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Microinsurance readiness assessment

OAC Burial Society

Final report

Authors: Nigel Bowman and Christine Hougaard

Date: 11 July 2012

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Table of Contents

1. Introduction .............................................................................................................................. 3

2. The Old Apostolic Church ........................................................................................................... 3

3. The OAC Burial Society............................................................................................................... 4

4. Compliance strategies ................................................................................................................ 5

4.1. Microinsurance license and transformation to a co-operative ................................................ 5

4.2. Fully underwritten ................................................................................................................. 8

4.3. Multiple co-operatives ........................................................................................................... 9

5. Modelling the financial impact ................................................................................................... 9

5.1. OAC Burial Society membership ........................................................................................... 10

5.2. Contribution rates ................................................................................................................ 10

5.3. Operating expenses ............................................................................................................. 11

5.4. Benefits paid ........................................................................................................................ 12

5.5. Reserves and surplus ........................................................................................................... 13

5.6. Capital requirements ........................................................................................................... 15

6. Policy lessons for microinsurance framework........................................................................... 18

7. Appendix 1: Impact assessment ............................................................................................... 21

8. Appendix 2: FAIS registration requirements ............................................................................. 72

9. Appendix 3: Expected financial position under each compliance strategy ................................ 74

9.1. Base scenario ....................................................................................................................... 74

9.2. Alternative 1: microinsurance license ................................................................................... 75

9.3. Alternative 2: fully underwritten .......................................................................................... 76

9.4. Alternative 3: multiple co-operatives ................................................................................... 77

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1. Introduction

On 28 July 2011, the South African National Treasury published a Policy Document1 outlining

detailed proposals for a microinsurance regulatory framework for South Africa. It will form the basis

for draft legislation, which is intended for 2012, for tabling to parliament in 2013. Implementation is

likely to follow in 2013/14. The proposals in the Policy Document provide a detailed overview of the

direction that microinsurance legislation is likely to take, though the exact requirements are not yet

cast in stone.

The Policy Document follows from an earlier Discussion Document on the Future of Microinsurance

Regulation published in 2008. In developing the final Policy Document, National Treasury consulted

widely with various stakeholders and a number of stakeholders, including The Old Apostolic Church

and the OAC Burial Society, made formal submissions on the 2008 Discussion Document.

As part of its ongoing support to microinsurance development in South Africa, FinMark Trust has

funded this “microinsurance readiness assessment” on the OAC Burial Society as a potential

candidate for the new microinsurance licence proposed in the 2011 Policy Document. This

assessment is intended to inform both the OAC Burial Society’s compliance strategy as well as the

finalisation of the regulation.

Section 2 of this document briefly introduces the Old Apostolic Church itself, while section 3

introduces the OAC Burial Society. Section 4 outlines three alternative strategies for complying with

the proposed microinsurance regulation and summarises the main impacts of each strategy. A more

detailed line-by-line analysis of the potential impacts under each strategy is provided in Appendix 1.

In section 5 we provide estimates of the financial impact of each alternative compliance strategy by

considering various key financial components of the OAC Burial Society over a 5-year period such as

contribution rates, operating expenses, benefits paid and accumulated surplus. Appendix 3 provides

more detail relating to the expected financial position of the OAC Burial Society under each

alternative strategy including key business ratios and indicators.

Finally section 6 considers the potential policy lessons that emerge from this readiness assessment.

2. The Old Apostolic Church

The Old Apostolic Church is a Christian community that has its roots in Germany, but is now centred

in South Africa. It is estimated to have around 2 million members in Africa and 30 000 in Europe.

Congregations can be found in South Africa, Swaziland, Namibia, Zimbabwe, Mozambique,

Botswana, Zambia, Malawi, USA, Canada, British Isles, Netherlands, Belgium, Australia, New Zealand

and the United Arab Emirates.

The OAC has a strong hierarchical organisational structure. The highest decision-making body of the

OAC is the Conference of Apostles, comprising all Apostles from across the world. The Conference of

Apostles meets annually with all actions and decisions being guided by the OAC’s constitution. The

Church in South Africa is managed by the Apostolate, consisting of all South African Apostles. The

1 The Policy Document, titled “The South African Microinsurance Regulatory Framework” can be found at

http://www.treasury.gov.za/publications/other/MicroinsuranceRegulatoryFramework/default.aspx . We have

not included an overview of its contents in this report.

