INSURANCE LAWS AMENDMENT BILL

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INSURANCE LAWS AMENDMENT BILL
BRIEFING TO THE SELECT COMMITTEE ON FINANCE 25
JUNE 2008
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STRUCTURE OF PRESENTATION

• Background
• Process
• Overview of main proposed amendments
• Approach in the presentation will be as follows
• 1. Issue for review
• 2. Brief summary of law governing the issue
• 3. Problems encountered / motivation for
  amendment
• 4. Outline of proposed amendment

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BACKGROUND

• Bill proposes amendments to Long-term Insurance
  Act No. 52 (LTIA) and Short-term Insurance Act
  No. 53 (STIA), both of 1998
• Proposed amendments are required to update
  legislation, to close regulatory gaps identified
  in existing statutes and to effect improvements
  to certain provisions
• Primary objective of Bill is to strengthen the
  legislative framework for a sound and
  well-regulated insurance industry and to promote
  financial stability in the interests of industry
  players and consumers

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• OVERVIEW OF PROPOSED
• AMENDMENTS

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SIGNIFICANT PROPOSED AMENDMENTS

• Amendments common to LTIA and STIA
• Demarcation between health insurance and medical
  schemes business
• Auditor expanded functions and alignment with
  other legislation
• Statutory actuary expanded reporting duties new
  provisions for short-term insurers
• Audit committee alignment with other legislation
• Maintenance of a financially sound condition,
  holding of assets and arrangements regarding
  liabilities
• Independent review report on a matter in
  statutory return by a person nominated by
  Registrar
• Binder agreements
• Amendments specific to LTIA
• With-profit business process for award of a
  bonus or similar benefit
• Assistance policy benefits
• Amendments specific to STIA
• Enabling provisions for planned future
  introduction of Financial Condition Reporting
  (FCR) Method of calculating of value of assets
  and liabilities in Schedule 2 calculation of
  Lloyd's security in Schedule 3

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DEMARCATION BETWEEN HEALTH INSURANCE AND MEDICAL
SCHEMES

• Brief summary of law governing the issue
• Definitions of health policy in LTIA and
  accident and health policy in STIA exclude
  contracts where policy benefits amount to doing
  the business of a medical scheme
• business of a medical scheme defined in Medical
  Schemes Act, but not cross-referenced in LTIA and
  STIA
• Problems encountered / motivation for amendment
• Confusion as to interpretation of definitions of
  health policy, accident and health policy and
  business of a medical scheme
• Has resulted in legal disputes re. certain
  product offerings of insurers
• Outline of proposed amendment
• Provisions to enable a policy process between MoF
  and MoH
• Regulations to demarcate types of policies
  excluded from definition of business of a
  medical scheme

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AUDITOR

• Brief summary of law governing the issue
• LTIA and STIA already regulate the appointment of
  auditors
• Problems encountered / motivation for amendment
• Auditing Profession Act, 2005 (Act No. 26 of
  2005) repealed the Public Accountants and
  Auditors Act, 1991 (Act No. 80 of 1991)
• Appointment of auditor should be aligned to
  requirements in Companies Act and also apply to
  insurers who are not incorporated
• Outline of proposed amendment
• Updated reference to Auditing Profession Act
• In addition to name of the firm, the name of the
  individual who undertakes the audit must be
  provided to the Registrar
• Limit on term of same individual serving as the
  auditor
• Appointment of auditor aligned to Companies Act
• Required reporting extended auditor must inform
  the Registrar of any matter which he/she became
  aware of in the performance of his/her functions
  as auditor and which, in the opinion of the
  auditor, may prejudice the insurers ability to
  comply with any section of the Act

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STATUTORY ACTUARY

• Brief summary of law governing the issue
• LTIA requires statutory actuary to report to the
  board any matter that may prejudice an insurers
  financial soundness but not entitled or
  required to attend meetings of the board
• STIA does not prescribe that a statutory actuary
  must be appointed
• Problems encountered / motivation for amendment
• Statutory actuary can play an important role in
  informing Registrar of problems at an insurer
  before it becomes financially unsound
• Must be adequately enabled to ensure that
  concerns are dealt with at board level
• Proposed introduction of FCR for short-term
  insurers will require actuarial skills in some
  circumstances
• Outline of proposed amendment
• Extending matters which the actuary must report
  on to the Registrar
• Requirements for the statutory actuary to attend
  and speak at board meetings on the business of
  the meeting which concerns the duties conferred
  on or assigned to him / her as statutory actuary
• Appointment (and removal) of statutory actuary by
  a short-term insurer under circumstances
  determined by the Registrar, either generally or
  in a particular case, for purposes of FCR
  (corresponding to existing requirements in the
  LTIA)

