You, as a consumer of long-term and short-term insurance, will be better protected later this year through beefed-up regulations governing the insurance industry. But you may have to pay more in premiums if the industry has to spend more on compliance.

In line with its broader reforms of the financial services industry, National Treasury recently published proposed amendments to the Policyholder Protection Rules, as they are known. These form part of the regulatory system under the Long-term and Short-term Insurance Acts and are designed to protect you against unfair business practices by life companies and short-term insurers. The proposed amendments to these rules, which have been released for public comment and are due to be promulgated in their final form in May, will provide better protection for you in the context of the government’s broader reform initiatives.

These initiatives are:

• Treating Customers Fairly (TCF): a regulatory regime in terms of which the spirit rather than the letter of the law ensures your fair treatment as a consumer. A major upshot of TCF has been the Retail Distribution Review by the Financial Services Board (FSB), which is looking at improving the ways in which financial products are marketed and sold to you.

• Twin Peaks: a reshaping of the regulatory bodies governing financial services into two broad structures. One (the prudential authority) will oversee the financial stability of institutions such as banks, asset managers and insurance companies; the other (the market conduct authority, similar to the current FSB) will regulate their business conduct.

Major legislation is in the pipeline to entrench TCF and Twin Peaks. It includes the Financial Sector Regulation Bill, the Insurance Bill and the planned Conduct of Financial Institutions Bill.

The proposed amendments to the Policyholder Protection Rules, however, have been made within the existing regulatory framework. A second tranche of amendments will follow the enactment of the Insurance Bill.

Key changes

Below are some of the main points of the proposed amendments as published, which will apply to new and existing policies under the Long Term and Short Term Insurance Acts:

• A new rule requiring that insurers have policies and procedures in place to ensure consistent delivery of TCF outcomes.

• A new rule to ensure that retail products and services are designed to meet the needs of identified policyholder groups and are targeted accordingly, so that products are not sold to people who don’t need them.

• A new rule that prohibits “negative-option” selection of policy terms and conditions. Negative-option selection means that a term or condition of which you may not be aware applies unless you specifically select an alternative term or condition.

• A new rule that compels an insurer to charge fair premiums by balancing its interests with those of consumers, and prohibit fees over and above the premium.

• New rules regulating the advertising and marketing of insurance to ensure, among other things, that advertisements are not misleading, direct marketing is not too intrusive on your privacy, and communication is in simple language that is easily understood by the lay-person.

• A new rule requiring insurers continually to monitor a pro­duct line after the product’s launch to ensure it meets your needs and delivers a fair deal for you, the consumer.

• New rules regulating the management of complaints by insurers, requiring, among other things, that proper complaints procedures are in place.

• A new rule governing credit life and consumer credit insurance whereby the sale of such products must comply with any credit insurance regulations made by the Minister of Trade and Industry.

• A new rule that requires the written consent of a person, or the person’s legal guardian, before his or her life can be insured. According to the FSB, this will prevent anyone from insuring another person’s life with malicious intentions.

 • A new rule under the Short-term Insurance Act governing the termination of policies. In terms of the rule, if your insurer cancels your policy, it must continue to cover you for the shorter of (a) 30 days after receiving proof that you are aware of the cancellation or (b) the period until the date on which the insurer receives proof that you have secured other cover.

Regulatory overkill?

Patrick Bracher, a director of law firm Norton Rose Fulbright who specialises in finance and insurance law, says although TCF is a good thing and some of the proposed amendments, such as the one banning negative-option selection, are overdue, the amendments are, generally, out of proportion to what is needed. Many of them may, from a purely practical view, be difficult to implement and enforce, he says. This may ultimately push up your premiums, because insurers will have to spend more on compliance. It’s very likely, he says, that the insurance industry will object to some of the proposed amendments or request that they are clarified further when it provides comment to the FSB.

For example, it may not be practical for insurers to obtain people’s consent to cover their lives under funeral, travel and accident policies if the policies are taken out by family members. Another impractical requirement is policyholders having to furnish proof that they have received notification of termination. Does it mean, Bracher asks, that if the policyholder does not open the envelope, he or she will continue to  be covered?

Bracher says many of the requirements are too vague to comply with in any real sense, yet insurers will be subject to penalties for non-compliance. For example, who decides whether  an insurance company has balanced its interests and those of its policyholders when determining premiums, and how can the FSB enforce this through criminal sanctions? And it’s all very well to insist on simple language in policy terms and conditions, but some policies, particularly business policies (the Policyholder Protection Rules will now also apply to the insurance of small businesses, not just individuals) are, of necessity, relatively complicated. Bracher says that, in comparison with countries such as the United Kingdom, there have been similar moves to fairer outcomes for consumers, but the accompanying regulations have been clearer and more direct.

• Public comments on the proposed rule amendments may be submitted in writing on or before February 22 to the FSB, care of Jo-Ann Ferreira at [email protected].