The Financial Service Board (FSB) released their 2007 Annual Report on 24 September 2007. The report covers "the operational and administrative activities of the support departments of the FSB" for the period 1 April 2006 to 31 March 2007.
In his introduction, FSB executive officer Rob Barrow briefly discussed two of the major regulatory issues that had confronted the organisation during the year under review. "The first was the detection of secret profits being made by pension fund administrators," said Barrow. These 'secret' profits were extensively reported on with Alexander Forbes emerging as the major transgressor. Barrow confirmed that most of these cases had now been finalised, with administrators agreeing to refund pension funds with compensatory interest. There are still pockets of resistance though: "We are still dealing with certain administrators who are resisting making refunds to their pension fund clients."
"The second major issue was the inspection and subsequent application for curatorship of the investment management business of the Fidentia Group, as well as two other entities with which Fidentia had been involved." Barrow restated some of the facts in a financial scandal which the media got hold of early in February 2007. The full extent of the loss to investors is not yet known. Barrow welcomed the National Prosecuting Authority's actions to date and hoped that further prosecutions would follow.
Three new licences issued
The FSB serves an oversight role across most sectors of the financial services industry. Its organisational structure covers the fields investment institutions; insurance (long-term and short-term); retirement funds and friendly societies; and market conduct and consumer education.
Today we look at some of the information contained in the short-term insurance section of the FSB's annual report. A good point of departure is to consider the way in which the FSB categorises players in the short-term insurance industry. Licenses are issued to traditional insurers, niche insurers, cell captive insurers and captive insurers. Domestic re-insurers, of which there are presently five dedicated to short-term insurance only, are also licensed.
In the 2007 year, the FSB issued three new short-term insurance licences. Two of these went to traditional insurers and one to a niche insurer. This brought the total number of licenses issued in the typical short-term insurance category to 30, and niche insurers to 45 at 31 March 2007. The total of active licences across all short-term insurance categories rose to 106.
Motor and property attract the most premium
Gross premiums in the short-term industry remain on the rise, although the growth rate was slower than in previous years. Gross written premiums for primary short-term insurers were up 12% for the 2006 calendar year at R51 billion
The motor and property categories continue to dominate net premiums. 2006 was practically a mirror of 2005, with motor capturing 44% of net premiums and property 33%. Net premiums for 2006 amounted to R37.6 billion.
Another take on short-term insurance challenges
Plenty has been written about the challenges facing the short-term insurance industry at present. The FSB summarised a few of the items they believe will have the most significant impact. Not surprising "compliance with regulatory requirements" features close to the top of this list. The FSB also identified effective cost management, increased competition, re-insurance capacity, technology and new international reporting standards as areas of concern.
The most significant challenge to businesses in coming years will be developing products to address the need of the low income market. This is something that short-term insurers will have to tackle in conjunction with other players in the financial services industry. One of the major stumbling blocks to servicing this market is the high cost of financial transactions. Even so-called entry level banking products levy prohibitive charges on account holders who purchase insurance products in this segment. A debit order charge of R7 per month amounts to a 25% surcharge on a R28 per month insurance policy.
The FSB has been busy in the latest reporting period. The insurance division paid visits to all licensed insurers over the year. Issues identified during these visits included lack of corporate governance, worrying outsourcing arrangements and significant key man risk among others. It was interesting to note that the FSB felt these problems were more prevalent in the smaller insurers. FAnews Online is not surprised that smaller companies find it more difficult to implement the current raft of regulatory requirements to the regulator's satisfaction.
Editor's thoughts:
There must be dozens of CEOs and short-term insurance brokers who are dreading the day the regulators finally lay off long-term insurance and turn their attention to the short-term players. The FSB 2007 Annual Report reveals there were no major regulatory developments affecting stakeholders in the short-term insurance industry in 2006. Should the short-term industry maintain their wait-and-see outlook, or adapt to pre-empt regulatory changes which are bound to follow? Send your comments to gareth@fanews.co.za
Get the latest issue of FAnews