Credit Contracts and Consumer Finance Act 2003: Proposed Regulations

November 2003

Previous Page / Table of Contents / Next Page

2. Rebate of Consumer-Credit Insurance Premium in the Event of Early Repayment

Consumer-credit insurance is insurance that protects the debtor in the event of the debtor's death or disability, or the debtor contracting a sickness, becoming injured or unemployed. The insurance provides cover for the debtor's liability under a credit contract in these circumstances.

In the event of full prepayment of a credit contract, the creditor must refund to the debtor a proportionate rebate of any consumer credit insurance contract financed under the contract. [2] The consumer credit insurance ceases to have any value after full prepayment, and it is more efficient to require the creditor to pay the rebate to the consumer and then claim reimbursement from the insurer, than it would be for the consumer to claim the rebate from the insurer directly.

In calculating the proportionate rebate, the creditor must use the formula prescribed by regulations (if such regulations have been made).

The Ministry proposes the following formula for calculating the proportionate rebate. This formula is used in Australia in respect of almost identical rules.

where:

In the following example, the debtor enters into a 36 month loan agreement and agrees to pay $500 for a consumer credit insurance policy. The debtor prepays the loan after 18 months. The rebate is calculated thus:

This formula is recognisable as the Rule of 78. Despite the fact that the Ministry has been critical of this formula when used to calculate rebates of interest on a credit contract, the Rule is considered to be appropriate for rebating insurance premiums. This is because the risk insured against (that the debtor will not be able to repay the credit) diminishes with time.

[2] Provided that the creditor has arranged the insurance.

Previous Page / Table of Contents / Next Page