On the regulatory front… prepare for what’s to come
In 2022, we saw a steady flow of regulatory changes to the insurance sector. What can we expect in 2023?
FAnews spoke to Danny Joffe, Head of Legal at Hollard Insure and Members of Law Firm, Fasken’s Insurance Team about the regulatory discussion points for brokers to keep an eye on. What key themes and trends they believe will emerge in the insurance industry in 2023 and how brokers and advisers can prepare and adapt for what’s to come.
What we can expect to be prioritised in 2023
According to Joffe, the year 2022 was a low year, with regards to the regulations being enacted in the non-life area. “The cell captive standards were released by the Financial Sector Conduct Authority (FSCA) dealing with NMIs owning cells, but apart from that, most of the draft regulations released for comment have not yet been finalised. This includes the cyber standards, as well as the draft proposed amendments to the Policyholder Protection Rules (PPRs).”
“The year 2023 we expect will be far busier, specifically if the Conduct of Financial Institutions Bill (COFI) is finally promulgated. COFI will deal with all the conduct issues that affect Financial Institutions and will take over from Financial Advisory and Intermediary Services (FAIS) Act and the old Short-Term Insurance Act. Matters such as fees, transformation, disclosures and product oversight will all be central themes of COFI. It will also hopefully deal with product supplier agents and independent intermediaries. If COFI is not passed, we can assume the new PPR will be released, including all commercial policies,” he added.
“We are also awaiting cell captive standards from the Prudential Authority dealing with the capitalisation of cells and ownership thereof,” said Joffe.
Broker fees, according to Joffe, are also becoming a theme the FSCA is looking at carefully, and both insurers (who are expected to govern and oversee the fees) and the brokers who need to make sure the consents and disclosures are signed off, will need to be careful in complying with the PPR regulations. “Finally, succession planning and cyber remains high on the FSCA’s agenda and we can expect it to be prioritised in 2023.”
More on the agenda
On 18 May 2017, International Financial Reporting Standards (IFRS) 17 insurance contracts were issued by the Accounting Standards Board, which provides for accounting standards that change the way insurance contracts are accounted for and sets out principles for the recognition, measurement, presentation and disclosure of insurance contracts. The purpose of IFRS 17 is to combine the current measurement of the future cash flows with the recognition of profit over the period that services are provided under the contract, present insurance service results (including presentation of insurance revenue) separately from insurance finance income or expenses and require an entity to make an accounting policy choice of whether to recognise all insurance finance income or expenses in profit or loss or to recognise some of that income or expenses in other comprehensive income.
According to Members of Law Firm, Fasken’s Insurance Team, in June 2020, the Board published amendments to IFRS 17 aimed at helping companies implement the Standard and making it easier for them to explain their financial performance. The amendments included a deferral of the effective date of IFRS 17 by two years.
“The consequence of the amendments is that as of 1 January 2023, the IFRS 17, incorporating the amendments, is effective from annual reporting period beginning on or after 1 January 2023. IFRS 17 brings complex changes to the accounting methods for insurance contracts, that will potentially require a larger amount of data and the introduction of new systems for its successful implementation. These changes will also bring about the need for adequate training of both staff and boards of directors in order to ensure compliance. Interestingly, in June 2022 the Prudential Authority published a survey wherein they found that 45% of participants were still in the planning stage when it came to IFRS 17 compliance, as at 31 May 2021. Given that the deadline is nearly upon us, insurers are urged to comply as soon as possible, particularly given that non-compliance brings with it various risks such as a possibility of delisting,” they said.
Speaking about COFI, Members of Law Firm, Fasken’s Insurance Team stated that the amendments proposed by COFI to the Financial Sector Regulation Act (FSR Act) will also empower the FSCA to ultimately set joint standards with the South African Reserve Bank and the Prudential Authority to avoid duplications. “COFI presently contains a ‘governance arrangement’ that provides for high-level requirements, aligned to the Treating Customers Fairly (TCF) principles, regarding a financial institution’s governance and culture. However, there is still a possibility that more detailed requirements could be implemented in subordinate legislation.”
