INSURANCE LAWS AMENDMENT BILL

1
INSURANCE LAWS AMENDMENT BILL (2008)
BRIEFING TO THE PORTFOLIO COMMITTEE ON FINANCE
28 MAY 2008
2
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

3
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

4
PROCESS

• Bill submitted to Cabinet and approved in April
  2008
• Bill reviewed and certified by State Law Advisors
  in May 2008
• Bill published for public comment on 09 May 2008
• Bill introduced into Parliament in May 2008

5

• OVERVIEW OF PROPOSED
• AMENDMENTS

6
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

7
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
• Provision for a dispute resolution process
• (LTI clauses 1, 3, 23. STI clauses 27, 29, 52)

8
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
• (LTI clause 6. STI clause 32)

9
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
• 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)
• (LTI clause 7. STI clauses 33, 34, 35, 47, 48)

10
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
• (LTI clause 8. STI clause 36)

11
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
• (LTI clauses 11, 12, 13. STI clauses 39, 40,
  41, 42)

12
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
• (LTI clause 15, STI clause 44)

13
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 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

14
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 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
• (LTI clause 18, STI clause 46)

15

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

16
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 (Clause 16)

17
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)
• (Clause 19)

18

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

19
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.
• (Clause 54)

20
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 Regulation
• Katherine.Gibson_at_treasury.gov.za
• [phone]
• Financial Services Board
• Jonathan Dixon
• Deputy Executive Officer Insurance
• Jonathand_at_fsb.co.za