CAUTION: Some policies can be cancelled by insurers. It is important to check your policy so that you are not taken by surprise.
Policyholders always have the right to cancel a policy by terminating premiums, although the insured/policyholder is not always entitled to benefits on such termination of premiums e.g. in the case of group risk policies.
Can an insurer cancel a policy?
Life policies have traditionally been perceived as non-cancellable on the part of insurers. Life insurers can, however, insert a clause in a policy giving them the right to cancel the policy on notice. There are also policies that are annually or monthly renewable contracts. This means that the insurer can decide not to renew the policy, usually by giving notice to the policyholder. It is particularly in respect of funeral policies that insurers have the right of cancellation, both in group and individual policies.
An insurer would normally rely on such a clause when the risk experience of the particular group (in a group scheme policy), or in a particular portfolio, is so poor that the policies are no longer sustainable. (The insurer cannot, of course, cancel only one particular policy or the membership of one person, it must be done for the group as a whole). The effect of cancellation can be problematic for the policyholders, particularly older policyholders who would find it difficult, if not impossible, to obtain replacement cover.
We recently received a number of complaints about the cancellation of a particular kind of policy. The cancellation affected some 10 000 policyholders although only 52 complained to us. The majority of complainants were over 60 years of age.
- The insurer had marketed a pure risk policy, through a bank, which provided benefits for dependants for a period of 2 years following the death of the life assured.
- The bank partner marketed these policies to bank clients who already had funeral policies.
- The benefits were modest.
- The funding of the benefits was on a -pay as you go- method – no reserves were set up for the policies.
- The insurer had the right to increase premiums.
- The insurer also had the right to cancel the policies.
- From the complaints, it appears the sales personnel had not drawn attention to the right of cancellation and policyholders were taken by surprise when they were informed of the intended cancellation.
The claims experience in respect of these policies necessitated premium increases. As a result some policyholders cancelled their policies. Younger healthier policyholders were more likely to lapse their policies, leaving the fund more exposed to poor risk experience and resulting in higher loss ratios which would simply perpetuate the problem. With higher premiums the policies became less attractive and new policyholders did not join the shrinking risk pool. The portfolio became unsustainable without a further steep premium increase, which would have exacerbated the already existing problem. The insurer notified policyholders that it was cancelling the policies. It offered policyholders under 60 options for alternative policies. Policyholders over 60 were offered R1 000 as a goodwill gesture. The insurer had no suitable policy to offer as an affordable alternative to this age group.
When our office received these complaints most complainants were understandably upset at the cancellation. We investigated the legal position and it was clear that the insurer had the right to rely on the cancellation clause. Having studied the documentation surrounding the insurer’s decision to terminate the policies, it transpired that the policies were no longer sustainable. In the circumstances we could not rule that the insurer should reinstate the policies as it would not be feasible from a prudential point of view.
We did, however, make a provisional determination that older policyholders should receive increased compensation which should be linked to the premium paying period. The insurer complied and also offered the same increased sum to policyholders over 60 who had not complained to the office, paying out an additional R2 822 500,00 in compensation.
Comment from The Office of the Ombudsman
All policyholders should check their risk policies to ascertain whether their policies are cancellable by the insurer or not. It is important to know this. Policyholders may very well be satisfied with such policies as it may be the only affordable option, but they should know that cancellation is a possibility.
There is a growing trend towards cancellable policies, particularly in the funeral or micro-insurance market. The discussion paper on a proposed new regulatory framework for micro-insurance (The Future of Micro-Insurance Regulation in South Africa) is premised on such a model. From a prudential point of view this makes sense in order to allow new smaller players into the market.
We are concerned about the implications for the affected policyholders, particularly for the older age groups. It is necessary for the regulator and other policymakers to take account of the implications of this model. We have highlighted this aspect in our comment on the paper. It should be investigated whether it is possible in the first instance to ensure that lives assured remain covered until an alternative policy provides cover i.e. during the waiting period of the new policy. This could be done, for example, by insisting on longer notice periods for cancellation.
The position of the older policyholder in cancellable policies simply cannot be ignored. It is not acceptable that policyholders who contributed to funeral policies for extended periods should have their cover terminated at a time when they are more likely to need it and when they are less likely to obtain replacement cover. It defeats the object of the exercise of taking out an insurance policy.