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South African church province is divided into six districts for administrative purposes: Free State,

Gauteng, Northern District, Western Cape, Eastern Cape and KwaZulu-Natal. Each district is

managed by a Forum of Apostles, consisting of all Apostles from that district. Each district is further

split into smaller geographic areas for administrative purposes, known as Overseerships. Three

church officials are jointly responsible for an Overseership: an Overseer, who is responsible for the

administration within the Overseership, an Evangelist and a Prophet. Each Overseership is made up

of Elderships (generally groupings of suburbs), with each Eldership usually having three or four

Congregations under its control.

3. The OAC Burial Society

The OAC Burial Society was formed in 1977 with the purpose of providing a dignified funeral service

to those OAC members who could not afford such a service. It currently has approximately 70,000

principal members and about 240,000 members in total. Membership of the Burial Society is

voluntary, but restricted to sealed OAC members only.

Family funeral benefits up to R7,500 for a monthly contribution of R22.00. The Burial Society is

incorporated as a friendly society, with a Central Society and six Affiliated Societies, one for each

district. Each of the Central and Affiliated Societies are separate legal entities, with each registered

as a Friendly Society. The Burial Society Rules make provision for profits in one Affiliated Society to

be transferred to another Affiliated Society in the event of it making a loss (Rule 21). According to

the schedule of benefits contained in the Rules of the Burial Society, members are entitled to a

funeral service on death that consists of a specified set of services, the cost of which may not exceed

R7,500 per funeral, of which R5,250 is towards funeral expenses (including removal of the body,

preparation of legal documentation, all arrangements related to the funeral, the preparation of the

mortal remains, the use of a private room for viewing of the body, transport of the body to the

church and cemetery/crematorium, a hearse, the service of a trained funeral official and attendants

and the preparation of the grave, including provision of artificial mats, etc). In addition, up to R2,250

is allocated towards grave/cremation fees, transport costs and the publication of a notice of death in

a newspaper. Services are provided exclusively by undertakers under contract with or as appointed

by the executive committee of the Burial Society and no option of a cash payout is provided. The

OAC negotiates a service package on behalf of members at a price that is usually substantially below

the market price charged by undertakers. Any costs over and above that covered by the Burial

Society benefit are for the member or their family’s own account. The current contribution rate is

R22.00 per month per principal member, irrespective of the number of eligible dependants who are

also covered on the policy.

The Burial Society has strong governance and financial controls in place. Governance of each

Affiliated Society is exercised via an executive committee, consisting of a minimum of four members

who are all appointed by the Forum of Apostles of the district in which the Affiliate society operates.

The chairman of each Affiliate society executive committee, who is assigned by the Apostolate,

serves on the board of management of the central society. The central society board of management

includes an additional independent member who is also appointed by the Apostolate and serves as

the chairman of the board. The Burial Society has a total staff complement of 20 to 25, with a

significant amount of the work performed on a voluntary basis without remuneration by church

members. Financial statements are audited on an annual basis and submitted to the FSB. There have

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been no recent qualified audit reports. An actuarial valuation is performed every five years, as

required by the Friendly Societies Act, or more regularly if benefits or contributions are changed.

The Burial Society’s operations are controlled by the Burial Society Rules, which cover the executive

structures, appointment of the executive members, their powers and regular meetings; the

appointment of an actuary and an auditor; a fidelity guarantee protecting the Burial Society against

losses due to dishonesty or fraud; the creation of separate bank accounts, how funds may be

invested and the maintenance of appropriate accounting systems; membership requirements and

rights; contribution rates and payment rules; financial management, particularly in the event an

Affiliated Society incurs a loss, and 5-yearly actuarial investigations; claims and claim procedures;

dispute resolution; rule amendments; arrangements for dissolution; annual and special general

meeting arrangements; and a schedule of the benefits provided.