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AUDIT COMMITTEE

• Brief summary of law governing the issue
• LTIA and STIA currently provide for the
  composition and duties of the audit committee
• Problems encountered / motivation for amendment
• Provisions need to be updated in line with the
  Companies Act as amended by the Corporate Laws
  Amendment Act
• Insurers that are not incorporated under the
  Companies Act should meet the same governance
  requirements
• Outline of proposed amendment
• Audit committee requirements in LTIA and STIA
  amended to align with provisions of the Companies
  Act applicable to widely held companies

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MAINTENANCE OF A FINANCIALLY SOUND
CONDITION,HOLDING OF ASSETS AND ARRANGEMENTS
REGARDING LIABILITIES

• Brief summary of law governing the issue
• Section 29 of LTIA and section 28 of STIA
  regulate the maintenance of a financially sound
  condition.
• Problems encountered / motivation for amendment
• Insurers should value their assets on the basis
  of fair value determined in financial reporting
  standards, as introduced in the Companies Act.
• Requirement in STIA for a contingency reserve
  will not be applicable under FCR.
• Outline of proposed amendment
• Clarification of certain provisions with respect
  to valuation of assets, liabilities and capital
  adequacy requirement
• Require valuation in terms of fair value. If
  Registrar is satisfied that the value of an asset
  thus calculated does not reflect a proper value,
  the Registrar may require an independent
  valuation (consistent with existing powers)
• Removal of obligation on short-term insurers to
  hold a contingency reserve with the introduction
  of FCR

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INDEPENDENT REVIEW

• Brief summary of law governing the issue
• New provisions
• Problems encountered / motivation for amendment
• Statutory returns sometimes point to a matter
  that requires a closer look. The matter may be
  specialised and may need to be dealt with
  speedily
• A report by an expert would assist the Registrar
  in assessing the risk and to take further action
  if necessary
• The work of a statutory actuary may also require
  a peer review
• Outline of proposed amendment
• To empower Registrar to direct the insurer to
  furnish him/her with a report compiled by an
  expert nominated by the Registrar at the cost of
  the insurer on a matter forming part of the
  statutory returns

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BINDER AGREEMENTS

• Brief summary of law governing the issue
• LTIA does not contain provisions regarding binder
  agreements
• STIA provides for binder agreements - generally
  enabling a third party to make an agreement with
  a policyholder legally binding on the insurer, or
  until the completion of a formal contract by an
  insurer takes place
• Problems encountered / motivation for amendment
• The wording of provisions presents interpretation
  difficulties
• Agreements between insurers and the third party
  are not always concluded in writing
• The functions that the third party may perform
  and the powers of the person to do so are not
  sufficiently clear
• The third party may further delegate certain
  functions without the knowledge and permission of
  the insurer
• Certain of the services rendered as an
  intermediary and those rendered in terms of a
  binder agreement may be the same resulting in
  arbitrage of commission regulation
• Possible conflicts of interest emerge when
  services as an independent intermediary and
  services in terms of a binder agreement are
  rendered by the same person
• Risk that the insurer may not accept liability
  for the actions of the third party in terms of
  the binder agreement

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BINDER AGREEMENTS (continued)

• Outline of proposed amendment
• A written agreement is required, setting-out the
  functions and the powers of the third party. The
  functions can be any one or more of the
  following-
• to enter into, vary or renew, a policy on behalf
  of the insurer
• to determine the wording of a policy
• to charge premiums
• to determine the value of policy benefits
• to settle or pay claims.
• The person must disclose the name of the insurer
  to policyholders, keep and maintain proper books
  of account and other records and to give the
  insurer access thereto
• The person may not delegate, assign or
  sub-contract any of the functions
• Limitations on the form of remuneration for
  services to avoid conflicts of interest and
  maintain transparency
• Person rendering services in terms of a binder
  agreement may not also be an independent
  intermediary for the particular type of policy
  contemplated in the agreement
• Clear accountability and responsibilities, such
  that the insurer remains liable for compliance
  with the Act

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• PROPOSED AMENDMENTS SPECIFIC TO THE
• LONG-TERM INSURANCE ACT

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AWARD OF A BONUS OR SIMILAR BENEFIT

