Regulation in the insurance industry
Tom Healy, Business Unit Manager of the Knowledge Centre within Marsh Africa.
There has generally been a lack of trust within the insurance industry. The industry was perceived to be a necessary evil within the public domain and this perception did very little in driving trust between insurers and policy holders.
Objectively speaking, the benefits of insurance cover far outweigh the disadvantages. This is because insurance cover permits businesses and home owners to recover quickly after major negative events and protects purchases like homes, motor vehicles and valuables.
According to the International Monetary Fund, insurance regulation in South Africa is sound and it is in fact the assessment aspect that is identified as an area for development. This is driven by the fact that the Financial Services Board (FSB) takes a thorough approach to regulation, recognizing the scale and development of the South African market and the need for effective market conduct as well as prudential regulation.
South Africa is home to the largest insurance market in Africa. The South African market generates 90% of Africa’s life insurance income and has the second highest life insurance penetration in the world after South Korea. It remains healthy despite the challenges in operations. We are all aware of the important and unique role insurance plays in the daily lives of millions of people so it’s important to have an insurance industry that is sustainable, innovative and competitive.
Like many industries, the insurance industry faces its own set of challenges. These range from difficult new business, investment and regulatory environments, geopolitical uncertainty in certain parts of Africa, social changes and technological advancements as well as uncertain economic environments.
Among the most significant, the changing regulatory environment which stems from the continuous changes in the industry is notable. The sector has experienced a promulgation of regulatory legislation which has improved the level of compliance with the international standards body, the International Association of Insurance Supervisors (IAIS).
Tom Healy, Business Unit Manager of the Knowledge Centre within Marsh Africa advises, “Without an Association and/or Regulatory Body, entities within an industry could each do their own thing as far as general supplier, customer and member relationships are concerned. The same applies to standards of products and services. There would also be no collective body for communication or collective bargaining purposes. Regulatory Bodies and Associations, therefore, ensure there are minimum professional and legal standards in place, supported by Compliance functions to ensure adherence to accepted laws and governance.”
The recent changes in legislation have also resulted in a financial sector that largely meets the existing requirements of The South African insurance regulator, the Financial Services Board (FSB).
Ongoing public complaints of poor customer outcomes from the South African insurance industry are largely behind the Financial Services Board (FSB) and the National Treasury drives to introduce more and more governance, regulation and supervision to the industry. The regulatory intervention is to ensure insurers deliver on the promises made to their markets. This assists in curbing the negative perception of the industry. For the market to continue to grow, the industry needs to manage its reputation by respecting all regulations and continuing to increase access to insurance products for all customers. Financial advisers and brokers must be authorised to provide financial advisory and intermediary services.
A key positive element for the South African insurance industry is that the various South African Regulatory Bodies are national and apply to the whole country. “In the UK and USA, component countries or states may have additional regulations to those which apply overall. Our standards are as good as any in the world and, in fact, South Africa is a world leader in Financial Services Sector standards”, says Healy.
Amongst the key insurance regulations are the following, which supplement the original Short and Long-term Insurance Acts 1988 in South Africa: The Policyholder Protection Rules, Micro Insurance Regulations, Binder Regulations Capital Adequacy Requirements, Demarcation Regulations, Captive Insurer Regulations, VAT Regulations, Consumer Credit Regulations, the FAIS Act and Subordinate Legislation, etc. The Financial Advisory & Intermediary Services Act 2002 (FAIS) was introduced from 01 July 2004 and mainly regulates the Intermediary sector.
The South African Regulatory authorities decided on a Twin Peaks approach to Insurance Industry regulation, divided into Prudential and Conduct. Prudential relates to the financial management side of the industry such as Insurer Income Statements and Balance Sheets and this regulatory monitoring function will be transferred from the Financial Services Board to the Reserve Bank under National Treasury. Conduct refers more to the supplier, product, service, relationship and customer communication side of the Insurance industry, all in the ultimate interests of Treating Customers Fairly.
To ensure fair treatment of Insurance Industry Customers, Treating Customers Fairly is an over-riding conduct ethic driven by the Financial Services Board which was launched in November 2014. The FSB is the official Market Conduct Authority, however, an additional Joint Committee between the FSB, Reserve Bank and National Treasury, will be formed to resolve any conflicts within the regulatory twin peaks.
Industry players will therefore need to be aware of both existing and pending Insurance Industry regulatory requirements and abide by them for Compliance and Client Service purposes.
“There is a good reason for most regulations - so embrace and understand them in order to implement each successfully”, adds Healy.
