Insurance policy rate 'not reasonable'

16:00, Dec 21 2013
Laurence Paton
FORMAL COMPLAINT: Laurence Paton isn’t impressed with how ‘‘reasonable’’ his differing loan rates have been.

Retired accountant Laurence Paton claims AMP broke a contractual promise to only charge "reasonable" interest on a loan made against a whole of life insurance policy.

Whole of life policies are no longer sold, though they were popular in the 1970s and 80s, when premiums were tax-deductible. AMP and AXA (which have now merged) were active in selling them. Many of these policies still exist, with more than $250 million in premiums paid to various insurers each year.

In their heyday, a big selling point was that policyholders could borrow against their "surrender value" of their policies, the sum of money the insurer was contractually obliged to give the policyholder if he or she surrendered the policy.

Paton had two whole of life policies - one from AMP and one from National Mutual (which later became AXA).

In 2007, he needed cash for a property development and decided to borrow up to 90 per cent of the surrender value of the policies. The interest rates were 9 per cent on the AMP policy and 10 per cent on the AXA one.

But then the global financial crisis struck and interest rates crashed. AMP's rate on the loan dropped, reaching a low of 5 per cent in 2009 (it has since risen to 6 per cent). However the rate from AXA, which was being prepared for sale, remained at 10 per cent.


An outraged Paton said the marketing material cited "reasonable" rates of interest. He was unable to get AXA and then AMP to drop the rate.

He then complained to the Insurance Ombudsman, but was told that the ombudsman could not intervene because the dispute was a matter of pricing.

"It's a breach of contract," Paton said. "A condition in the policy allowed you to borrow against the security of your policy as a ‘reasonable' rate. Ten per cent is not a reasonable rate."

He estimated that if the AXA rate had tracked that of AMP's, he would have incurred around $14,700 less interest on his borrowing.

Before being readied for sale, the AXA loan rates tracked alongside the AMP rates, he said.

AMP has maintained two life insurance businesses - AMP Life Ltd and the National Mutual Life Association of Australasia (NMLA). Prices for each are set differently.

AMP said in a written statement: "The AMP Life NZ rate is currently based on a basket of floating bank rates. The size of the loans on policies is approximately $50 million. The NMLA rate is generally more stable, and has been so historically over the interest rate cycle."

"The interest rate on the loans on policies is set taking into account a number of factors, which include those specific to the terms and conditions of the products. A comparison of the rates on different products across AMP Life and NMLA is, therefore, not a simple exercise."

It said the rates would be reviewed in February as part of a "broader integration activity".

In protest, Paton stopped paying the premiums on the old AXA policy, and it has now lapsed and the loan has been effectively repaid using the assets that backed the policy.

He's also taken up an offer from the Ombudsman to begin the complaint process again, as his original one was never formally investigated.

Sunday Star Times