The regulation of South Africa’s insurance industry has been beefed up to protect you better, but the protection comes at a cost.
Among other things, insurance companies are now required to put policies and procedures in place to ensure your consistent fair treatment as a customer, to ensure appropriate products are sold to you, to refrain from misleading marketing, and to bolster their claims and complaints management systems.
The downside is that in spending more to comply with the increased regulation, your insurance company will probably have to up your premiums.
Amendments to the regulations under the Long- and Short-Term Insurance Acts, including significant changes to the Policyholder Protection Rules that apply to both long-term and short-term insurance services and products, were published in the Government Gazette on December 15.
At the beginning of last year, National Treasury published proposed amendments to the Policyholder Protection Rules, which are designed to protect you against unfair business practices by life companies and short-term insurers. These proposals were in line with Treasury’s broader initiatives to reform the financial services industry, which include:
- Treating Customers Fairly (TCF): a regulatory regime that 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 aims 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 to entrench TCF and Twin Peaks includes the Financial Sector Regulation Act, delineating the “Twin Peaks” structure, which was signed into law in August last year; the Insurance Bill and the planned Conduct of Financial Institutions Bill.
The amendments to the Policyholder Protection Rules were finalised towards the end of last year, once industry feedback had been taken into consideration. Many of the amendments were effective from January 1, but some that place more onerous requirements on insurance companies will be phased in over the next two years.
Below are some of the main points of the 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 is when 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 prohibits 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 consumer.
- 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.
- New rules regulating the management of claims and complaints, 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 under the Short-term Insurance Act governing the termination of policies. If your insurer cancels your policy, it must continue to cover you for the shorter of (a) 31 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. If the insurer is unable to receive proof, it must be able to show that (a) 31 days had passed since the notification was sent to your last known address and (b) it had taken all reasonable steps to ensure that your contact details were correct and to contact you.
Craig Woolley, the head of insurance at law firm Norton Rose Fulbright, says that although the intentions of the regulators are honourable, and although some of the requirements are overdue, on the whole the increased regulation will prove onerous for insurers and will drive up the cost of insurance. For example, your insurer will have to provide you with more detailed information in the processing of your claim, and this will entail having to employ more people.
He says the fact that these regulations now apply not only to individuals but to juristic entities whose annual turnover or asset value is less than R2 million - in other words, small businesses - will place an addition burden on insurers, who will now have to verify an entity’s turnover or asset value.
Woolley says many of the big insurance companies follow most of these “rules” anyway, and in a less regulated environment, those that didn’t act in the interests of their customers would suffer harm to their reputation. The costs of compliance are high, and the smaller companies will bear the brunt of the increased regulation, he says.
Woolley says changing weather patterns are causing global reinsurers (insurers of insurers) to increase what they charge local insurance companies. So, together with the increased cost of regulation, you, the consumer, may well be facing a double whammy in insurance premiums in the coming months.