Credit card repayment insurance warning: 200,000 people with 'poor value' cover

Thursday, 23 September 2021

While poor sales practices around credit card insurance in Australia and the UK have led to hundreds of millions being repaid to policyholders, in New Zealand, insurers and banks have faced far less action from regulators.

An estimated 200,000 people still have poor-value credit card repayment insurance and should consider ditching it, a financial watchdog says.

The Financial Markets Authority Te Mana Tātai Hokohoko (FMA) says exclusions in policies are leading to “numerous” claims being declined.

Credit card repayment insurance was designed to make repayments on behalf of a customer, if they fell ill, lost their job, were disabled, made bankrupt, or died.

But a report from the FMA said the insurance had delivered super-profits to insurers, and paid out as little as 10 cents in claims for every dollar of premiums collected.

The regulator even found systems so poor at banks and insurers that when people with credit card repayment insurance died, their estates were not notified that a claim could be made, and in some cases, banks and insurers kept deducting premiums.

* 'ANZ let them down': Bank fined $280,000 for misleading customers

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.

* $280,000 award sought after ANZ admits misleading customers over credit card insurance

Banks stopped selling credit card repayment insurance in New Zealand after criticism from the FMA in 2019, and mis-selling scandals in Australia and Great Britain, but concerns about it in New Zealand dated back to 2013.

Despite stopping selling them, banks did not cancel the policies they had already sold, and the FMA estimates insurers have been making $20 million in premiums each year from about 400,000 policies that have not been cancelled.

Credit card insurance claims are being turned down because of the numerous 'exclusions' on policies, says James Greig, director of supervision at the Financial Markets Authority Te Mana Tātai Hokohoko.

Communication from insurers and the banks that sold credit card insurance, and consumer understanding, was so poor people forgot they had it, and never submitted claims, the FMA found.

The regulator found some people thought they had no choice but to accept the insurance, if they wanted a credit card.

Some people carried on paying their premiums, even when they got so old many of the benefits of credit card insurance no longer applied to them.

Often, after a policyholder turned 65, the fine print of credit card insurance policies excluded them from making claims for being made redundant, bankrupt, or becoming disabled.

“Several participants told us they do not contact customers when such a milestone occurs,” said James Greig, the FMA’s director of supervision.

Insurers and banks systems were so poor, when policyholders died, their estates were not always contacted, avoiding claims. Sometimes premiums were charged to the credit cards of dead people.

“There were multiple failings we have seen in that space,” said Greig.

The FMA also found insurers failing to cancel policies even when policyholders got so old they could make no claims at all, or when they told their bank, or insurer, that they no longer wanted them.

When banks sold credit card insurance, card holders were given little to no help deciding whether it was suitable for them.

“This is unacceptable,” Greig said.

“New Zealanders should check if they have credit card repayment insurance and ask themselves whether they still need it,” he said.

Tough new laws due to come into force next year would require banks and insurers to ensure customers’ interests were prioritised, he said.

All the banks sold credit card repayment insurance, often claiming they were doing to so ‘simplify’ their product ranges.

That would require banks and insurers to check each year whether credit card repayment insurance was suitable for each policyholder.

Banks and insurers could face legal action, he said.

“The issues uncovered in this review are concerning and the FMA’s inquiries remain ongoing,” he said.

Some insurers had set money aside to compensate customers.

“A number of the providers have got extensive remediation plans,” Greig said.

The biggest insurers in the market were Cigna (the insurer for ANZ, Kiwibank and BNZ policies), Westpac Life, AIA Life (the insurer for ASB policies), and Hallmark Life (the insurer for GEM cards).

Cigna’s latest accounts show $9.3m set aside for compensation at the end of December, but do not specify what for.

Banks say they have made changes to the way their credit card insurance customers.

A Kiwibank spokeswoman said the bank now wrote to its policyholders every six months to check they understood their cover, and wanted to continue with it.

An ANZ spokeswoman said the bank had enhanced policies, dropped the price, and: “Where we find an issue, we go to some lengths to ensure we put customers right, and refunding premium as well as interest, any relevant fees, and additional compensation for the inconvenience.”

ANZ was fined $280,000 in March for misleading customers over credit card insurance, and in some instances double-charging them. ANZ stopped selling credit card repayment insurance in 2019.

Kiwibank was the last of the big five banks to stop selling credit card repayment insurance, ending sales in April.

ASB stopped selling the insurance in February 2018, shortly after its parent bank Commonwealth Bank of Australia paid A$10m (NZ$10.34m) in refunds to 65,000 students and unemployed people unable to claim on the redundancy cover portion of its policies.

BNZ stopped selling it in October 2018, a full year before its parent National Australia Bank settled a class action lawsuit for A$49.5m.

Westpac stopped selling credit card repayment insurance in 2019.

Hallmark Life, which provides loan repayment insurance to GEM credit cards, stopped selling loan protection insurance last year.