The full story appeared on the front page of last weekend's Personal Finance.)
What is interesting is that, in many cases, short-term insurance companies and their sales people automatically increase the amount of insurance on your household contents every year to take account of inflation. So if they can automatically increase premiums in one area, they should also be able to do the reverse with a depreciating asset such as a motor vehicle.
Contents con?
But the favour that your insurance broker and/or insurance company may be doing you in automatically increasing your premium on your household contents may also be a bit of a con.
One of our readers, Charles Isaacson, a retired medical professor, was insured through Personal Finance's old friends, Alexander Forbes, this time its short-term insurance company.
He became suspicious about the increases, particularly since he had downsized, and he felt his insured value should be R250 000 instead of the R715 000 assumed by Alexander Forbes.
After the good professor queried the values he received a rather cheeky letter from an Alexander Forbes consultant telling him that his household contents were insured for R30 000 in 1980 and if the value was increased "by the poverbial inflationary increase of 10 percent (I assume she means a year) your contents would be insured for R914 000".
A very interesting way to calculate inflation - a flat 10 percent a year - particularly when inflation varies.
The consultant then told the professor that in 2004 the contents were insured for R480 000. This was increased by 15 percent in 2005 and by 10 percent a year thereafter.
To start off with, the silly consultant does not seem to be able to work out the 10-percent increases in arriving at a final figure of R715 000. More importantly, she and/or Alexander Forbes were too lazy to look up the official inflation rates.
In the year that the value was pushed up by 15 percent, the inflation rate (CPIX) for the previous year (2004) was 4.6 percent. The following year it was 3.5 percent, then five percent and finally 7.9 percent.
By my calculations, using the actual inflation rates, the insured value should have been no more than R589 000.
But this all gets more interesting because when the professor complained, Trevor Steele, the Gauteng regional manager of Alexander Forbes Insurance, came up with a new set of figures in which it was reflected that over this period the professor had reduced his insured value as well.
In what seemed to be an attempt to counteract this, Alexander Forbes had, in some years, simply pushed the inflation rate even higher than "the proverbial 10 percent". It achieved a remarkable 26 percent inflation rate at the end of 2004.
After Personal Finance took up the case it was resolved by Alexander Forbes this week.
Check your policy
The point is that although most brokers are honest about ensuring that you are insured for the correct amount, there are too many - those with their eyes on the commission alone - who are not.
What you need to do is:
- Decide whether you want to be insured for actual depreciated value or replacement value. This must be stated in the policy document. Replacement value will cost you higher premiums than actual value. Normally, replacement value does not apply to motor vehicles but you receive the choice for household contents while your actual home (the building) is normally insured for replacement value.
- Check your values annually. Remember that if you are under-insured when you make a claim your benefit will be reduced by a proportional amount. So if you are under-insured by 20 percent your benefit will be reduced by 20 percent.
Mike Woollam, a Pietermaritzburg-based short-term insurance expert, says that valuations can be problematic.
The issue is to get the valuation right. Even using the standard inflation rates (CPI or CPIX) can be misleading. For example, when you insure your home (the building), building inflation can be very different from CPIX. Woollam points out that last year building inflation was ahead of CPIX but this year the figure is lower.
With car insurance the intention is to give you back what you had at the time of the loss. Woollam says the Auto Dealers Digest retail values provide a guide. But even taking a midway point in the retail range for a particular motor vehicle can present problems because your vehicle may be in shocking condition with a high mileage or it may be in excellent condition with a low mileage. This could lead to a 10-percent variation either way.
The best solution, Woollam says, is to have a motor dealer give you an accurate figure, because even good insurance agents are not experts in valuations.
Annual affair
Another interesting aspect of Pillai's ruling is that even if you first took out your short-term policy before October 2004, when he became operative, you can still make a complaint to him about any over-payment since then.
Absa Brokers unsuccessfully attempted to argue that the complainant's first policy was taken out before Pillai was operational so he could not hear the complaint. Pillai sent the brokers packing, telling them correctly that short-term insurance is an annual affair.
This is the second time in recent weeks that Absa Brokers has received un-favourable publicity in Personal Finance. In another report, the Insurance Sector Education and Training Authority (Inseta) accused some of its financial advisers of cheating to achieve qualifications required in terms of the FAIS Act.