Should loans be hedged? For many consumers, this is a relevant question, especially in times of economic uncertainty. However, many customers have a negative memory of residual debt insurance. Nevertheless, it has a future! With individual services and financial service providers who are advisors and partners to their customers.
A guest contribution by Alexander Hoffmann
Consumers want more security. Life risks such as job loss, serious illness, occupational disability or even death are again being perceived more consciously – especially as a result of the pandemic. According to the Initiative Restkreditversicherer (Initiative-RKV), the unrest in the economy as a whole has also brought the topic of cover into focus. After all, loans taken out want to continue to be serviced even in uncertain times. Many bank customers are increasingly asking themselves how they can best secure their loans. In this environment, residual debt insurance in particular has regained enormous importance.
Hedging of loans against life risks
Residual debt insurance is a special form of risk insurance. They are designed to ensure that borrowers can continue to service their loans. Even if they themselves can no longer meet their obligations. In addition to death, they cover other risks. For example, unemployment due to job loss, a serious illness or occupational disability. Moreover, the residual debt insurance serves as additional loan collateral vis-à-vis the bank.
Prejudice and politically explosive topic
Despite the extensive coverage, the residual debt insurance has fallen into disrepute in recent years and has since then to fight with prejudices: too expensive, incomplete insurance coverage and sale by dubious sales concepts are some of the criticisms of the consumer center.
Missing standards and the partly automatic mediation without intensive consultation, exclusion clauses as well as costs and high commissions are also criticized. This is despite the fact that commissions have recently been capped in a legislative resolution. However, residual debt insurance remains unique in Germany. This is because it provides effective protection for consumers and is a stabilising factor for the economy as a whole. And it is protection that has once again become an important issue for consumers, where banks and insurance companies need to reposition themselves. Individual performance and additional services play a special role.
Financial service providers must become advisors and partners
Product providers are required to constantly expand their services. High quality and transparency are important for the customer. According to the German Insurance Association (GDV), insurers should improve the comprehensibility of their products by drafting customer-friendly documents. In addition, the association stresses that insurers must clearly define benefit exclusions and other limitations. Last but not least, ongoing quality assurance is an increasingly important factor: it should be possible to adapt insurance products to changes in life situations by extending benefits. Particularly in the wake of Post COVID, for example, the inclusion of mental illness in insurers’ benefit provision is significant. And it is not only the benefits of residual debt insurance that need to be rethought and adapted to today’s individual needs, but also the communication of banks and insurers.
Image of residual debt insurance has suffered enormously
The image of residual debt insurance has also suffered primarily because conditions were not communicated transparently. Banks and insurers should therefore structure their conditions in a customer-friendly and easy-to-understand manner. And in order for borrowers to once again perceive residual debt insurance as comprehensive protection and not as a potential rip-off, banks and insurers need to pick up their customers exactly where they themselves are at a loss. A bank should be an advisor and partner to its customers.
This means that financial service providers must first and foremost analyse the needs of the customer and, as a competent partner, offer exactly what the borrower requires. It is also essential that banks and insurers provide easily understandable and, above all, complete information about the benefits and conditions of residual debt insurance. In the best case, they match the identified needs and offer together with the customer. Depending on the borrower, further aspects emerge in this process where banks and insurers can help with combined services and assistance around the topic of protection.
The end result is an all-round care package tailored to the customer. At the same time, banks and insurers are positioning themselves as competent partners who always offer their customers exactly what they need. This is not least the most important step in reducing prejudices against residual debt insurance and strengthening customer loyalty.
The future of residual debt insurance relies on individuality
The pandemic and economic uncertainties have brought residual debt insurance back from its former obscurity. Borrowers want to be able to meet their payment obligations at any time. No matter what. This applies to consumer loans and real estate loans, to new and existing contracts.
With residual debt insurance, banks and insurers can offer their customers comprehensive protection. But it is important to overcome the bad image of residual debt insurance. This is achieved – in addition to advice at eye level – with individual services that meet the needs of the borrower. Because: A sensible insurance is close to the reality of the customer’s life.
Financial service providers must therefore offer insurance with additional options and services that support the customer and his family in every situation in life. The needs of the customer are the focus. Residual debt insurance must not be an off-the-shelf product, lest it again disappoint borrowers’ expectations. This is also crucial in competition. Precisely tailored credit protection with a combination of service and assistance benefits that go beyond residual debt insurance is a differentiating feature. An additional service can be, for example, that customers are offered cyber protection via payment protection insurance. Or even simpler: the terms and conditions of the residual debt insurance policies are adapted to those of the GDV in order to make the insurance more customer-friendly. In both cases, the insurance offer is upgraded and financial service providers can convince even better in an increasingly competitive market.
About the Author:
Alexander Hoffmann has been Managing Director of AXA Partners Germany and Switzerland since February 2020. The 54-year-old previously held senior positions at Genworth Financial, Chubb, HBOS, AIG and Standard Life.