By Angelique Ruzicka, editor, Justmoney
Finbond’s chief executive officer, Dr. Willie van Aardt, hit back at the National Credit Regulator’s allegations that the lender had been overcharging customers when it came to credit life insurance premiums. The NCR alleged that in one instance Finbond had charged a customer a premium of R136 per R1000 borrowed.
Dr. van Aardt said: “Finbond takes its obligations under the NCA seriously and respects the authority of the NCR. However we do not believe that the NCR application has any legal merit. We are very confident that we at all times complied with all relevant laws and regulations and that the NCR application will be dismissed.”
Responding to the claim that Finbond was overcharging customers, Dr. van Aardt said: “The insurance premium rates of the credit life insurance products that Finbond Mutual Bank sells to consumers are risk based, product specific, fully justified and not unreasonable nor at an unreasonable cost to the consumer.
“Finbond’s comprehensive credit life risk rates are determined with due consideration to all relevant factors which includes: the credit score of the consumer, market demographics, market risk, structure of product, concentration risk, specific policy wording, scope of cover, amount of cover, exclusions, underwriting requirements and operational cost structures and bad debt associated with providing short term unsecured loans. Using multivariate analysis techniques to adjust the data for interrelationships between risk factors, credit scores were found to be correlated with the propensity for loss. This correlation is primarily due to a correlation between credit scores and the likelihood of a claimable event occurring.”
However, the NCR claimed that Finbond’s loss ratio is “very low”. The loss ratio was considered as this calculates the risk that a lender takes on. It can reveal whether the premiums are excessive in relation to the number claims made by customers versus amount of premiums collected.
Incorrect calculations
Dr. van Aardt further argued that Finbond never charged any customers R136 per R 1000, adding that the NCR had got it wrong. “The NCR has incorrectly calculated Finbond’s cost of insurance and based their application on this when in fact it is between 3% (R17 per R 1000) for lower risk customers and 9% (R90 per R 1000) for higher risk customers on a reducing capital balance based of the term of the loan and the credit score of the customer.”
When asked about whether Finbond was charging a fair rate compared to competitors Dr. van Aardt said: “In order to compare the rate that Finbond’s customers are paying with a rate of other credit providers you need to consider: market demographics, market risk, concentration risk, credit risk, specific structure of product, specific policy wording, scope of cover, amount of cover, exclusions, claimable events, underwriting requirements and operational cost structures."
He added that consumers would’ve voted with their feet if Finbond was charging excessive credit life insurance premiums. “The market that the Finbond operates in is a fiercely competitive market. There are 5,450 registered credit providers in the country with 41 642 branches, offering a variety of loans, loan terms and insurance offerings.
"Given this intensely competitive market it makes no sense that customers would continue to come back to the Finbond and that the Finbond would be able to continually grow market share if the products offered by the Finbond did not in fact add value to its customers and its customers did not perceive it as value for money. In many locations there are numerous competitors within short walking distance from the Finbond. If the pricing of Finbond’s credit life product was excessively expensive as the NCR alleges Finbond would lose significant market share in terms of normal supply and demand market forces in a free market system.”
"Given this intensely competitive market it makes no sense that customers would continue to come back to the Finbond and that the Finbond would be able to continually grow market share if the products offered by the Finbond did not in fact add value to its customers and its customers did not perceive it as value for money. In many locations there are numerous competitors within short walking distance from the Finbond. If the pricing of Finbond’s credit life product was excessively expensive as the NCR alleges Finbond would lose significant market share in terms of normal supply and demand market forces in a free market system.”
“The NCR’s simple analysis and methodology used in determining “reasonableness” and “industry averages” are grossly inadequate and fundamentally flawed given that they make no allowance for market demographics, market risk, concentration risk, credit risk, liquidity risk, structure of product, specific policy wording, scope of cover, amount of cover, exclusions, claimable events, underwriting requirements and operational cost structures. The NCR is making grossly oversimplified, apples with bananas comparisons that do not hold water.”
For more about the NCR’s allegations against Finbond, click here.