Moonstone: New values and commission structure due in January 2009

We received the following e-mail from the FSB:

The purpose of this email is to advise you that amendments to Part 3 and Part 5 of the Regulations issued under the Long-term Insurance Act, 1998 were approved by the Minister of Finance. The amended regulations will be published in the Government Regulation Gazette on 5 September 2008, in Gazette: No. R. 31395. The regulations will become effective on 1 January 2009.

The regulations prescribe:

· enhanced minimum values for new investment policies when contractual changes take place; and

· new commission regulations for investment policies

The draft regulations were widely circulated and posted on the National Treasury and FSB websites on 28 February 2008 and interested parties were invited to comment. The draft regulations were further amended after comments were received.

An Information Letter on the amended Regulations will be issued by the Registrar shortly.

What is fact is that the new reduced commission scales will come into effect in January next year.

There are two areas of concern for product houses and advisors:

• A number of brokers that I spoke to have indicated that they have already made significant change to their product mix, and that the influence of these changes on their cash flow would be minimal. This means that investments previously allocated to recurring premium endowments are now placed elsewhere, and with other providers.
• Further enhancements to termination values will prove to be even more of an incentive for cash-strapped consumers to terminate existing policies in order to make ends meet. From figures released recently by product houses, those companies operating in the middle and lower income ends of the market felt the pinch of surrenders far more seriously than the rest. This could well change as the consumers higher up the pecking order also start feeling the pinch.

While endowments have had to bear a huge amount of criticism and negative publicity of late, it is a probably the one savings instrument that have been the most successful in helping the man in the street commit himself to regular contributions to long-term savings. In my personal capacity I can cite many examples where my endowments bailed me out of difficulties, usually via loans against the policies.

It is of vital interest that the new industry body, of which the LOA will form a part, conduct a massive information drive to counter the negative publicity bound to emanate from the financial media on the subject of increased termination values.

And no, sending press releases to “selected media representatives”, or publishing articles on the LOA or company websites will not do the trick.

In our opinion the practical value of endowments, based on real life cases, should make the headlines. The improved benefits flowing from reduced commission and other costs should be conveyed to the consumer, rather than attempts to justify the high costs charged in the past.

To paraphrase an old saying about training:

If you thought the price of advertising was high, consider the cost of an ignorant public.

A further point to consider, should it be a legal option, is to provide brokers with discounted future commission. This strategy was very successfully employed by Old Mutual in the eighties when "Onrusbarend" du Plessis announced in an after-dinner speech that commission on retirement annuities would henceforth be spread over five years. The Mutual market share of RA's rose from something like 26% to 42% as a result of this strategy.