ASSISTANCE BUSINESS IN THE RSA

1
ASSISTANCE BUSINESS IN THE RSA

• PRESENTATION
• to
• PCOF
• on
• 8 Augustus 2003
• by
• A Swanepoel

2
ASSISTANCE BUSINESS IN THE RSA

• Background
• Who are the stakeholders?
• Characteristics of the market
• Problem areas and risks
• The way forward?
• Questions

3
ASSISTANCE BUSINESS IN THE RSA

• Background
• Cultural issue of importance
• Provide for funeral plus ancillary services
• Honesty, trust, caring and social responsibility
  important in burial societies
• Very often the first step into financial services
• Contributors are mostly from non-white sector

4
ASSISTANCE BUSINESS IN THE RSA

• Principles to take into consideration
• Is this a market that needs more than the normal
  protection?
• Market conduct rules and supervision the main
  issue
• There are prudential issues with small insurers
• Cost-benefit of supervision?
• Non-systemic

5
ASSISTANCE BUSINESS IN THE RSA

• Who are the stakeholders?

6
ASSISTANCE BUSINESS IN THE RSA

• Structure of market

7
ASSISTANCE BUSINESS IN THE RSA

• Distribution channels

8
ASSISTANCE BUSINESS IN THE RSA

• Long-term insurers
• 37 insurers registered for assistance business
• 32 limited to R10 000
• 5 limited to 5000/3000/2000/1000(2)
• Total premiums R690 million (plus extra?)
• That is 0,5 of total premium income of life
  insurers

9
ASSISTANCE BUSINESS IN THE RSA

• Total contributions R??? (my estimate R2,5
  billion based on 55/15 relationship) plus the
  extra volume
• Friendly societies
• Total contributions R32 mil (for all types of
  benefits)
• Total benefits funeral R14m, death R4m

10
ASSISTANCE BUSINESS IN THE RSA

• Burial societies
• Approx. 100 000 primary burial societies
• Covering 3 million members
• Between 10 to 200 members per society, mostly
  women
• Contributions estimated at R2 billion

11
ASSISTANCE BUSINESS IN THE RSA

• Characteristics of the market
• Buyers are unsophisticated in general
• Market is in the hands of the administrators and
  the intermediaries
• Very often a long food chain /fat in
  distribution channel
• No commission limitations on (assistance)
  insurance policies

12
ASSISTANCE BUSINESS IN THE RSA

• Mostly done via group schemes/typical no
  underwriting/only risk, no savings element
• Only two types of institutions who can
  legitimately underwrite namely insurers and
  friendly societies (burial societies)
• Demarcation between burial societies and friendly
  societies grey
• Death benefits normally paid within 48 hours
• Benefits often paid in kind but option to receive
  cash remains (sec 53)
• Not all cover sold under the banner of assistance
  business

13
ASSISTANCE BUSINESS IN THE RSA

• Problem areas and risks
• Lack of knowledge of products and financial
  disciplines
• Excessive commission paid
• Often no security that benefits will be paid
• Policies cancelled after long periods of
  contributions

14
ASSISTANCE BUSINESS IN THE RSA

• Policyholders not in contact with
  underwriter/long food chain
• On-off underwriting/difficult to trace schemes on
  cancellation
• Illegal operators
• (Fraud/disappear/no contractual rights/weak
  enforcement
• Policyholder misled regarding status of operator
• Cash flow underwriting until problems arise
• Only portion of premiums paid to underwriter
• VAT and other tax evasions
• Double underwriting

15
ASSISTANCE BUSINESS IN THE RSA

• Integrity of many intermediaries problematic
• Do not pay premiums to next level or
  administrator/underwriter
• Do not pay claims to beneficiaries or withhold
  portion
• Little knowledge of legalities involved
• Overselling, too may policies taken out
• Undertakers enforce contractual agreement that
  they only may conduct funeral
• Exploitation regarding costs of coffins and
  services

16
ASSISTANCE BUSINESS IN THE RSA

• Fraudulent and excessive claims
• Organisational, record keeping and accounting
  problems
• Difficult for small insurers to comply with Act
• Weak enforcement system in Courts/3xfines of R600
• Lack of compliance with PPR and other sections of
  the Insurance Act

17
ASSISTANCE BUSINESS IN THE RSA

• Developments thus far
• LOAs Assistance Business Standing Committee
• FSBs Working Group on assistance business
• Study on Burial Societies (Thomson and Posel)
• National Cooperative Association of South Africa
  and the National Committee on Burial Societies
• FSBs consumer education campaign (still much to
  do)
• FAIS Act
• There is a general agreement and a will to do
  something now

18
ASSISTANCE BUSINESS IN THE RSA

• The way forward

AREA POSSIBLE ACTIONS
A.Formal market insurers 1.FAIS Act will bring conduct of Administrators in line 2.Intermediaries/funeral parlours will be brought into the FAIS net 3.More controlled movement of schemes 4.Disciplinary actions/removal from industry 5.Better disclosure now obligatory 6.Stricter enforcement of Ins. Act
19
ASSISTANCE BUSINESS IN THE RSA

• The way forward

AREA POSSIBLE ACTIONS
B.Semi-formal market friendly and burial societies 1.Self-regulation (stokvel approach)for small mutuals 2.Revise FS Act and enforcement 3.Education on rights and responsibilities
20
ASSISTANCE BUSINESS IN THE RSA

• The way forward

AREA POSSIBLE ACTIONS
C. Illegal operators 1.Education, education, education 2.Name and shame 3.Quick and cost-effective enforcement with penalties 4.Rather bring them into the net than penalise them
21
ASSISTANCE BUSINESS IN THE RSA

• Further work
• More research necessary
• Making group schemes more permanent (cost vs
  security)
• Beef up enforcement and penalties
• FIC Amendment Bill/Enforcement Committee
• Consumer education
• Central funeral fund(s), underwritten by
  insurers, cut out high cost of distribution?
• Credit Life much the same problems
• Enhance effectiveness of dispute resolution
  mechanisms