The Burial Society is a large, financially sound operation. It is active in 2,068 congregations across the

country. According to the 2010 financial statements, contributions were R15.3m, expenses were

restricted to 22.1% of contributions and the operating surplus was R4.2m. Recent claims ratios vary

between 72% and 81%, which implies good value to members. Any surplus arising is accumulated

within the Burial Society. The accumulated surplus at the end of 2010 was R48.4m, which is 4.4

times the benefits paid during 2010. The Burial Society is financially very sound.

4. Compliance strategies

The Policy Document proposes that the existing exemption from registration as a long-term insurer

for Friendly Societies underwriting assistance business2, under which the Burial Society operates, be

removed and that the friendly society institutional form falls away in favour of the co-operatives

framework. This will have major implications on both the Burial Society’s institutional form and on

the licensing requirements in order for the Burial Society to continue offering funeral benefits to its

members. This report considers three alternative strategies for compliance with the proposed

microinsurance regulatory framework, namely acquiring a microinsurance licence, obtaining

underwriting from a licensed insurer or splitting up into smaller co-operatives. Each strategy is

assessed in detail against the proposals contained in the Policy Document with the results shown in

Appendix 1. This section provides a summary of each compliance strategy and its main implications

for the Burial Society.

4.1. Microinsurance license and transformation to a co-operative

The Policy Document holds that either companies or co-operatives may obtain a microinsurance

licence and sets various prudential and market conduct requirements for microinsurance licence

holders. Under this compliance strategy each Affiliated Society therefore converts to a primary co-

operative with the Central Society converting to a secondary co-operative and the secondary co-

operative applies for registration as a microinsurer, as envisaged under the proposed

microinsurance regulatory framework. That means that, in addition to the provisions of the

2 This exemption is contained in section 7(2)(b) of the Long-term Insurance Act, 52 of 1998, provided the

benefits do not exceed a prescribed maximum amount, currently set at R7,500. In return, friendly societies

need only perform an actuarial valuation every five years and submit annual audited returns to the registrar.

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forthcoming microinsurance legislation, the Burial Society will be subject to the Co-operatives Act,

14 of 2005.

Under this compliance strategy, there are two groups of impacts: (i) that of converting to a co-

operative; and (ii) that of obtaining a microinsurance licence. We summarise the salient impacts in

this section. More details and additional areas of impact are explored in Appendix 1.

Converting to a co-operative

At first glance, there are many similarities between co-operatives and friendly societies (as regulated

under the Friendly Societies Act of 1956): both sets of legislation require a member-owned

organisational structure where members may vote at an annual general meeting. Whereas friendly

societies operate by rules, all co-operatives are required to have a constitution. The two documents

serve a similar purpose. Nevertheless, conversion to a co-operative will have a number of

implications for the Burial Society:

Member elected board of management. The current practice is for board members to be appointed

by the Apostolate (for the Central Society board) or the district Forum of Apostles (for the Affiliated

Societies’ executive committees). This practice is in conflict with the Co-operatives Act, which

requires board members to be elected by members of the co-operative. This impact is common

across all three alternative compliance strategies (if the friendly society form falls away, all three

compliance strategies will entail conversion to a co-operative). A potential solution could have the

Apostolate propose the board, with voting by members to elect the board.

Amendment of constitution by special resolution. The Co-operatives Act requires that constitutional

amendments be made only by special resolution at the AGM or extraordinary general meetings. This

is likely to have a significant operational impact for the Burial Society since the board of

management of the Central Society may alter or rescind any rule or make any additional rule,

provided that any change that affects the contribution rate or benefits shall be supported by a

report by the actuary. Any Rule changes must also be approved by the Apostolate as the final

decision-making body. The requirement of the Co-operatives Act is regarded by the Burial Society as

a deviation from the church’s principle that all rules pertaining to members of the church (including

the Burial Society) will be scrutinized by the Apostolate and if not acceptable, it will not be accepted.

This impact is common across all three alternative compliance strategies.

Tax impacts likely to be small. There are a number of potential tax impacts resulting from the

required change in institutional form, none of which are expected to be significant. The Policy

Document proposes that transition arrangements be put in place to limit the tax liability when

changing institutional form, which we trust will happen in practice. The on-going corporations tax

liability is expected to be small because the non-profit motive of the Burial Society is likely to ensure

that any surplus arising will be small. The situation with respect to VAT will not change unless the

proposal that life microinsurance business is exempt is reversed.

