“Regulatory Overview” from a short-term insurance perspective
01 October 2013 | Magazine Archives FAnews & FAnuus | Short Term | Adv Suzette Strydom, SAIA
The South African insurance industry is in the process of undergoing a number of changes, with new regulation being brought in by the National Treasury (NT) and the Financial Services Board (FSB). While practitioners in the short-term industry are worried about the effects these changes will have on their businesses, the South African Insurance Association remains concerned with the impact of the Regulatory Reform on costs, specifically compliance costs, which will ultimately be passed on to consumers, despite any positive impact that the changes may have on the industry.
The burden of the amount of regulatory reform internationally and in South Africa has again been identified by the Banana Skins 2013 Report as the top risk burdening the industry with costs, and also distracts management from running profitable insurance businesses.
According to a recent Deloitte LLP Report, it is estimated that Europe’s 40 largest insurers spent as much as $6.5 billion in 2012 in complying with legislation and regulation.
International developments
At a recent meeting of the G20 the body issued a joint declaration noting that "the international coordination and commitment to the implementation of these regulatory
reforms are unprecedented. But we have more work to do. We are committed to maintaining the momentum of reform until the job is done.”
In addition to South Africa’s membership of the G20, it is also a very active member of various other international bodies. South Africa’s participation assists with the global objective of achieving the proposed regulatory reforms to build a safe, reliable financial system. South Africa officially became a member of the Brazil, Russia, India and China (BRICS) emerging market economic cluster on 24 December 2010. Currently, a BRICS development bank is being implemented to mobilise domestic savings and co-fund infrastructure development in developing regions.
In addition, a BRICS Trade and Development Risk pool is being considered to provide investors and governments with unrestricted access to quality insurance capacity in support of private sector and state-funded infrastructure development projects. This will also benefit domestic and cross-border trade and development.
South Africa also volunteered to undertake the International Monetary Fund – World Bank Financial Sector Assessment Programme (FSAP) review in 2012, with some of the high level recommendations that are currently being introduced in South Africa.
One of these recommendations, namely the much anticipated Twin Peaks Model of regulation, will gain momentum in 2014 with the South African Reserve Bank holding the financial
stability mandate as prudential regulator of banks, insurers and financial conglomerates and with the FSB as market conduct regulator for banks, insurers, pension funds, intermediaries, collective investments schemes and the like.
Macro-prudential
From a macro-prudential perspective, the process of establishing a group supervision department, which will eventually be housed in the South African Reserve Bank, gained momentum with the publication of the 2013 Insurance Laws Amendment Bill (ILAB) on 26 June 2013.
The ILAB proposes a new section in the Insurance Acts for the regulation of on insurance groups. The effective and appropriate supervision of insurance groups is to promote a fair, safe and stable insurance market for the benefit and protection of policyholders to detect early warning signs of financial institutions in distress through stress testing on financial institutions that may pose potential systemic risk,
In addition, in July 2013, the International Association of Insurance Supervisors (IAIS) published its list of Global Systemically Important Financial Institutions (GSIFIs). These financial institutions have been identified based on size, market importance and global interconnectedness. Their distress or failure would cause significant dislocation in the global financial system and adverse economic consequences across various countries. A list of Domestic Systemically Important Financial Institutions (DSIFIs) is expected for publication in 2014. In addition, work is underway to develop a list of Globally Systemically Important Insurers (GSII) thereafter.
Micro-prudential
On a micro-prudential level, the publication and passing of the ILAB as a phased-in approach is currently underway to build towards compliance with the Financial Solvency Assessment and Management ("SAM”) requirements, as well as to improve on current shortcomings in the Insurance Laws (Short-Term and Long-Term Insurance Acts).
As part of the regulatory reform process, the reviewing of the current regulatory framework applied to reinsurance business under the auspices of SAM, is also being considered.
One of the objectives of this review is to consider whether to allow foreign reinsurers to operate on a branch basis in South Africa in future and if so, under what circumstances.
A discussion document is to be issued for comment by the FSB in this regard during the first quarter of 2014.
The FSB issued a call for contributions from industry associations on the introduction of
a Policyholder Protection Scheme (PPS) in South Africa to protect policyholders against
the inability of insurers to pay claims based on developments in Europe following the global
financial crisis.
Market conduct
From a market conduct perspective, the work towards full implementation of the Treating
Customers Fairly (TCF) initiative remains ongoing.
The FSB’s TCF readiness baseline exercise, which was conducted at the end of 2012, is expected shortly. A number of steps are being taken to embed TCF requirements and
principles incrementally into the regulatory framework. One of these steps is the development of Key Information Documents (KID’s) that will serve as compulsory pre contractual point-of-sale documents providing consumers with the necessary information to enable them to make informed decisions on the key features of the product offered at point-of-sale.
In addition, the work on developing standardised terminology and simplified definitions for insurance terminology remains ongoing.
The work on implementing market conduct reporting by registered long-term and short-term
insurers for personal and commercial lines business, with effect January 2014 (in addition
to the current statutory returns), remains ongoing. A draft market conduct return and
guideline is expected for circulation shortly.
A joint consumer credit insurance task team, which includes representatives from the National Treasury (NT), the FSB, the National Credit Regulator (NCR) and the Competition
Commissioner, appointed an actuarial firm to analyse and produce a report on the responses
received from credit insurers on two information requests issued by the FSB and NCR in the
last couple of years. NT is expected to release the findings of this process, and will also release proposed policy desicions in a discussion document for comment by November 2014.
Cross-sectoral review
A copy of a proposed affordability assessment guideline for credit providers issued in terms of the National Credit Act 2005 will also be issued for comment within the next few weeks.
The long-awaited Retail Distribution Review (RDR) is in its final stages. The RDR will be a
cross-sectoral review and will include a review on remuneration, commission, distribution challenges, definition of intermediary services and advice, aggregators, etc.
The FSB is considering a draft guideline on advertising and marketing for registered insurers.
Further guidance is also in the pipeline on the process and notification requirements to the FSB when insurers and intermediaries cancel and replace a book of policies, including the possible review of Policyholder Protection Rule 7.3.
Following a discussion paper issued by the FSB on a review of Third-Party Cell Captive
Insurance and Similar Arrangements on 11 June 2013 for comment, we expect the FSB to issue a further discussion paper with revised proposals during October 2013. The NT will issue for comment the revised Demarcation Regulations by the end of November 2013.
The work on the review of Ombuds structures to strengthen consumer protection and recourse mechanisms, will gain momentum in 2014, but we are not sure when the NT will release its final proposals.
Professional client
On the Financial Advisory and Intermediary (FAIS) front, the development of a new category for Financial Services Provider (FSP), namely Professional Client, is being considered. Draft proposals are underway on amending the dates applicable to representatives to successfully complete the relevant regulatory exams (RE), unless they work under supervision in terms of the Exemption of Services under Supervision, the removal of the second level RE
due to the current unavailability of the RE2, confirming that representatives who comply
with the experience, qualification and level 1 RE requirements, will be released from
supervision.
The proposed new sub-categories of financial products (namely Long-term Insurance subcategory B2A and Short-term Insurance Personal Lines, A1), qualifying criteria for representatives who render financial services to the lower and middle income market in respect of basic financial products was circulated for comment on 12 August 2013.
We anticipate a busy last quarter of 2013 with even more developments expected in 2014 – specifically on the Twin Peaks architecture.
