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Premium collections under the spotlight again

24 April 2019 Jonathan Faurie

Following a highly publicised incident that occurred in 2018, the issue of insurance premium collection by third parties was once again thrust into the spotlight.

The Financial Sector Conduct Authority (FSCA) has recently released a position paper relating to the proposed future regulatory framework for insurance premium collection which is currently open for public comment. Here are some of the highlights of that paper. 

Qualifying intermediaries

The Short-term and Long-term Insurance Acts imposes specific requirements in respect of premium collection activities and who can collect them. 

Perhaps one of the most important parts of the position paper is the clarification of what is meant by qualifying intermediaries as stipulated in the Short-term and Long-term Insurance Acts. 

The position paper proposes that third party premium collection should only be performed in very limited instances by certain types of third parties. These are qualifying intermediaries as proposed in the RDR who meet specific operational and systems requirements in order to promote innovation, fair competition and financial inclusion. 

The position paper points out that, considering the context provided above, there is a case to be made for prohibiting the collection of premiums by independent intermediaries altogether. However, the impact of such a blanket prohibition is still unclear and requires further exploration and input. An alternative to a blanket prohibition would be to require insurers to obtain approval from the FSCA on a case by case basis before they outsource premium collection to independent intermediaries. 

Trust money

One of the issues that was raised in the past is that intermediaries are not ringfencing premiums and are using them to fund their own operational and investment needs even though the money belongs to the insurer. This was dealt within the position paper. 

The position paper points out that during recent industry engagements, it was proposed that the separate bank account requirement should be replaced with a requirement that premium monies be held in a statutory trust account. However, details as to the specific mechanics of what this solution would entail have been vague. While the FSCA supports the proposal that premiums should be treated as money that should be held in trust, additional input from commentators is required on the practical implications of this solution. 

The position paper adds that to ensure transparency and to help the relevant insurers exercise its oversight responsibilities, a third party that collects premiums should keep adequate accounting records in relation to the premiums collected. 

The FSCA acknowledges that section 19(1) of the FAIS Act requires that a financial services provider (FSP) must maintain full and proper accounting records on a continual basis, brought up to date monthly. However, these requirements apply in respect of the whole of the business of the FSP. The FSCA is of the view that the accounting records relating to the premium collection portion of the FSP’s business should be appropriately ring-fenced from the rest of its business, and the regulatory framework should reflect this. 

Reduction of premium remittance period

The reduction of premium remittance period is also an issue that was discussed in the position paper. 

The position paper adds that it is unclear as to why a 45-day premium remittance period is still appropriate considering the technological developments within the payments landscape during the last decade. 

The position paper points out that the current requirement that received premiums must be remitted 15 days after the end of the month, during which such premiums are collected, has significantly contributed to the undesirable premium collection practices prevalent across the insurance industry. Further, it poses significant risks to the stability of the sector and the delivery of fair outcomes to policyholders. 

The FSCA has engaged specifically with specialist Third Party Payment Providers (TPPPs) who perform high volume bulk collections from multiple payees to multiple beneficiaries involving many transaction types. Even in complex value chains, it was demonstrated that a maximum of three working days (calculated from the day on which the policyholder pays the premium) is enough for premiums to be paid over to the insurer. 

The FSCA adds that, based on current payment system capabilities and market expectations, it is proposed that the current premium remittance period be significantly shortened. 

Interest Earned

The position paper does not put forward any regulatory proposals regarding the treatment of interest earned on premiums that have been collected by third parties. 

The FSCA remains of the view that any interest earned on premium monies belongs to the insurer and there is no justification for a collecting intermediary to retain interest earned on any premium monies that are held on behalf of the insurer. 

Nevertheless, it is envisaged that if the proposals outlined in this paper are implemented, specifically the proposal relating to the reduction of the premium remittance period to three working days, the issue of interest will become academic. 

Editor’s Thoughts:
Comments on the position paper need to be made by 10 May 2019 to the following email address: FSCA.RFDPremiumCollectionPaper@fsca.co.za. To find out more about the contents of the position paper, you can email Eugene du Toit at eugene.dutoit@fsca.co.za. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Andre Stols, 25 Apr 2019
whomever at the FSCA that did their research on the days between debiting and payover, has not even got a clue of what is going on with Banks in reality and in my opinion, that person(s) did not do proper research. in practice, Banks do take up to 5 days to return an unpaid debit order, so if the FSCA wants to reduce the 45 days, I suggest they allow for a day or 2 in order for an organisation to adjust the bordereau after all returned debit orders have been confirmed. in my opinion about 7 working days should be allowed at least.
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Added by Lizelle, 24 Apr 2019
Premium collection is an important function performed by qualified intermediaries to facilitate flexible payment terms for clients and reduce costs. Experience has also shown that where qualified intermediaries are involved in the premium collection process, lapse rates are lower. The FIA has put together a working group to gather information and prepare a comprehensive response to the FSCA.
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Added by Bettie Barnard, 24 Apr 2019
Goeiemore

Ek het nie 'n probleem as hul die 45 dae wil verkort, waarin premies aan versekeraars oorbetaal moet word nie, bv na 7dae nie.

Ek het wel 'n probleem met die voorstel van 3 dae. Wat van UNPAID D/O's? Ek het 'n kennisgewing van FNB waar die premie op die 1ste aangevra is en eers op die 5de unpaid teruggekom het.

SO, nou betaal jy die premies binne 3 dae oor na die versekeraar en net daarna laat weet FNB my dat nie al die premies suksesvol gevorder is nie. Wat maak ek nou? Trek daardie premie af van die volgende batch premies wat op 'n later datum gevorder word?

Vriendelike groete
Bettie
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Added by Humphrey, 24 Apr 2019
Many times i do not agree with the Regulator but here I do - the question is why has it taken so long to come to this conclusion. The money paid by the client is "premium" and the "premium" belongs to the insurer - why on earth should any other entity benefit from the interest. Whilst one may argue it is just the shareholders of the insurer that lose out, the reality is that this ultimately impacts on profit of the insurer and therefore will have an impact on the premiums charged in a need to ensure the required ROC is achieved.
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Added by Ayanda, 24 Apr 2019
Some solid advice from multiple generations past:
“If it ain’t broke, don’t fix it”
And it ain’t broke simply because there once was a bad driver at the wheel!
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Added by Alan, 24 Apr 2019
"The FSCA remains of the view that any interest earned on premium monies belongs to the insurer and there is no justification for a collecting intermediary to retain interest earned on any premium monies that are held on behalf of the insurer. "
Why was S10(3) of the General Code of Conduct included. This section specifically exempts any FSP who receives, holds or in any other matter deals with premiums payable under a short-term reinsurance policy or who is subject to section 45 of the Short-term Insurance Act, from the requirement that such premiums be held in a separate account if the FSP complies with the requirements contemplated in S 45
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