Obtaining a microinsurance licence

Microinsurance reserving and capital requirements easily met. The Policy Document proposes that

microinsurers must hold a minimum amount in reserves to cover policy liabilities and an additional

amount of capital to cover adverse experience. The results of the financial model (see Section 5 for

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more details) show that both the reserving and capital requirements will easily be covered by the

accumulated surplus of the Burial Society. The microinsurance framework will restrict investments to

short-term, liquid assets. This requirement will not impact the Burial Society since it already

complies.

Opportunity to increase funeral cover or offer additional types of cover. Current legislation has

restricted the Burial Society to offering funeral benefits only, and subject to a cap of R7,500. The

proposed microinsurance regulation increases the cap to R50,000 (for death events) which provides

the opportunity to increase funeral cover if the need arises. It also provides the opportunity to the

Burial Society to consider introducing other types of cover if there is a need amongst its members

(e.g. life cover not linked to funeral expenses only, hospitalisation cover such as hospital cash

benefits or various short-term insurance types of cover).

On the flip side, the Burial Society is concerned that increased benefit limits can open the door to

funeral service providers to increase their prices as experienced when the Friendly Society limit was

increased from R5,000 to R7,500.

Longer grace periods have a substantial impact on benefits paid. The Policy Document proposes that

grace periods be extended up to 6 months depending on how long a policy has been in-force. In

practice, this will increase the number of members qualifying for cover by approximately 10% (those

members that currently have between 3 and 6 premiums outstanding and have been members of

the Burial Society long enough to qualify) which will, in turn, increase benefits paid by approximately

10% or roughly R1.5m per year. It is important to note that this increase in benefits paid is actually a

benefit improvement to members and not just a cost to the Burial Society.

FAIS compliance costs are significant. The FAIS Act requires anyone that provides advice or

intermediary services, as defined in the FAIS Act, to be registered as a financial services provider and

comply with the provisions of the FAIS framework. The Burial Society is of the opinion that the FAIS

Act does not apply to them and has therefore not registered. Consultation with the regulator and

industry experts has led us to believe that the Burial Society’s opinion is incorrect and it should in

fact be registered3. FAIS registration will have far reaching impacts and be particularly costly. By far

the largest element of cost will be the compliance officer function. It is estimated that it will cost

roughly R5m per annum to outsource the function4 (at an “impossibly low” rate, to quote a service

provider consulted). Alternatively, to perform the compliance function internally is expected to cost

between R3m and R4m per annum5, but this requires suitably qualified candidates to be either

identified within the Burial Society or, more likely, appointed. The main driver behind the high cost is

the fact that all branches (congregations in the Burial Society’s case) need to be visited at least

3 It is important to note that the view expressed in this report that the Burial Society should be registered

under the FAIS Act is not based on a formal legal opinion and that the Burial Society disagrees with this view. 4 Based on an assumed cost of R200 per month per congregation where the Burial Society is active (2,068)

quoted by a provider of outsourced compliance officer services. 5 Assuming four compliance officers will be appointed, implying each compliance officer will visit 500

congregations each year, at an annual salary of R500,000 per compliance officer. Travel costs are assumed to

add between 50% and 100% of the direct salary costs. These assumptions are based on discussions with

professional compliance officer service providers who suggested that an in-house compliance function would

be more cost effective that to outsource it.

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annually, of which there are 2,068 spread across the country, some in remote areas. It is the high

number of congregations and their geographic spread that gives rise to the high cost.

The annual FAIS ombud fee and levies for key individuals and representatives also represent

significant costs of approximately R500,000 and R550,000 per annum respectively. These two costs

are directly linked to the number of key individuals and representatives. We conservatively expect

roughly 2,000 key individuals and representatives will need to be registered (one representative for

each congregation). This number could well be substantially higher (over 6,000) if all church officials

that have a member facing role for the Burial Society are considered representatives. Total FAIS

related costs are expected to almost double the current total operating expenses from R5m to R10m

per year. The fit and proper requirements under the proposed market conduct regulation are

unlikely to prove difficult to meet. However, it is important to note that this observation is based on

the assumption that the microinsurance fit and proper requirements will be as for sub-category 1.1

Long-term Category A (assistance business) since these requirements have not yet been determined.

