LOA welcomes release of draft Regulations on Commission and Early Termination Values

LOA welcomes release of draft Regulations on Commission and Early Termination Values

The Life Offices’ Association (LOA) has welcomed the release of the draft regulations on Commission and Early Termination Values, which will form part of the Long-term Insurance Act once gazetted.

Gerhard Joubert, CEO of the LOA, says while the life industry will need time to study the new draft regulations in greater detail, it seems that the new commission model achieves a fair balance between upfront and as-and-when commission.

“We believe that the new commission model is fair to the intermediary while at the same time ensuring the sustainability of the life industry, and above all, ensuring that policyholders receive a fair deal.”

Commission regulations

The new draft regulations recommend that half of commission due to the intermediary is paid upfront, while the other half is paid over the term of the policy to encourage ongoing service. Currently all commission is paid to intermediaries in the beginning of the first and second policy years.

In terms of the new draft regulations, intermediaries will receive maximum commission of 5% on endowment and retirement annuity (RA) fund policy premiums, split into a 2.5% upfront component and a 2.5% ongoing service commission, payable monthly.

The upfront commission portion will be discounted by 6% since the time value of the commission that is paid in advance should be equivalent to that of on-going commission. Discounting is the reverse of compounding and is used to determine the present value of a future value by deducting interest.

Regulations on Early Termination Values

The draft regulations on Early Termination Values provide for a maximum reduction in fund values of 15% for both endowment policies that are made paid-up or surrendered and retirement annuity (RA) fund policies that are made paid-up or transferred to another fund.

In terms of the draft regulations this percentage must be reduced with every year that the policy is in force until no early termination charge applies. The regulations state that in the case of policies with a term of five to 10 years, fund values may not be reduced once a policy has been in force for five years. Where a policy term is longer than 10 years, the fund values may only be reduced if an early termination takes place within the first 10 years.

The same maximum termination charge rules apply to term reductions. In the case of premium reductions a proportion of the early termination charge may be applied (for example, if a policy's premium is reduced by a third, the maximum charge is a third of what would have been applied to a paid-up).

In addition to the termination charge, insurers may levy an administration charge of not more than R300.