A short-term insurance innovation too far
One of the newest entrants to South Africa’s short-term insurance market was recently brought to book by the Registrar of Short-term Insurance. The Registrar referred a case against Discovery Insure Limited (Discovery) to the Enforcement Committee of the
Discovery Insure arrived on the domestic insurance scene with much fanfare. Its driver behaviour linked product offering was widely hailed as the most innovative to hit the short-term market for some time… So where did the insurer go wrong? “The contravention related to the Travel and Card Cash Back benefits offered as part of the Vitality Drive product,” observes the FSB. “These benefits did not form part of the policy benefits, nor did they directly relate to the risks being insured – and as such constituted an inducement to clients to enter into and continue short-term policies with Discovery”.
It was an honest mistake...
The Registrar took several mitigating circumstances into account. “We were satisfied that Discovery acted on the basis of legal advice [albeit flawed]; co-operated with the Registrar’s investigation; and that no policyholders were disadvantaged as a result of the contravention,” concludes Jonathan Dixon, Deputy Executive Officer: Insurance at the FSB. “Enforcement action was necessary to ensure a level playing field and consistent application of s44 of the STIA”. He says that the enforcement decision, and the publication thereof, should also contribute to a consistent interpretation of the requirements. Consequently, the Registrar agreed that a penalty of just R50000 be imposed. Discovery said that the contravention of the STIA occurred as a result of a bona fide oversight on their part and accepted the penalty.
Is this a case of short-term insurance innovation coming unstuck due to outdated legislation? A simple assessment of the offending “inducement” should prove telling. “As part of the product vision to encourage better driving, Discovery Insure offered exciting incentives to clients based on their driving behaviour,” says Anton Ossip, CEO of Discovery Insure. “These incentives included cash back on fuel purchases as well as discounts on travel and retail spend”. Unfortunately the insurer erred in not linking all of its “discounts” tightly enough to the insurance policy, contravening the STIA.
Dixon says that only certain features of the product were found to be in breach of s44 (which deals with a prohibition on inducements). “In slightly simplified terms, the test applied is that the benefits being offered may be considered an inducement if they do not form part of the policy contract or if they do not relate to the risk being underwritten,” he says. “Certain benefits such as the discounts offered on flights with partner airlines failed this test”. He adds that one of the core features of the Discovery offering – namely a premium refund based on driver behaviour and paid out as a discount on fuel purchases – was restructured to form part of the policy contract. Because this refund relates to motor risk it was not deemed to be an inducement.
Discovery has already removed the contravening benefits and restructured the Vitality Drive program to simplify and enhance benefits for all of its policyholder. “We pride ourselves on the highest standards of governance and compliance,” says Ossip. “We changed the product structure on 1 August 2012 by removing the offending incentives and instead boosting the incentives that were deemed appropriate”. How will policyholders be affected going forward?
Incentives for good driver behaviour remain in place
The bottom line is that instead of fuel “cash back” incentives and discounts on travel and retail spend, current and future Discovery Insure clients will receive higher fuel cash backs incentives for good driver behaviour. Fuel rewards have proven to be a powerful catalyst for driver behaviour change and are the most used and valuable incentive structure on the Discovery Insure program. “We have increased the maximum reward to up to 50% of monthly fuel purchases,” he says. “The simplified benefit also allows the maximum fuel rewards to be available to all clients regardless of their preferred payment method”. These enhancements were introduced and rolled out to Discovery Insure clients on the same day that the offending incentives were withdrawn.
Apart from these slight modifications the Enforcement Committee ruling should not have any impact on either Discovery Insure clients or their insurance brokers. “We have informed all clients and financial advisers of the changes, and the communications have been received in an overwhelmingly positive manner given the emphasis of the redesigned product on the boosted fuel benefits,” concludes Ossip.
Discovery was happy with the quantum of the fine levied and remains adamant that the Regulator took it to task for a “bona fide oversight in a realm where there are very few precedents on the matter”. The group maintains that it places a high value on innovation, but never at the expense of the law. Is the law over-prescriptive? Or did Discovery simply blur the lines between incentive and product innovation. We will let you – our reader – be the judge!
Editor’s thoughts: While on the subject of inappropriate incentives we wonder what the Regulator of Short-Term Insurance thinks of the “we will better your premium or give you R400 cash back” incentive offered by the country’s leading direct insurer. The incentive cannot be linked to a policy, because none has been entered into – or can it? Can you think of any practices that South Africa’s direct insurers engage in that the Registrar may wish to investigate? Please add your comment or send it to [email protected]
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