The FAIS related costs will be increased further if the microinsurance fit and proper requirements

are more onerous.

As a final point on FAIS, it is important to note that it is not the proposed microinsurance regulatory

regime that will cause the increased cost. There seems to be consensus that the Burial Society

should already be complying with the requirements of the FAIS Act. All the above FAIS impacts are

therefore equally applicable to the “fully underwritten” alternative below.

4.2. Fully underwritten

Under this compliance strategy the funeral services provided by the Burial Society are fully

underwritten by a registered insurer (or microinsurer) with the Burial Society not taking on any of

the insurance risk. The OAC Burial Society will pay an insurance premium to the registered insurer

who will in turn be responsible for paying all valid death claims. We have assumed the insurance

premium payable is equal to expected claims plus a margin to cover the insurer’s expenses and

profit. The total margin is assumed to be 15%. The Burial Society is assumed to continue performing

all the current administrative functions, incurring the same level of costs as in the past.

The Policy Document proposes that the Friendly Societies Act be phased out with existing Friendly

Societies converting to co-operatives. Thus, as for the previous strategy, each Affiliated Society

converts to a primary co-operative with the Central Society converting to a secondary co-operative.

Likewise, all of the FAIS-related impacts will also apply.

The underwriter’s expense and profit margins will increase costs. The risk of providing funeral cover

under this compliance strategy is carried by the underwriter and the cost of benefits paid by the

Burial Society will be replaced by insurance premiums paid to the underwriter. The insurance

premium should be set relative to the past claims history, with additional margins added to cover

the underwriter’s expenses and to contribute to profit. The level of margin added will be determined

by negotiation with the underwriter, but 15% seems reasonable. This translates into a substantial

increase in cost in excess of R2m per year. The cost of the Burial Society applying for its own

microinsurance license will be substantially lower, which means that alternative 1 is a more

attractive option unless the Burial Society is able to negotiate substantially lower margins from

the underwriter. Note that the Burial Society is expected to continue playing an unchanged role in

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signing up members and collecting contributions under this alternative compliance strategy. No

change is therefore expected to the FAIS compliance costs.

4.3. Multiple co-operatives

The Policy Document proposes that any organisation that guarantees benefits to its members or that

exceeds the membership threshold (the proposed threshold is 2,500 members) must either obtain a

microinsurance license or be fully underwritten by an existing registered insurer. The third

compliance strategy is for the Burial Society to break up into a number of small co-operatives, each

with membership below the 2,500 membership threshold. In addition, each co-operative may not

guarantee the funeral services it provides to its members. There will then be no need to obtain a

microinsurance license or be underwritten by an existing insurer if both of these conditions are met.

Note that this alternative is a theoretical option and should not be considered in practice, since it is

in effect circumventing the intention behind the proposed microinsurance regulation. We have

included it in the readiness assessment as a means of gauging the attraction (or not) of the intended

compliance routes. That is, if this alternative turns out to be the most attractive of the three

alternatives assessed, then the proposed microinsurance regulation is unlikely to achieve its

objectives.

Affiliated Societies to split into 28 co-operatives. The 6 Affiliated Societies are required to split into at

least 28 individual co-operatives in order to ensure the proposed member threshold of 2,500 is not

exceeded (above which the organisation will be regarded as a formal microinsurance player). The

split will have major administrative implications, probably rendering this alternative impractical. For

example, each co-operative is required to have its own registered office and its own bank account,

major reorganisation will be required to split the membership, the accumulated surplus will need to

be split appropriately between the co-operatives, the registration process will be duplicated multiple

times, risks cannot be shared across societies, etc.

Multiple co-operatives increase audit costs. All 29 co-operatives (28 primary and one secondary)

must prepare audited annual financial statements for submission to the CIPC. The additional audit

costs will substantially increase operating expenses by approximately 10%.

As no guaranteed benefits will be provided under this scenario, there will technically be no

intermediary services as defined under the FAIS framework. Therefore, the FAIS Act will not be

applicable and none of the FAIS-related compliance costs will be incurred, saving approximately R5m

per annum.

