Financial sector gears up for regulations
Regulatory and legislative changes are currently underway. How do we, as an industry, prepare and adapt?
FAnews spoke to Danny Joffe, Head of Legal at Hollard Insure and Bianca Da Costa (Partner), Roy Hsiao (Senior Associate) and Tshepo Mokoana (Associate) at Fasken, about the key themes and trends emerging in the insurance industry.
BI, notable trends and themes
The insurance industry in South Africa, according to Da Costa, Hsiao and Mokoana, has been put to the test over the last three years by a series of incidents. Mainly emanating from the COVID-19 pandemic, the 2021 July unrest, and the more recently, the Durban floods; the latter being a sad reminder of the effects of climate change and the need for stringent environmental regulation.
They believe that one of the major consequences of the worldwide pandemic is the rapid change in customer attitudes. This change extends across all spheres of consumer markets, including the insurance market.
The following, according to Da Costa, Hsiao and Mokoana, are notable trends and themes, specifically relating to Business Interruption (BI) products:
- An increase in cyberattacks. With the recent 2022 cyberattack against TransUnion, companies will need to ensure that they protect themselves against costs and damages that result from a cyberattack. It is expected that most large corporations will be looking at mitigating risks that result from cyberattacks.
- Scrutinisation of both new and existing insurance policies, regarding the express exclusion/inclusion of extended BI cover for epidemics, pandemics and contagious/infectious diseases and the implementation of requirements for cover.
- Niche BI product o?erings at a premium. An example is China's return-to-work insurance product implemented by domestic Chinese insurers, as a result of a push by the Chinese government to provide cover for ?nancial loss due to disruptions caused by COVID-19.
- The outcome of adjudication of BI claims by courts, and the development in the law, is likely to add more pressure to the insurance industry and may drive change faster than customer dissatisfaction. This may prompt insurers to reconsider policy o?erings and the manner and speed in which claims are handled in a way that is aligned with the Treating Customers Fairly principles (TCF) and Policy Protection Rules (PPRs); and
- Less ‘valuable’ insurance products, for example, insurers may see a decrease in demand for car insurance and reductions in motor vehicle claims as more people work from home. Insurers will need to adapt to the change in customer demand by rethinking the type of cover that they provide.
Da Costa, Hsiao and Mokoana believe that the COVID-19 pandemic comes on the back of customers demanding a shift from traditional insurance products to policies that are aligned with technological enhancements, immediate claim resolution and cost-e?cient insurance products. “It is likely that COVID-19 will be the catalyst for much-anticipated innovation in the insurance industry. Insurers have been urged to rethink the overall customer experience and to market product o?erings that are more appealing to customers.”
From a regulatory perspective
“The key themes emerging currently in the regulatory space are the implementation of the new PPRs, which will include all commercial policies within the jurisdiction of the current PPR regulations, the implementation of the new joint standard on outsourcing, the implementation of the new standards on cyber security and resilience, as well as potentially passing the Conduct of Financial Institutions (COFI) Bill, which is set to regulate the conduct of all financial institutions. Currently, we only have prudential legislation in the form of the Insurance Act, the conduct pieces are still governed by the old Short-Term Insurance Act,” said Joffe.
Other key trends, according to Joffe, are reinsurers and insurers looking at their covers after COVID-19, and the BI claims, as mentioned above. Climate change inspired losses are also a theme that cannot be ignored, after the large losses suffered as a result of the KZN floods.
Three regulatory responses
Da Costa, Hsiao and Mokoana said there are three regulatory responses in the South African insurance industry. “Insurers are required to consider the fair treatment of policyholder’s principles, continuity of business objectives and compliance with regulatory requirements, and the maintenance of financial soundness.”
In terms of the fair treatment of policyholders, they mentioned that insurers are obliged to comply with the PPRs, consider offering premium relief, focus on the suitability of the product and the vulnerability of the policyholders when launching new products, avoid delays in settling claims and relay clear information to policyholders regarding renewals and lapses of policies impacted by COVID-19.
When it comes to continuity of business, Da Costa, Hsiao and Mokoana emphasised that insurers are encouraged to regularly review business continuity plans, identify COVID-19-related risks, mitigate these risks to ensure the operational ability and communicate developments and risks clearly to policyholders and stakeholders to reduce risks of financial loss or data breaches.
Looking at compliance with regulatory requirements and maintaining financial soundness[1], Da Costa, Hsiao and Mokoana said lowering of an insurer’s solvency capital requirement in specific circumstances may be permitted, and extension of deadlines of certain legislative reporting requirements. Insurers should reconsider the distribution of dividends and bonuses. Insurers are also not required to realign foreign asset holdings with foreign portfolio investments for a limited period. Insurers are encouraged to use technology to comply with due diligence and Know Your Customer requirements.
Thoughts on COFI
As the financial sector gears towards full implementation of the Twin Peaks regulatory framework, Da Costa, Hsiao and Mokoana said the impact that the COFI Bill will have on the financial sector cannot be overstated. Institutions such as insurers, banks and credit providers will be duly affected.
Joffe mentioned, however, that there is still no clear indication as to when the Bill will become law. “The industry provided detailed comments, during the early course of 2021, and given the notice of the new PPRs as mentioned above, it appears that the introduction of COFI is still some time away.”
“It will need a formal passage through parliament still, unlike the PPRs, which are enacted as regulations to the Short-Term Insurance Act. The new governance standard on outsourcing also indicates that this will become effective, before COFI is introduced. The PPR also proposes strict oversight from insurers, with regards to product development and exclusions with specific committees set up to research, govern and oversee all products from prior to implementation, throughout the life of the particular product. This is already being done with personal lines and small commercial policies governed by the current PPRs,” added Joffe.
Da Costa, Hsiao and Mokoana said the Act is aimed at consolidating the conduct standards of financial institutions housed in various pieces of legislation into one statute. “This is a move away from the regulation of conduct, according to the specific activity undertaken by that institution. COFI is also aimed at the codification of the TCF principles. The inclusion of TCF principles in COFI will render those principles legally binding and enforceable across all financial institutions. Throughout the product life cycle, from product design and advertising, to advising and servicing, to complaints and claims processing, regulated companies will be asked to demonstrate how they offer the six TCF Outcomes to their customers.”
RDR within South Africa
The latest Retail Distribution Review (RDR) paper within South Africa was released some time ago, and the industry is keenly awaiting updates to the paper, Joffe stated. “One of the main topics is that of product supplier or tied agents in the non-life space, and independent intermediaries, given that the current laws and regulations in the non-life industry do not adequately address tied agents.”
“There is the individual representative that acts for the insurer (dealt with) in the old Short-Term Insurance Act, but the RDR paper dealt with this extensively, and it would benefit the consumers to understand what kind of intermediary they are dealing with,” added Joffe.
The positive characteristic of the South African regulatory regime, according to Da Costa, Hsiao and Mokoana, is that it undergoes a rigorous public consultation process. This means that none of the changes seen elsewhere, could be imposed locally, without industry or public participation.
“RDR principles are founded on TCF principles, which are an intrinsic part of the COFI Bill. Therefore, preparation for the COFI Act will essentially prepare the industry for RDR principles,” they concluded.
Writer’s thoughts
As the industry braces itself to deal with the regulatory changes, brokers and insurers need to stay well informed of the effects of these changes. Knowing the “what” is not enough anymore, knowing “how” is now the key to ensure we manage the journey ahead. Many, however, believe that what we need is less regulation not more. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za
[1] Joint Communication 1 & 2 of 2020 & PA Communication 1 of 2020.
