Why Banks and Insurers Should Be Separate Entities

Here is an interesting article on the pitfalls of having an insurer too closely linked to the bank. This type of horror story makes you value the fact that you CAN now take out insurance on your home from an independent party!

The article starts as follows:

Thousands of South Africans enter into mortgage loan agreements with one or other of the country's 'big four' banks each year. The banks 'front' the full purchase price (minus deposit) of the asset - usually a residential home - in return for a healthy whack of interest income over the term of the loan. As a condition of the loan, ownership of the home vests with the bank until such time as the homeowner makes the final mortgage payment and arranges to cancel the bond. In the event the homeowner misses his monthly bond repayment the bank can initiate steps to recover the property and sell it to recover costs.

But default risk isn't the only threat to ongoing bank profitability... Banks also need assurance that their investment is 'safe' in the event the underlying asset goes up in smoke, or is destroyed as a result of flooding, earthquake or hurricane! To mitigate this risk banks insist on proof of homeowners insurance as part of the mortgage agreement. Although the banks cannot stipulate which short-term insurer the homeowner approaches for this cover, the trend is toward using the banks' own insurer for this purpose. Many homeowners opt for bank insurance because of the apparent administrative ease at mortgage stage. But few consider the implications of bank and insurers having shared profit objectives. Can banks and their insurers keep transactions at arms length when the situation demands it? Not always - as you are about to discover...

Read the full story here: On Banks and Insurers - Pray never the twain shall meet