Short-term insurance regulation is waiting in the wings
Forget the many changes introduced in the soon-to-be enacted Insurance Laws Amendment Bill. They pale into insignificance when compared with some of the undecided issues that have been held over for implementation by way of regulation in 2009. According to Ilse French, Insurance Technical and Knowledge Management Director at PriceWaterhouseCoopers, these changes are going to have a huge impact on the short-term insurance industry.
French, who was speaking at the unveiling of the 10th edition of PwC’s South African Financial Services Journal, said the unresolved issues included the definition of health policies and profit sharing with third parties through binder agreements.
More haste – less speed
The hasty implementation of the Bill is consistent with government’s recent approach to legislation in the financial services environment. “This Bill was issued for comment on the 9th May this year and the comment date closed on the 28th May,” said French. Despite objections from the industry that the three week period was too short to offer meaningful comment, no extension was granted. Instead the Bill was altered slightly to delay the implementation of certain sections, meaning insurance companies will have to wait till June 2009 for regulations on health policies and binder agreements to be finalised. French notes that “these [regulations] will go right to the core of the business model of some of the insurers.”
Financial Condition Reporting for short-term insurers has also been updated. This is in line with the Financial Services Board’s (FSB) preferences for such companies to include all risks (including operational and credit risk) when calculating capital adequacy. At present, short-term insures express capital adequacy as a percentage of premiums. French says the Bill allows the FSB to appoint a statutory actuary to a short-term insurance company under certain conditions, for example: “if they use internal models to calculate capital, most likely the FSB will require the appointment of an actuary.”
Medical schemes business versus insurance business
FAnews Online readers should be familiar with the drawn out battle that took place between GuardRisk and the Council for Medical Schemes over the last few years. The final court ruling allowed GuardRisk to continue marketing its Gap Insurance products, which covers the difference between actual hospitalisation expenses incurred and the amount covered by a clients’ medical scheme. Although GuardRisk welcomed the victory a number of industry analysts warned at the time that the last salvo in the battle had not been fired.
As a direct result of the GuardRisk/CMS struggle the Insurance Laws Amendments Bill set about clarifying the demarcation between a medical scheme business and an insurance business. And the CMS has emerged with the upper hand. “This Act effectively allows the minister to declare any business a medical schemes business,” said French. Insurance companies that are applying definitions according to the existing Insurance Act will have to adjust their business practices to allow for these changes.
Why is the medical schemes industry kicking up such a fuss? French says the debate centres around fundamental differences in the way in which medical schemes and insurers price their product. “Insurers are allowed to risk rate while medical schemes cannot apply the risk rating,” says French. She pointed out that if insurers were allowed to sell health insurance product using risk rating criteria the medical schemes would be left with the old and sick only. And this moves the argument into the social space.
Binder agreements in the firing line
Credit life insurers and retail insurance operations make extensive use of binder agreements. These agreements allow “insurers to enter into agreements with third parties – or with underwriting managers.” Once regulations are agreed to the Bill will determine how much profit may be paid and who will be able to enter into such agreements. French noted that the industry was extremely unhappy with this intervention. “A lot of insurers are basing their business model on the current status of sharing profits with third parties,” she said.
Intermediaries will also be affected. Apart from regulating “every delegated authority granted to brokers” the Bill will also stipulate how an insurer goes about authorising persons to perform duties on its behalf. We’ll have to wait till the regulations come into effect, to find out how drastic the changes will be.
Editor’s thoughts:
Three weeks is not enough time to consult the entire short-term industry on regulatory changes. The warning shots have been fired: The industry knows that two important items will go to regulation next year and that the window period for comment will be extremely short. They need to reach agreement on their approach today – so that next year’s response can be drawn up at the drop of a hat. Will the short-term industry be ready to engage regulators next year? Add your comments below, or send them to gareth@fanews.co.za
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