Martin Hesse, the Editor of Personal Finance.
Martin Hesse, the Editor of Personal Finance.
WORDS ON WEALTH

Among the raft of recently introduced or soon-to-be-introduced financial sector reforms aimed largely at greater protection for you, the consumer, are the amended Policyholder Protection Rules (PPRs) under the Long Term Insurance Act. 

While the PPRs, for both long-term and short-term insurance, have been in place since 2004, the recent regulatory overhaul, in line with the Financial Sector Conduct Authority’s Treating Customers Fairly (TCF) approach, has seen them being amended accordingly.

Subject to certain transitional arrangements, the amended PPRs took effect on October 1 last year. Requirements for insurance companies include the disclosure of costs, stricter marketing practices, clearer communication with policyholders, adherence to the TCF principles, the removal of post-sales barriers to changing policies, making claims or lodging complaints, and tighter oversight of intermediaries.

While the amendments may be onerous for providers of retail life cover for individuals, they present substantial practical challenges for insurers providing group risk cover as part of an employee benefits package.

Traditionally, risk cover for a group, such as the members of a retirement fund, has differed from individual cover in that the employer or pension fund is the policyholder, and all employees covered by the scheme enjoy equitable benefits and pay more or less the same rates.

In determining the cost of cover, the insurer takes into account the risks posed by the group as a whole, although the risks posed by members, which might range from blue-collar factory workers to office-bound executives, may differ widely.

Individual cover, on the other hand, is a one-on-one contract, in most cases, between you and your insurer, whereby your premium is based on the specific risks you pose to the insurer, such as you smoking or doing deep-sea diving.

In a recent presentation to journalists, Michele Jennings, the chief executive of Sanlam Group Risk, outlined the challenges faced by group risk cover providers in complying with the amended PPRs. She warned that employers, retirement fund trustees and fund administrators may not fully grasp how they, too, will be affected, as will brokers, the members themselves and their beneficiaries.

The additional measures required to ensure compliance are likely to push up the costs of cover, she said.

Furthermore, all responsibility for compliance lies with the insurer, even though in group schemes various functions are outsourced to, for example, the fund administrator and the broker.

A major change is the new definition of “policyholder” in a group scheme. Previously, the employer or retirement fund was the policyholder, but it now includes the members themselves, Jennings said. This has huge implications for insurers, for they now have to communicate with members directly - essentially giving each one of them the same amount of information that the holder of a retail policy would receive - before entering into a policy, during the policy contract, and on termination of the policy.

Where this is impractical for the insurer and the function is outsourced, the PPRs require that insurers must make sure such communication occurs, and monitor compliance.

Jennings said members will need to know a lot more about what they are covered for, including terms and conditions, exclusions, costs and premiums, claims procedures, and channels for complaints.

They will also need to be informed when their employer or pension fund changes insurers. When a policy is replaced, the new insurer must inform members of all the differences between the old and new cover.

She said the amended PPRs require that insurers must maintain comprehensive, up-to-date databases of members of group risk schemes, with their names, identity numbers and contact details. This is easier said than done - Sanlam Group Risk, for instance, services a large number of small businesses, and in many of these staff turnover is high.

Insurers must also ensure that claims are managed appropriately, and that there is direct communication with the individual member. The member must be informed of a claim payout within 10 days of submitting the claim, and must be given full reasons if the claim is repudiated. Insurers must keep records of all claims (valid or not) and maintain claims data.

The consequences of these amendments remain to be seen. Will there be a greater reluctance on the part of employers and pension funds to switch insurers? Will they hasten the migration of employers to umbrella funds, which are structured to enable such one-on-one communication with members? Will insurers converge in offering a more standardised form of group cover, or diverge in making products incomparable?

It is my view that, while the intentions of the amended PPRs are honourable, perhaps the regulators could have given more thought to their practical implementation, especially in the group risk space. There will certainly be benefits for you, the member, but you may also be bombarded with information that you don’t really need. And ultimately, it will cost you more.

PERSONAL FINANCE