Kiwibank the last holdout on poor-value credit card repayment insurance

Friday, 13 March 2020

Data gathered by the Reserve Bank and Financial Markets Authority revealed the worst-value personal insurance sold by banks and insurers. First published in 2020.

Kiwibank is the last of the big banks to sell discredited credit card repayment insurance, but says it is no longer 'proactively' marketing it.

In Australia class action lawsuits and probes by regulators, which have cost banks just under A$60 million (NZ$62m) to date, has ended bank sales of credit card repayment insurance, which yielded super-profits as payouts to policyholders were so low.

But while the implosion of the credit card repayment insurance market came with a noisy bang of publicity in Australia, here it's demise has happened quietly with the New Zealand subsidiaries of the big four Australian banks ending sales without money being returned to customers.

ASB stopped selling the insurance in February 2018, shortly after it's parent bank CBA paid A$10m in refunds to 65,000 students and unemployed people unable to claim on the redundancy cover portion of its policies.

Kiwibank is the last of the big banks to sell credit card repayment insurance.

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BNZ stopped selling it in October 2018, a full year before its parent NAB settled a class action lawsuit for A$49.5m with its lawyer Sharon Cook saying: 'We can only move forward if we deal with the past, so that we can earn trust among customers and the broader community and grow confidence in the future of NAB.'

The decisions by Westpac and ANZ came in October and July of last year.

But the banks say their self-imposed New Zealand sales bans were the result of reviews they undertook independently, and were not a result of orders from their Australian parent banks.

Westpac and BNZ say ending sales was a step towards simplifying their product ranges. ASB said its review concluded customers may prefer to buy other forms of insurance to protect them against financial risk. ANZ says sales were falling.

Banks and insurers came under pressure in 2018 and 2019 from regulators like Liam Mason from the Financial Markets Authority probing the claims payment rates of credit card repayment insurance.

A probe by the Australian Securities and Investments Commission (Asic) found credit card repayment insurance paid out the lowest dollar value of claims of any kind of insurance.

Asic published figures last year showing the big four bank policies paid between 6 cent and 16c in claims for every dollar customers paid in premiums between 2011 and 2018.

It concluded many people would struggle to make claims as there were so many exclusions on policies.

Concerns over poor value loan repayment protection insurance (the big four banks have also stopped selling personal loan payment protection insurance) in New Zealand went back at least until 2013, but did not prompt quick action by regulators.

But no claims figures are revealed by insurers here and Kiwibank refused to reveal its loss ratio saying the figures were 'commercially sensitive'.

The Financial Markets Authority (FMA) is critical of the product, but proposed laws that would let it regulate 'fair' outcomes for bank and insurance customers, and potentially allow it to ban the sale of poor value insurance, have not yet been passed by Parliament.

Speaking at an industry conference last year, Liam Mason, director of regulation at the FMA, said there were 'very slim circumstances' in which credit card repayment insurance was likely to be of real value to consumers.

'We see this from the performance of the products, whether in terms of loss ratio or declinature rates,' he said.

'We also saw clear evidence of poor outcomes for customers from some of these products. Of concern, we see some are being sold to customers without their understanding of the limitations.'

All the big banks continue to profit from credit card repayment insurance as they still have customers paying premiums on policies they bought before their self-imposed sales bans.

While the big banks do not cite the FMA's probe as an influence, some of their product reviews overlapped with the regulator gathering premiums and claims data of credit card repayment insurance.

ANZ, Westpac, BNZ and ASB are all still profiting from credit card repayment insurance they sold before they stopped selling new policies.

Westpac and ANZ's withdrawal from the market followed the publication in January last year of a review by the FMA of life insurance, which dubbed the products 'poor value' and concluded banks and insurers knew customers were getting a poor deal.

'Some insurers had been aware of extremely low loss ratios on certain products for some time but had done little to address this,' the FMA said.

The insurers had also been aware that a high proportion of claims were being declined, it said.

The insurers covered by the FMA's review included Westpac Life, ANZ's Onepath Life, and Kiwibank's Kiwi Insurance.

Kiwibank says it changed its credit card repayment insurance last year to increase the number of claims that were accepted.

Credit card debt is risky to have. If debtors lose their icnomes they can struggle to make repayments, and banks are not averse to calling in debt collectors.

ASB says it had dropped the price of its existing policies, and ANZ said it 'revised' its policies in 2018 to make them better value.

'Kiwi Insurance continues to offer credit card repayment insurance as our customers who use it tell us they value the security it provides when the unexpected happens,' said spokeswoman Kara Tait.

'In 2019 we added some enhancements to the product such as increasing eligibility to claim under 'temporary or permanent inability to work' to include caregivers and those studying. We also increased some of the maximum benefit payments.'

Asic criticised Australian banks for selling credit card repayment insurance to people like students, the unemployed and the self-employed who couldn't claim for the 'redundancy' portion of the cover, for which they were still charged.

It found the design of credit card repayment insurance to be inherently flawed, as many customers had little idea they would be unable to claim should their incomes be interrupted, either because of their age, their work status, or they had 'existing' medical conditions.

'The higher decline and withdrawal rates on credit repayment insurance indicate there were systemic issues with the way it was sold, that consumers did not understand it or its exclusions and limits, that policy exclusions were too onerous, and that policies were often not suitable to individual's circumstances,' Asic found.

It found that 20 per cent of claims were declined, or withdrawn between 2011 and 2018.

Asic said research showed bank sales techniques had not prevented people from buying policies that were unsuitable for their needs.

Following another FMA probe done in conjunction with the Reserve Bank, banks pledged to stop paying incentives to staff for selling products like insurance.

'Kiwi Insurance doesn't proactively market Credit Card Repayment Insurance and staff are not incentivised in any way for selling it,' says Kiwibank spokeswoman Kara Tait.

'Customers are made aware of the product when they apply for a credit card and they choose if they want to take out the insurance. Customers receive regular communications to ensure they understand the policy and that it continues to be right for them.'

Kiwibank charges 74c per $100 of debt for credit card repayment insurance. At Westpac the cost for existing policyholders is 53c. At ASB it is 74c. At ANZ it is 79c.