Big car insurance headache for South African banks

South African banks offering car financing can automatically add insurance premiums to monthly payments if customers fail to provide proof of vehicle cover timeously.

This is necessary because many people cancel their comprehensive car insurance cover soon after driving a vehicle off the showroom floor, contravening the terms of their agreement with the financing house or bank.

MyBroadband was recently reminded of this provision in vehicle financing agreements after a reader’s email interaction with Nedbank’s vehicle financing division, Motor Finance Corporation (MFC).

The reader had bought a Suzuki S-Presso in October 2022 and taken up comprehensive insurance through Naked.

That remained the case until they received an email from MFC asking that they provide proof of comprehensive insurance cover.

“If you have recently changed your insurer, we would like to update our records with your latest insurance details to ensure you are adequately covered,” the email stated.

“It is also a condition of your finance agreement with us that you have comprehensive insurance for your vehicle for the duration of your contract.”

The customer ignored the email as the wording implied that she would only need to send her new proof of cover if she had changed insurers, which was not the case.

The actual intention of the demand was that she provide proof of cover to verify that she still had car insurance.

MFC subsequently sent another email 30 days later, warning it might automatically add an amount of R406.29 to her premium. She did not thoroughly read this notice as it appeared similar to the previous one.

Fifteen days later, another email put it more clearly.

“Unfortunately, after various attempts, we have yet to obtain proof of your comprehensive vehicle insurance cover,” the email stated.

“We may debit a recurring monthly amount of R 406.29 for Vehicle Debt Protector Insurance to ensure that you are insured in the event of a total loss or theft.”

Increase in customers cancelling insurance soon after a car purchase

MFC told MyBroadband its strategy to ask for insurance cover annually was implemented in September 2022.

It was required as the bank increasingly became aware of clients taking up insurance when purchasing a vehicle to collect it from the dealer and then cancelling their cover shortly thereafter.

“In some cases, we found that clients cancelled their cover on the same day after collecting the vehicle,” MFC said.

Nowadays, there are several insurers that make it easy to cancel cover, whereas this previously required discussing the decision with an insurer’s retention department.

The increase in insurance cancellation creates a financial risk not only for the customer, who would remain liable for paying the premiums in the case of a total loss or write-off, but also for the bank.

Customers who cannot pay off their loan — because they would need to also pay for another car — might not always be on time with their payments or would need to enter into debt restructuring agreements, allowing them to make smaller payments over a longer period.

“Across the industry, it is estimated that around 40% of financed clients are not insured,” MFC said.

In addition, many customers changed insurers without notifying their banks.

MFC said its clients were given more than 45 days to supply their most recent proof of insurance from receiving the first request from the bank, aligning with the timeline of its notifications to the reader.

“This allows a client sufficient time to obtain such and to share it with us,” MFC stated.

During this waiting period, MFC said various reminders are sent via email and SMS to remind clients that the updated proof has not been received.

The finance agreement update allowing MFC to add a temporary limited cover policy with the customer’s permission was added in July 2021.

The agreement also includes a clause which states customers must inform MFC if they change insurers and provide the relevant proof of new insurance.

Technically speaking, the agreement stipulates that MFC can cancel the finance agreement altogether if it does not receive valid proof of insurance.

That presumably means it would confiscate the vehicle for resale or auction.

According to DirectAxis, this clause is common in vehicle finance agreements.

However, in the case of MFC and at least one other major financing house, limited cover is instead added to the premium on customers’ behalf, who agree to this in one of the clauses of the financing agreement.

While this provides some protection for both banks and customers, MFC is not obliged to ensure that the driver’s risk is insured adequately or at all.

“The policy referred to in this clause will not necessarily be a like-for-like replacement of the policy previously in place, and will not necessarily cover all insured events covered in any previous policy.”

Refunds for double insurance

Although the initiative was still rather new, MFC said it could already see the benefits as claims against these policies have been coming in successfully.

“The intent of issuing these policies is not to replace the current insurance cover but rather to assist the client during an uninsured period and offer the client time to obtain insurance again,” MFC stated.

“Should the client obtain insurance and provide proof of such to MFC, the issued policy will be cancelled.”

In addition, MFC said it would refund all premiums from the limited cover if it is made aware that the customer had been dual-insured due to the automatic cover add-on.

MyBroadband also asked whether MFC requested annual updates about insurance cover from customers directly insured with the bank or financing house.

“Where MFC can validate the insurance policy directly with the insurer, whether internally or externally, the client would not be asked for an update,” it said.

“However, not many insurers provide this information to MFC/Nedbank.”

“In future, we would welcome being able to have this arrangement with all insurers.”