CR311 Investment performance – Limitations of insurer’s responsibility

by with No Comment Case ReportsInvestment PerformanceTopics & Cases

Investment performance CR311

Limitations of insurer’s responsibility

In 2000 Ms F took out two endowment policies which included investments in an offshore equity fund, and which matured in 2010. The total amount of premiums she had paid in amounted to R54 967 and the combined maturity values of the two polices totaled R40 947. She submitted a complaint to the office, expressing her unhappiness about the poor performance of the investments. She also stated that the maturity values had not met her expectations based on the illustrative values provided at the inception of the polices. She complained that the insurer should have intervened by hedging against the downward spiral of the investments, or should have contacted her to suggest alternative portfolios.

The insurer explained that the reason for the inadequate returns was the poor performance of the offshore markets over the term of the polices, and added that it had sent the complainant annual benefit statements reflecting the values. It contended that it had been up to her to monitor the performance of the market and to request any switch to the investment portfolios if she wished.

In determining that Ms F’s claim could not be upheld, the office highlighted the following:
1. The off-shore equity markets in which Ms F had been invested were volatile and performed poorly over the particular period of investment; there was negative growth over five of the 10 year period;

2. The ASISA Code of Conduct provided that illustrative values, created in quotations, must be reasonable given the economic environment and the policy charging structure, and that they were mere guidelines, were not guaranteed, and did not form part of the contract;

3. The insurer cannot act as the insured’s financial advisor and it cannot be expected from it to intervene and monitor each investment, suggest alternatives and then to carry the burden of losses that may result;

4. It is the duty of the insurer to dispatch appropriate communication to the policyholder and to pay the benefit in terms of the policy contract, whereas it is the responsibility of the insured to seek financial advice and to switch the portfolios when he/she chooses to do so;

5. The investment managers of a particular portfolio have the duty to make investment decisions within the confines of their mandate, which in this case would have been to invest in off-shore equities and to secure growth in the long-term. In this matter it could not be said that they had acted negligently.

6. Policy charges were set out in the contractual documents and also had an impact on the final amount paid out;

7. A complaint cannot be upheld merely because an investment in a policy turned out less successful than originally hoped.

8. In this case, to appease the complainant, the insurer was requested to provide an actuarial certificate to certify the correctness of the calculation of the benefit, which it did.

NvC
March 2011

CR228 Maturity – Policy open-ended after maturity date

by with No Comment Case ReportsMaturityTopics & Cases

CR228

Maturity – Policy open-ended after maturity date; whether complainant could rely on rate of interest quoted to him as applying throughout period until withdrawal of proceeds

Background

The complainant had a 5-year endowment policy which matured on 1 August 1999, with a maturity value of R79 166. In June 1999 he had received a letter advising him of his options on maturity. The letter advised him that

“as an alternative to the termination of the policy and payment of the maturity value, you have the option to extend the term of the policy and defer payment to a later date. This represents a particularly valuable option as the entire proceeds, together with any future growth, would be completely tax free in your hands … This may be done either with or without continuing premium payments, whichever suits you better, enabling you to participate in the growth offered by [the insurer].”

Although the letter asked him to return a maturity claim instruction form, the complainant did not fill in the form because, so he maintained, he did not want to select any of the investment portfolio options offered to him but simply wanted to leave the policy where it was, extend the term and defer payment to a later date, without further payments.

On 18 September 2000 the complainant was advised by telephone that his value at that date was R86 175 (7.75% pa interest X 417 days was added to the original maturity value). In 2002 the complainant’s broker’s enquired on his behalf what interest was being paid on the investment. He received a fax dated 14 March 2002, stating that “The policy matured in 08/1999 and when the claim is processed, we will pay client R79 166 plus interest calculated with an annual effect rate of 7%”. Some time later that year he was advised that the surrender value was R101 468, and on 1 July 2003 when he enquired again, he was told that the value was R103 195. These amounts all closely approximated a calculation at 7% pa interest. However in June 2005 when he decided to cash the policy he was told that the value was R101 285, whereas his calculations indicated that at 7% pa interest it should be about R118 806. He objected strenuously.

The insurer’s response was that the complainant had ignored the options available and had given the insurer no instructions. His funds had therefore been automatically reinvested in a deferred maturity call portfolio for five years, at the end of which (1/8/2004) the value was R98 664. It was then open-ended again. According to the insurer the interest rate of 7% quoted was not guaranteed into the future, but was simply the rate payable at the time of the fax.

Discussion

We pointed out to the insurer that there did appear to be room for more than one interpretation of the letter advising the complainant of his option to defer payment to a later date and leave the funds with the company which issued the policy. He was never informed by the insurer as to how his investment would be treated if he did not select one of the options. Neither was he later advised that his original maturity value of R79 166 had been “open-ended” or placed in a call portfolio, or that the interest rate which would ultimately be applied depended on current rates available on bank call accounts, subject to fluctuation. The fax of 14 March 2002 was ambiguous, in that it could well give the impression that the amount of R79 166, plus interest calculated with an annual effect rate of 7%, would be paid whenever the claim was processed.

In our view it was reasonable for the client to have relied on the impression created in his mind that there was consensus that the insurer would pay him the maturity value plus 7% per annum interest, at the date that his claim was processed, whenever that might be.

However, we noted that, at the time of the maturing of the policy after the second period of five years (the 1999 maturity value having been automatically re-invested for a further period of five years), the complainant was sent a letter dated 4 May 2004. Under “What can you do with the maturity proceeds?” this letter set out the options the policyholder had on maturity. It also clearly set out, at the end of the letter, “What happens if we do not hear from you?” The answer to this question read as follows:

“We will automatically reinvest your proceeds in our Deferred Maturity portfolio, if we do not hear from you or if we are still waiting for outstanding requirements by two days before 1 August 2004. To make sure that we process your instructions in time, please contact us before 1 July 2004.”

The complainant was thus informed at that point how his investment would be treated from 1 August 2004 onwards if he did not select one of the options, and by doing nothing he may be taken to have acquiesced in that course of action. Thus it appears that his reliance could no longer be said to be reasonable after 4 May 2004 when he received this letter.

Result

We proposed that it would be an equitable resolution of the complaint to calculate the value payable as the maturity value on 1 August 1999 of R79 166, plus 7% annual interest up to 31 July 2004, plus the return thereafter equivalent to that earned in the insurer’s deferred maturity portfolio, from August 2004 to date of payment.

The insurer did the calculations and made an offer on that basis, the amount offered being R117 300. The complainant accepted.
SM
May 2007