5. Modelling the financial impact

We have developed a model that estimates the financial impact of each of the three compliance

strategies by projecting the Burial Society membership and its cash flows, the most significant of

which are contributions, expenses, benefits paid and investment returns. The model uses the 2010

end of year membership and accumulated surplus as the starting point and assumes each alternative

compliance strategy will be implemented with effect from 2013. The projections have been done for

a 5-year period from 2013 to 2017 and compared to the financials of the Burial Society if it were to

continue operating in its current form.

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Note that the assumptions and detailed calculations underlying the graphs provided in this section

and the financials in Appendix 3 are not included in this report but are available on request together

with the spreadsheet model used to generate the financial projections.

5.1. OAC Burial Society membership

The latest available number of principal members is 66,673 as of the end of 2010. This number is

estimated to grow marginally from year to year as illustrated in figure 1, despite a slow decline in

membership over the recent years. We expect the decreasing membership trend to reverse because

the rate at which members have been leaving is reducing quicker than the rate at which members

are joining, causing an expected net gain of members in the future.

Figure 1: Projected principal membership for the OAC Burial Society (2011 to 2017)

5.2. Contribution rates

The current contribution rate is R22.00 per month per principal member. We have assumed the

contribution rate will continue unchanged until an operating loss is projected (for the base scenario

where the Burial Society continues operating in its current form). The first loss is expected to occur

in 2015. From this year on we have assumed the contribution rate will be increased such that no

operating losses are made in any year. This effectively means the accumulated surplus will not be

used to subsidise contributions over the projection period to 2017. Figure 2 below shows the

required contribution rate under the status quo such that the accumulated surplus is not utilised to

subsidise contributions.

67 074

67 478

67 884

68 292

68 703

69 116

69 532

2011 2012 2013 2014 2015 2016 2017

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Figure 2: Monthly contribution with no subsidy from the accumulated surplus

5.3. Operating expenses

Figure 3 shows a graphic comparison of the expected level of operating expenses for each of the 3

compliance scenarios relative to the expected expense levels if the status quo was to hold (i.e. the

base scenario).

Figure 3: comparison of operating expenses against status quo

Note: alternative 1 is obtaining a microinsurance licence; alternative two is the fully underwritten scenario and

alternative 3 the multiple co-operatives scenario.

22.00 22.00 22.00 22.0023.00

25.00

27.00

2011 2012 2013 2014 2015 2016 2017

0

2 000 000

4 000 000

6 000 000

8 000 000

10 000 000

12 000 000

14 000 000

16 000 000

2011 2012 2013 2014 2015 2016 2017

Base scenario

Alternative 1

Alternative 2

Alternative 3

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Alternatives 1 and 2 are expected to result in significant increases in expenses, mostly as a result of

the expected cost of compliance with the FAIS Act (FAIS related expenses make up 97% of the

increase and are estimated to be approximately R5m in 2013 increasing to R6m in 2017). It is

important to note that the need to comply with the FAIS Act is not a result of the proposed

microinsurance regulation as mentioned previously. Alternative 2 is expected to result in marginally

lower expenses than alternative 1, mostly due to saving the cost of preparing the microinsurance

returns for submission to the FSB.

The expenses associated with alternative 3 are expected to be roughly 10% higher than under the

status quo. This is mostly caused by additional audit costs since each of the 29 co-operatives will be

required to submit audited annual financial statements. However, it is likely that the full extent of

the additional costs arising from the significantly increased complexity of administering 29 co-

operatives have been captured for this alternative.

5.4. Benefits paid

Figure 4 shows a graphic comparison of the expected annual level of burial services benefits paid for

each of the three compliance scenarios relative to the expected benefits paid if the status quo was

to hold (i.e. the base scenario).

Figure 4: Comparison of total annual benefits paid against status quo

Both alternatives 1 and 2 are expected to result in an increase in benefits paid. Benefits paid under

alternative 3 are the same as for the status quo.

The increase under alternative 1 (approximately 10%) comprises two components. By far the larger

of the two components is caused by the increased length of the grace period (from 2 months up to 6

months, depending on duration the policy has been in force). This component makes up 95% of the

0

5 000 000

10 000 000

15 000 000

20 000 000

25 000 000

2011 2012 2013 2014 2015 2016 2017

Base scenario

Alternative 1

Alternative 2

Alternative 3

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increase. The remaining 5% is because the Policy Document holds that accidental deaths during the

waiting period must be paid, which are currently excluded along with natural deaths.

