Some survive, some stumble in regulatory crapshoot
Stakeholders in the financial services sector will be doing plenty of ‘head scratching’ following apparently contradictory regulatory outcomes in the healthcare and non-life insurance disciplines. On the one hand, a non-life insurer with a 70-year track record, which was showing signs of an operational turnaround, was sent to the proverbial chopping block; on the other, a medical scheme that was bleeding cash and members ‘hand over fist’ was handed another lifeline.
Some survive, voluntary wind up declined
We begin today’s newsletter with the latest from the court process initiated by Health Squared Medical Scheme (HSMS) and contested by the Council for Medial Schemes (CMS). HSMS recently approached the High Court for the voluntary winding up of the ailing medical scheme, and the CMS stepped in to oppose the liquidation in favour of having a curator installed. There is plenty of financial nonsense going on behind the scenes, with HSMS saying the scheme was kaput and that members could ill afford the ZAR280 000,00 per month a curatorship would cost it. We have heard, however, that the scheme has been spending money on all manner of non-essentials, so who knows what the curator might unearth.
On 9 September 2022, in Press Release 11 of 2022, the CMS announced that it had won the latest round in this ongoing saga, thanks to the Honourable Judge Crutchfield agreeing to place HSMS under provisional curatorship following the CMS’ application. The curatorship is effective 8 September 2022. “The CMS brought the curatorship application to examine the actual financial position of the scheme and oversee the liquidation process,” writes the regulator. “The Court agreed with CMS that a curator is a suitable remedy to address the concerns raised by CMS, [given that] we have a statutory duty to uphold the rights and interests of beneficiaries”. This was an interesting phrasing, because it suggests that the CMS expects to find something untoward in the scheme’s books.
This writer recently unpacked CMS Press Releases 8-10 in an article titled ‘Wait-and-see regulator strands 1000s of medical aid members’. The short version of that article is that HSMS was in serious financial trouble: its average age was 47.1 years compared to the 2021 open schemes industry average of 35.5 years and its pensioner ratio stood at 25.9%, far above the industry average of 11.0%. To make matters worse, the scheme’s solvency capital ratio had plummeted from 15.42% at the end of December 2019, to 6% by December 2021, to around 2% at the time of writing. Schemes are, by law, required to hold 25% of members’ annual premiums in capital . So, the question becomes… One wonders how long it will take the provisional curator to pull the plug given the financial fragility exposed by the CMS, and given that the CMS expects the curator to “oversee” the liquidation?
Some stumble, liquidation underway post haste
The bar in the ‘who is the fastest liquidator in SA’s financial services sector’ has already been set, with the court-appointed provisional curator taking less than six weeks to decide Constantia Insurance Company Limited’s (CICL) fate. On 26 July 2022, the High Court appointed Ashish Desai as the provisional curator for CICL. And Desai wasted little time in determining the financial state of play at that business, pressing for the 70-year-old insurer’s final winding up, or liquidation if you prefer, in a communication dated 30 August 2022. “The curator, in consultation with independent experts, has analysed the financial position of CICL based on the unaudited numbers made available [and] concluded that CICL is in breach of its capital requirements,” wrote Desai. He added that CICL’s liabilities exceeded its assets, making the insurer “both technically and financially insolvent”.
For some history, you can read ‘PA moves on Constantia Insurance’. To summarise, the provisional curator had been appointed on the basis of the PA’s founding affidavit to the provisional curatorship application. The authority said that CICL “was in breach of its capital requirements under the Insurance Act, No. 18 of 2017 [in terms of which] an insurer is required to maintain, at all times, a minimum capital requirement (MCR) and a solvency capital requirement (SCR)”. This capital squeeze was common knowledge going back to midway through 2019. What stumped industry commentators is the speed of the provisional curator’s decision against the backdrop of claims that CICL was operationally sound.
Operationally sound or not?
At the beginning of August, Peter Todd, interim CEO of Conduit Capital, which is in turn the owner of CICL, suggested that there was no reason for concern. “The improved operating performance and increase in cash reserves means the business has sufficient resources to meet all current and future claims obligations; there is no reason for policyholders or partners to be concerned”. At this stage we can only speculate over the reasons that the curator acted so swiftly. There must have been something sinister lurking in the financials for him to act so quickly on a company that had claimed to have turned the corner in its 2020 and 2021 financial years. Mind you, it is not unheard of for financial statements to smooth over certain wrinkles…
Sadly, the appointment of a provisional curator and negative press that ensued will have undone any progress made over the aforementioned periods. Brokers and underwriting management agencies (UMAs) that had clients on Constantia’s books would have been doing their clients a disservice by not moving their business… They are, after all, required to do due diligence before placing or renewing business with an insurer.
More questions than answers, yet again
It seems my newsletters are throwing up more questions than answers these days. For example: how can any broker or UMA consider placing business with an insurer that is on solvency watch? And if a broker or UMA refuses to place business with an insurer that is on solvency watch, how will that insurer ever trade out of financial difficulty? In light of this ‘question couplet’ one might conclude that any warning from a regulator re the solvency or sustainability of a regulated entity would result in that entity’s demise. And that in turn suggests that the regulators have the power to disconnect any firm from South Africa’s financial services network, at will!
Writer’s thoughts:
It is extremely difficult to get a clear picture of what is going on at a struggling business based on press releases and court papers alone. As such, I would love to hear from brokers or UMAs whose business and / or clients have been impacted by the Constantia Insurance or Health Squared Medical Schemes matters. Please reach out to me by email, or leave a general comment in the thread. Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
