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INSURANCE LAWS INSURANCE LAWS AMENDMENT BILLAMENDMENT BILL

BRIEFING TO THE SELECT COMMITTEE ON FINANCE BRIEFING TO THE SELECT COMMITTEE ON FINANCE 25 JUNE 200825 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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• 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

BACKGROUND

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OVERVIEW OF PROPOSED

AMENDMENTS

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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

SIGNIFICANT PROPOSED AMENDMENTS

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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”

DEMARCATION BETWEEN HEALTH INSURANCE AND MEDICAL SCHEMES

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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 insurer’s ability to comply with any section of the Act

AUDITOR

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Brief summary of law governing the issue• LTIA requires statutory actuary to report to the board any matter

that may prejudice an insurer’s 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)

STATUTORY ACTUARY

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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

AUDIT COMMITTEE

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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

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

REGARDING LIABILITIES

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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

INDEPENDENT REVIEW

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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

BINDER AGREEMENTS

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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

BINDER AGREEMENTS (continued)

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PROPOSED AMENDMENTS SPECIFIC

TO THE

LONG-TERM INSURANCE ACT

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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

AWARD OF A BONUS OR SIMILAR BENEFIT

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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”)

ASSISTANCE POLICY BENEFITS

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PROPOSED AMENDMENTS SPECIFIC

TO THE

SHORT-TERM INSURANCE ACT

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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 Lloyd’s underwriters.

FCR: CHANGES TO METHOD OF CALCULATING VALUE OF ASSETS AND LIABILITIES

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• 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

CONSULTATION

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• Binder agreements and health demarcation

• Technical amendments

AMENDMENTS EFFECTED BY PCOF: A-BILL

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CONTACT DETAILS:

National Treasury:

Jo-Ann FerreiraChief Director: LegislationJo-Ann.Ferreira@treasury.gov.za(012) 315 5263

Katherine GibsonDirector: Financial ServicesKatherine.Gibson@treasury.gov.za(012) 315 5061

END OF PRESENTATION