Credit card repayment insurance is a poor value product, consumers warned

New Zealand’s Financial Markets Authority is urging an estimated 200,000 people who have credit card repayment insurance to check if they still need the product. This after a review found it to be poor value.

Repayment insurance, sometimes known as CCRI, is a form of insurance which covers some, or all, of a customer’s outstanding credit card repayments in certain circumstances. These include bankruptcy, redundancy, injury, illness or death.

But the Financial Markets Authority review has confirmed that CCRI is a poor value product for New Zealand consumers.

This is based on several factors, including the limited level of underwriting completed by providers when they issue such a policy.

Customers’ circumstances not properly assessed

“The underwriting process involves an assessment and calculation of the amount of risk the insurer is taking on for the person buying insurance,” the authority explained.

“With the CCRI product, providers do not assess a customer’s medical and occupational circumstances. These factors mean numerous exclusions and prescriptive conditions are applied when someone makes a claim on the policy, so customers may not receive the benefits they expect.”

The report also found providers treated CCRI as a low-touch product, with customers receiving little communication or engagement. Therefore, many customers did not make claims.

“Because claims are being declined due to numerous exclusions or customers simply not making claims, this has resulted in providers experiencing low claims loss ratios and accruing significant profits. The amount paid out in claims to customers is low compared to the insurance premium collected by providers,” the authority said.

The loss ratio for CCRI was reported as low as 10%, meaning around 10c is paid in claims for every $1 received in premiums. This compares, on average, to loss ratios of 80% for health insurers and 47% for life insurers.

Concerns were first highlighted in a 2019 report

The Joint Reserve Bank of New Zealand and Financial Markets Authority report into conduct and culture of the life insurance industry highlighted concerns about CCRI in 2019, and since then insurers have stopped selling it to new customers.

But the authority said it remained focused on this product, given an estimated 200,000 New Zealanders still hold in-force policies, with insurers earning around NZ$20-million in premiums annually.

“We found underwriters and distributors are not displaying sufficient levels of customer care in their suitability assessments and communications with customers,” the report said.

“Product suitability assessments are a critical part of customer care, where a customer’s personal circumstances should be checked to ensure the product meets their needs and financial position.”