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The link between insurance, medicine and oil

09 March 2007 Gareth Stokes

Insurance intermediaries should forget about defending themselves and concentrate on the positive contribution that the industry makes to society. This view was expressed by Leon Louw, executive director of the Free Market Foundation during a presenta

On their website, the Free Market Foundation declares itself "an independent non-profit policy organisation founded in 1975 to promote and foster an open society, the rule of law, personal liberty, and economic and press freedom as fundamental components of its advocacy of human rights and democracy based on classical liberal principles."

Louw started his talk by comparing the insurance industry to a number of other 'pariah' industries operating in the global economy. The insurance, pharmaceutical and oil industries displayed a number of similarities. Though each of them offers distinct benefits to society, they are often vilified in the press and scorned by social and environment groups.

The oil industry satisfies the basic human need for energy, yet remains under fire from environmental activists. The pharmaceutical industry is often charged with profiteering despite serving society through research and development activities.

And the insurance sector is criticised in the press and by various consumer bodies despite providing peace of mind to policyholders. Imagine a world without insurance after a disaster on the scale of Hurricane Katrina.

Regulation is a stumbling block to wider access

Louw's next focus was on the regulation of the financial services industry as a whole. He singled out governments recent drive to bring insurance and financial products to the poorest sectors of the community for specific comment.

He believes one of the main reasons the insurance sector is struggling to roll out products to the poor is regulation. In his view, South Africa is suffering from a form of "regulatory diarrhoea." Regulation raises costs, raises the risks involved in doing business, raises the threshold at which it is economically viable to provide a product and lowers the rate of return. These side-effects are not welcomed by companies operating in the private sector.

Prior to the implementation of the Financial Advisory and Intermediary Services Act (FAIS), the Financial Services Board (FSB) completed a cost benefit analysis. Their study predicted that FAIS would produce annual benefits of some R1.15 billion rand, against implementation costs of R353 million. Louw challenged anyone to prove this analysis correct, suggesting the costs outweighed the benefits by some margin.

The FAIS Act proposes punishment for transgressors with fines of up to R500, 000 or 5 years in prison, forcing financial services companies to employ their own FAIS compliance officers.

In another recent article, titled South Africa is buckling under excessive regulation, Louw states:  "There are so many new laws, they are so complicated and counter-intuitive, and so few people know whats in them, that there is an entire new profession called 'compliance officers' whose sole job is to help companies comply with the deluge of new laws."

Take positive steps to meet the critics head on

Louw encouraged seminar attendees to believe that "insurance is incredible." He challenged the audience to take time out to evaluate the industry they operated in and focus on the aspects which made their contributions to the sector rewarding.

His sentiment was echoed by another panellist during the question and answer section following his speech. The future of the insurance industry is not what the industry is dealt with, but rather what the key players in the industry choose for themselves.

Editor's thoughts:
The last few years have been tough for insurance intermediaries. They have borne the full wrath of government regulation and seem to have to carry more than a fair share of the accompanying administrative burden. Do you believe that regulators should concentrate on insurers rather than intermediaries?   Send your comments to

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