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The curatorship saga and premium collection

05 November 2018Jonathan Faurie

Earlier in September, Insure Group Managers was placed under voluntary curatorship by the Financial Services Conduct Authority (FSCA) by mutual agreement with IGM management. Readers have been asking questions about Insure Group and its relationship with VBS Mutual Bank (VBS). FAnews spoke to Pieter Bezuidenhout, Insure Group’s Curator, to find out more about the current situation at Insure Group.

We also spoke to Caroline Da Silva – Divisional Executive for Regulatory Policy – to find out a bit more about the Insure Group situation from the regulator’s point of view. We also got a legal opinion from Ernie van der Vyver – a Partner at Clyde & Co. 

How did Insure Group get to this point?

Insure Group collects premiums on behalf of insurers and brokers which they hold onto for 45 days before paying it over. During this time, Insure Group should have invested the premiums in liquid investments to match their payment obligations but instead invested them into illiquid investments for the sole purpose of gaining higher return. 

These investments include a mining rehabilitation plant, a property portfolio, broker acquisition and premium financing to intermediaries to build up their business, and a minority shareholding in an asset management company. 

“For several years, Insure Group wanted to become involved in a Black Economic Empowerment transaction; it was merely a case of finding the right business partner. The board perused several options and was attracted to an offer by Vele Investments, the majority shareholder in VBS Bank. Through the Vele association with VBS, Insure Group started using the bank to place funds for short periods of up to 15 days at a time. At the time, the interest rate offered by VBS was substantially better than any other bank,” said Bezuidenhout. 

He added that he understood that Insure Group had entered into this relationship based on trust. VBS was a bank that was regulated by the South African Reserve Bank, so Insure Group assumed that there was nothing untoward with what they were doing. Unfortunately, this turned out not to be the case. 

“The money that the Great Bank Heist report said was paid to Insure Group was the return of funds placed with the bank for short periods prior to it being paid to Insurers. Although some press reports indicated that more than a billion rand was paid to Insure Group by VBS Bank, this is incorrect as to sequence. There are no indications in the SARB report that Insure Group was involved in any form of looting or wrong doing in so far as VBS is concerned. What we can confirm is that over a seven-month period, funds were placed with VBS for short periods and then returned to Insure Group,” said Bezuidenhout. 

A rear-guard action

In the Great Bank Heist report, significant allegations were levelled against Insure Group CEO Charl Cilliers who the report said allegedly received money from VBS in his personal capacity. 

“Cilliers was involved with the Vele Investments transaction from the start and was part of the team that sat down with Vele and structured the transaction. Insure Group is aware of the allegations levelled against Cilliers in the report and will have to wait for the investigation by the National Prosecuting Authority (NPA) and the FSCA to determine whether Cilliers acted in a fraudulent manner or not,” said Bezuidenhout. 

While allegations cannot be made before the investigation has run its course, he was named in the report and it is clear that there is more to Cilliers’ involvement than meets the eye. 

He added that, at this stage, Insure Group, and Cilliers’ legal counsel, have advised him to make himself available to the authorities throughout the investigation. 

A negative impact

Bezuidenhout pointed out that the curatorship issue, as well as the links to Vele Investments, and by association to VBS Bank, is affecting the company negatively. 

“This company was built on a premise of trust; and when a company is placed under curatorship, there is a certain amount of trust that is lost in the process. We have been painstakingly sitting down with clients and policyholders to explain to them how we got to this point. And when we explain ourselves, a measure of acceptance has been given to us by our clients. What we need to reiterate is that we are trying to steady the ship and operate as usual. With the assistance of the FSCA, we are pushing ahead. We cannot stop our business because it will be most disruptive to our clients and the insurance industry,” said Bezuidenhout. 

Staff morale has also been affected by this issue. However, Bezuidenhout points out that the staff are committed to steadying the ship and feel protected by the fact that the FSCA is now involved in the process and is committed to keep Insure Group operating as usual. 

The regulator speaks

The Insure Group curatorship comes a year after the FSCA (which was then the Financial Services Board) had to deal with the liquidation of Saxum who also faced liquidity issues. 

“We are working closely with Insure Group to ensure that the industry is not disrupted,” said Da Silva. 

A secondary fallout from the Insure Group saga is a potential looming collapse regarding Nzalo. “Regulators do not want to see the failure of any insurer as this impacts the insurer’s policyholders and may hurt other financial institutions to which it is connected. Further, it also has a reputational impact which may pose systemic risks on the sector,” said Da Silva. 

She added that while regulation helps to mitigate the risk of a financial institution running into financial difficulties it is not a guarantee against failure. 

Where to from here for Insure Group?

The road ahead for Insure Group will be a long one as the company strives to win back the trust of its clients. 

The FSCA is also learning from the Insure Group issue and is asking some serious questions. “We must all take some real lessons from this and change the premium collection framework significantly to mitigate risk. Insure Group has a very capable and well-managed premium collection capability and continues to function very efficiently in this regard, it was the rolling of the premiums and its investment strategy that caused the issues we now face,” said Da Silva. 

She added that some of the questions the industry should be asking is:

  • why should premium collection intermediaries hold on to premiums for 45 days allowing for the rolling of premiums?
  • is the rolling of premiums really market practice and do other collection intermediaries face similar risks?
  • where brokers collect premiums into their own accounts and do not use collection agents, are the risks the same? and
  • who does the interest on invested premiums belong to? 

Legal concerns

Ernie Van Der Vyer – a Partner at Clyde and Co – said that in principle, Insure Group is still bound to all of its contractual obligations which are fully enforceable. An insurer or other clients may be able to sever ties with Insure Group only if there is a clause within the contract which allows them to terminate the relationship. 

“Insure Group is in the process of paying back premiums to insurers, which they are trying to do to the best of their ability. It is also very clear at this stage that insurers and brokers have a claim against Insure Group,” said Van Der Vyer who is acting on behalf of five clients against Insure Group.  

Editor’s Thoughts:
Until a formal investigation has taken place, it is hard to attribute guilt in this case and it is dangerous to do so based on assumptions. The FSCA has said that it will be looking at the future of premium collection and will investigate the actions of Insure Group and key persons. A few months from now, the industry will look significantly different.  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Len Wright, 05 Nov 2018
Hopefully, the authorities will look closely at the other intermediaries who collect premiums to see if they are adequately liquid.

There are 16 other entities with maximum IGF cover of R100 million.

What are they doing with premiums collected?
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