“To enable the fulfilment of transformation objectives, COFI also mandates that should a financial institution be subject to the Financial Sector Code and the Broad-Based Black Empowerment Act 53 of 2003, either voluntarily or otherwise, the institution in question must have a transformation plan with targets in place. Other changes include authorising the FSCA to create directives pertaining to transformation polices and to utilise its enforcement and supervision powers regarding transformation compliance. Therefore, insurers are urged to keep abreast of further COFI developments,” said Members of Law Firm, Fasken’s Insurance Team.
Key themes and trends in 2023
With South Africa’s ongoing loadshedding woes far from over, Members of Law Firm, Fasken’s Insurance Team believe there still lies a possibility of increased claims, as a result of damaged electronic goods as a result of electric surges caused. “Although business interruption claims caused by loadshedding are not considered to be an insurable risk under most insurance contracts, there may be a growing need for business insurance that will directly or indirectly cover the consequences of loadshedding such as business interruption.”
Another theme is the growth of insurance for virtual assets. “Africa is one of the fastest growing crypto markets in the world, as evidenced by the FSCA’s recent declaration that crypto assets now fall into the classification of financial products as per the FAIS Act. The growth of cryptocurrencies, along with other virtual assets, brings about risks that many may wish to get cover from. Should the insurance industry see the need to cater and provide for these types of policies, this could become a new type of emerging insurance. However, the inherent risks of fluctuating valuation of some types of cryptocurrencies, necessitate insurers drafting policies with the particular nature of a particular kind of cryptocurrency in mind,” said the Fasken Team.
“With the rise in the prevalence of storing data online and the resultant rise of cyber-attacks, the insurance sector has seen the urgent need of cyber and privacy insurance to protect companies and individuals against damage flowing from cyber-attacks. In general, further technological developments have also increased the individual’s expectations of insurer’s digital offerings, meaning that there is likely to be a rising demand for these sorts of offerings,” they added.
On another note, reinsurers desire to fund large catastrophe claims may decrease. “Reinsurance provides a mechanism for insurers to handover some of the risks under insurance contracts to other insurers, whereby reducing an insurers own risk in providing for certain types of insurance. However, reinsurance may be impacted through the increased effect of climate change in causing large catastrophic events. The effects of climate change have become more evident from a South African perspective as of late, with events such as the KwaZulu Natal floods earlier this year. It is uncontentious that these types of events can result in large volumes of hefty reinsurance claims, and giving their increasing likelihood and risk, it is possible that reinsurers may move away from funding these sorts of claims, towards focusing on providing other types of reinsurance. Insurers, as a whole, also face a unique opportunity to incentivise positive change when it comes to global warming, in the form of stipulating particular pricing and underwriting requirements. There is a hope that such tools could be utilised to effect positive change in the world,” stated Members of Law Firm, Fasken’s Insurance Team.
How do brokers and advisers prepare?
“With the effect of IFRS 17, as amended, swiftly approaching, insurers should prepare for the final hurdles of compliance with the implementation of these new accounting standards. Whilst there is no longer any time to iron out the potential kinks prior to its consequences coming into effect, insurers may have to implement the new changes and dynamically deal with any potential difficulties as they arise. Brokers and advisers may have to be cognisant that adaptability may become an important trait going forward,” said the team.
“The insurance industry, including brokers and advisers, should also be prepared for the implementation of COFI, and be cognisant of the changes that will come with it to the regulatory environment. It is particularly important that insurers are attune as to how to adapt their objectives and internal processes to align themselves with this piece of legislation and with the aforementioned TCF principles. It is recommended that while we wait for the final promulgation of COFI, those in the insurance industry that will be affected should already be taking steps to prepare themselves for its implementation,” concluded Members of Law Firm, Fasken’s Insurance Team.
Writer’s thoughts
As the Fasken Insurance Team said, brokers and advisers may have to be cognisant that adaptability may become an important trait going forward. Prepare for what’s to come, with these regulatory discussion points, and any difficulties that may arise. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
