Opening the industry can of worms

Michele Jennings

When the Financial Sector Conduct Authority (FSCA) announced that it was embarking on a major regulatory reform programme, the industry implored with the regulator to consider their position very carefully and be certain that the regulation that it will implement will not cause any unintended consequences within the industry.

Unintended consequences generally refer to actions that will make doing business within the financial services industry complicated as opposed to easy. 

At a media roundtable with Sanlam Employee Benefits (EB), Michele Jennings – CEO Sanlam Employee Benefits: Group Risk – referred to the impending Policyholder Protection Rules (PPRs) and the unintended consequences that are associated thereto. 

Future engagement

Jennings pointed out that in terms of the new PPRs, an insurer needs to engage directly with a client which includes a member of a group scheme. If it cannot do so, the insurer needs to demonstrate to the FSCA that it is not reasonably practicable to engage directly with these clients. 

Further, an arrangement then needs to be put in place with the client to communicate with them before, during and after the inception of the policy. In addition, where fair treatment is compromised, the insurer must take reasonable steps to mitigate this risk.

The worst part about this is that the insurer can rely on intermediaries to carry out this additional member communication, but they cannot compensate them for this action through a fee in addition to commission, unless it is specifically provided for in the policy, permitted by the regulations and agreed to by the client. 

“This puts a lot of pressure on the insurer. In an environment where profit margins are under threat and cost margins need to be managed to the letter, larger companies are competing with smaller firms who do not have the same cost pressures. They may actually be at an advantage when it comes to this type of communications because they can bear the cost of it easier,” said Jennings. 

What is the message and its result?

Insurers will, by default, be put in a very uncomfortable situation in the future whereby they will be both the product provider and educator/risk manager which is a role that was commonly undertaken by intermediaries. 

For many years, the insurance industry has said that it wants to move past a situation where clients get a glazed look in their eyes when someone talks to them about insurance because of a lack of understanding. 

This is perhaps one of the faults of the PPRs. Intermediaries are the best place when it comes to dealing with clients because they have a relationship with them. They will know how to communicate with clients in a way that they understand what a product is and how it functions. Jennings added that in future, insurers will need to find creative ways to get clients to engage with them in a meaningful manner. The industry has shown in the past that creative may be dangerous. 

Open to negotiation

Will the PPRs open the door for negotiation between insurers and policyholders in the future? 

Jennings pointed out that according to the new PPRs, when a client cancels a policy with an insurer, the existing insurer must notify the regulator of the cancelation at their soonest convenience. Further, the new insurer must inform the client of any material changes to the policy, and in order to reduce effort, the client will probably request and receive a policy from the new insurer that is (as far as possible) a carbon copy of the client’s existing policy. 

“This information needs to be supplied to the new insurer and may include costing and indications on how an insurer prices their risk. If this is the case, it could be seen as anti-competitive; many insurers will be reluctant to part with this particular piece of information,” said Jennings. 

A new question needs to be asked at this juncture: how far will insurers go to protect this information? Will we face a situation in the future where a client says to their insurer: you are charging me X to cover my risk and your competitor has said that they will charge me Y to cover this same risk. If you do not match it, I will move my policy. Insurers will then think of the possibility of divulging pricing information and consider capitulating to the client’s demands. 

“We are currently seeing this in the industry where insurers are facing similar threats from clients. No insurer likes policy lapses and most insurers will do whatever it takes to retain business. It is now a question of how far they are prepared to go,” said Jennings. 

Talk to the FSCA

In the defence of the FSCA, they are implementing regulatory reform with the aim of improving the financial services industry and empowering clients. 

To do this, the FSCA has changed the way that it engages with the industry. It does not want to rule with a big stick approach, it wants to consult with insurers, understand the risks that they face, and help them manage these risks. 

Writer’s Thoughts:
If the concerns regarding the above unintended consequences are valid, are they being raised with the FSCA? Nothing will be achieved by taking an I told you so approach.  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts editor@fanews.co.za.