Regulators put micro-insurance under the microscope
National Treasury yesterday released proposals for yet another sub-sector of the insurance industry. Titled The Future of Micro-Insurance Regulation in South Africa the paper contains a roadmap to create new legislation to specifically legislate micro-insurers without impacting the existing Long-Term and Short-Term Insurance Acts. According to Treasury “this discussion paper proposes that a regulatory space for the provision of micro-insurance products be carved out within the broader regulation of insurance provision in South Africa.” The already stretched Financial Services Board (FSB) will have to keep an eye on the newly regulated industry too.
Although the document draws on a number of experts, insurance bodies and companies operating in the short and long-term industries there is still plenty of work to be done before a solution is finalised. Concerned parties have until 31 July 2008 to read the 136-page manuscript and submit comments for Treasury’s consideration.
What is micro-insurance?
To gain a better understanding of the scope and intention of the discussion paper we need to know what micro-insurance is. The paper turns to a definition provided by the International Association of Insurance Supervisors (IAIS) which defines micro-insurance as “insurance that is accessed by or accessible to the low-income population, potentially provided by a variety of different providers and managed in accordance with generally accepted insurance practices.” Micro-insurance is part of the broader insurance market, differentiated only by its means of distribution and distinctly structured product. Health insurance and other savings products (including long-term savings products) have been excluded from the definition.
Micro-insurance poses very specific challenges because of the market it serves. Treasury’s latest intervention is aimed at addressing the many risks with providing complex insurance products to a vulnerable target market. So once again the focus is on protecting the consumer. In South Africa the micro-insurance definition will apply to a “simplified set of risk products with terms not exceeding one year and benefit levels not exceeding R50 000.” Insurers who write only micro-insurance products will “be subject to a reduced set of licensing and operational requirements.”
Treasury’s long list of requirements
Treasury has already spent a great deal of time on defining the problems and proposing solutions for the micro-insurance industry. The discussion paper proposes the following:
- The creation of a dedicated micro-insurance license
- Said license to be available to existing registered long-term insurers, short-term insurers, friendly societies as well as public companies and co-operatives which comply with the registration requirements
- Said license to allow the license holder to write both long-term and short-term policies which comply with the product parameters set for micro-insurance products (including a benefit cap of R50 000 and a maximum term of 12 months)
- Said licensees will be governed by simplified distribution requirements (under the Financial Advisory and Intermediary Services Act – FAIS)
- And said licensees will have to comply with a special prudential regime commensurate to the risks applicable to micro-insurance policies.
Four reasons for the proposed changes
In the executive summary of the abovementioned document, Treasury sets out the main objectives for the proposed changes. The first is to “create a simplified distribution regime to bolster market development.” A stated objective of the Financial Sector Charter is to increase the reach of financial products to the LSM 1 to 5 consumer and this will hopefully further this aim. The second objective is to “allow the same risk carrier to write micro-insurance products extending across life and property classes of insurance policies.” This technical proposal will result in micro-insurance policies being categorised as short-term in nature, but include both life and property insurance categories.
The third objective is a continuation of efforts to broaden the market for insurance products. Treasury wants to “remove unnecessary barriers to entry and operation to facilitate broader participation.” This will be achieved by “reducing capital requirements from that required by long-term and short-term insurers, limiting operational requirements and allowing additional types of legal persons to operate under the micro-insurance regime.” And finally, the proposed regulation will “facilitate effective supervision and enforcements.” As legislation currently stands government would have to shut down a number of existing micro-insurance operators for non-compliance. The proposed new legislation will allow companies that are unable to register under the Long-Term and Short-Term Acts (and other legislation) to find an alternative legal home.
The way forward
After receiving submissions from the public and other interested parties Treasury will produce a more detailed design document late in 2008. The intention is for draft legislation to be released in 2009 before the proposed act is introduced in 2010.
Editor’s thoughts:
The financial services industry is already tightly regulated. It is clear that a number of companies selling and distributing micro-insurance products don’t have the critical mass to comply with the conditions of existing insurance legislation. Do you think Treasury’s proposed Micro-Insurance Act is a good idea? Add your comment below, or send to gareth@fanews.co.za
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