• Brief summary of law governing the issue
• The LTIA provides that an insurer may not award a
  bonus or similar benefit to a policyholder unless
  the statutory actuary is satisfied that it is
  actuarially sound and that a surplus is available
  for that purpose
• Problems encountered / motivation for amendment
• Bonuses are awarded at the insurers discretion
  and do not vest immediately the insurer may
  reduce the bonus at its discretion until such
  time that it vests
• The decision to award bonuses or to remove all or
  part of non-vested bonuses must be done in a
  proper and transparent manner
• Outline of proposed amendment
• To further regulate the award of a bonus or
  similar benefit to ensure fair and equitable
  treatment of policyholders
• Require the insurer to have in place principles
  and practices of financial management for
  purposes of awarding a bonus or similar benefit
  to a policyholder

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ASSISTANCE POLICY BENEFITS

• Brief summary of law governing the issue
• Currently either party to an assistance policy
  may request that a non-monetary benefit (a
  funeral) be instead provided as a sum of money
  equal in value to the cost that would have been
  incurred by the insurance provider had the
  funeral been provided
• Problems encountered / motivation for amendment
• Many policyholders who request a monetary benefit
  are provided with a sum of money far lower than
  the expected funeral cost
• Outline of proposed amendment
• Assistance policies must state upfront what the
  monetary equivalent of the non-monetary benefit
  will be (not exceeding the maximum amount in the
  definition of assistance policy)

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• PROPOSED AMENDMENTS SPECIFIC TO THE
• SHORT-TERM INSURANCE ACT

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FCR CHANGES TO METHOD OF CALCULATING VALUE OF
ASSETS AND LIABILITIES

• Brief summary of law governing the issue
• Schedule 2 of STIA regulates the method of
  calculation of the value of assets and
  liabilities. Liabilities consist of various
  reserves to cover possible future risks.
• Problems encountered / motivation for amendment
• The current measure of solvency based on a fixed
  percentage of net written premium, does not take
  into account either the size of the insurer, or
  the inherent risks underlying the types of
  business that it writes
• Outline of proposed amendment
• Enabling provisions for the planned future
  introduction of FCR
• FCR introduces a risk-based approach to solvency
  calculations. FCR is being developed in
  consultation with industry based on international
  developments but adjusted for SA circumstances.
• Both the value of the liabilities and the capital
  adequacy requirement can be calculated using
  either a prescribed rules-based method or by
  developing a partial or full internal model
  along the lines adopted by Basel II for banks
• Consequential changes are necessary to Schedule 3
  to enable the possible future introduction of FCR
  measures covering Lloyds underwriters.

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CONSULTATION

• Various meetings with and presentations to
  industry on principles
• 9 May 2008 Publication of Bill in the
  Government Gazette and on our website
• 28 May 2008 - National Treasury briefing to the
  committee (attached presentation)
• 30 May 2008 Public hearings on the Bill. The
  committee received 15 submissions to that point.
  As a result of concerns raised in the meeting
  that there was not sufficient consultation on the
  Bill, the chairperson instructed National
  Treasury to use the following week to consult and
  address outstanding issues
• 30 May 6 June 2008 various meetings with
  insurance and health industry, Council for
  Medical Schemes and Department of Health
• 6 June 2008 Report-back on hearings and on the
  consultation process
• 9 June 2008 - Tabled Bill and Matrix of Comments
  (with FSB / National Treasury responses to such
  comments) circulated to stakeholders and posted
  on the National Treasury website. Stakeholders
  are invited to provide further written comments
  on the wording of the ILAB
• 10 June 2008 Consultation with industry players
  on the proposed amendments
• 11 June 2008 - National Treasury circulates the
  amended version of the Tabled ILAB, with tracked
  changes, and invites further comment by
  stakeholders by 12 June
• 13 June 2008 Discussion of proposed amendments
  and finalisation / consideration of the Bill by
  the Committee

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AMENDMENTS EFFECTED BY PCOF A-BILL

• Binder agreements and health demarcation
• Technical amendments

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END OF PRESENTATION

• CONTACT DETAILS
• National Treasury
• Jo-Ann Ferreira
• Chief Director Legislation
• Jo-Ann.Ferreira_at_treasury.gov.za
• [phone]
• Katherine Gibson
• Director Financial Services
• Katherine.Gibson_at_treasury.gov.za
• [phone]