Alternative 2 represents a 15% increase, which is an estimate of the allowance for the underwriter’s

own expenses and profit margin. This is a subjective estimate, but appears reasonable. Note that we

have considered the cost of insurance to be equivalent to benefits paid to provide a direct

comparison of the cost of providing the burial services under the different compliance scenarios.

Strictly speaking, the cost of insurance should be considered an expense rather than benefits paid.

5.5. Reserves and surplus

Figure 5 below shows the expected operating surplus, including investment returns on the

accumulated surplus and reserves (where applicable), before tax and transfers to reserves, arising

each year. The contribution rates for alternatives 1, 2 and 3 have been set equal to that for the base

scenario. The patterns under each scenario are to be expected given the previous commentary on

expenses and benefits paid. The base scenario surplus reduces steadily until contribution rates begin

to be increased to ensure losses are not incurred. Alternatives 1 and 2 show large and increasing

losses mainly because of the FAIS compliance costs. Alternative 3 surpluses are marginally lower

than the base scenario because of the increased audit expenses.

Figure 5: Expected operating surplus or loss arising (contribution rates as for base scenario)

It has been the Burial Society’s recent practice to set contribution rates at an expected break-even

level, with no subsidy from the large accumulated surplus which has only been used to finance

experience variances (e.g. higher than expected benefit payments). This practice was assumed to

continue for the base scenario, as can be seen in figure 6 where the accumulated surplus for the

base scenario remains level just above R60m when the contribution rate begins increasing (from

2015). The amounts in this graph represent the accumulated surplus for the base scenario, the

-14 000 000

-12 000 000

-10 000 000

-8 000 000

-6 000 000

-4 000 000

-2 000 000

0

2 000 000

4 000 000

6 000 000

2011 2012 2013 2014 2015 2016 2017 Base scenario

Alternative 1

Alternative 2

Alternative 3

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accumulated surplus plus microinsurance reserves for alternative 1 and the accumulated surplus

plus reserves required by the Co-operatives Act for alternatives 2 and 3. The impact on accumulated

surplus and reserves is in line with the surpluses and losses shown previously in figure 5. Alternatives

1 and 2 require significant subsidy from accumulated reserves in order to maintain contribution

rates equal to those required under the base scenario.

Figure 6: Comparison of reserves and accumulated surplus

Figure 6 above shows the impact of each alternative compliance strategy on the accumulated

surplus. An alternative way to demonstrate the impact of each alternative is to calculate the

contribution rate required to prevent a subsidy from accumulated reserves. These contribution rates

are shown in figure 7. The contribution rates for the base scenario are the same as those shown in

Figure 2.

0

10 000 000

20 000 000

30 000 000

40 000 000

50 000 000

60 000 000

70 000 000

2011 2012 2013 2014 2015 2016 2017

Base scenario

Alternative 1

Alternative 2

Alternative 3

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Figure 7: Non-subsidised contribution rates

Alternatives 1 and 2 both require an approximate increase in the contribution rate of 25% in 2013 in

order to offset the expected additional costs.

5.6. Capital requirements

The proposed microinsurance regulatory framework requires microinsurers to hold capital,

determined by the level of contributions received in the previous year, as a buffer against adverse

experience. The required capital is subject to an absolute minimum of R3m. Figure 8 shows the

estimated required capital for the “microinsurance license” compliance strategy on two scenarios

(the other two alternative compliance strategies do not require capital to be held):

1. the base scenario contribution rates are not increased and the accumulated surplus is used

to subsidise the shortfall, or

2. contribution rates are increased such that no shortfall is expected and the accumulated

surplus is not used (i.e. contributions are set at a break-even level).

Capital is higher under the second scenario because it is based on the level of contributions received

during the year, which are increasing under the break-even contribution scenario so as not require a

subsidy from the accumulated surplus.

2011 2012 2013 2014 2015 2016 2017

Base scenario 22.00 22.00 22.00 22.00 23.00 25.00 27.00

Alternative 1 27.50 29.50 32.00 35.00 37.50

Alternative 2 28.00 30.00 32.50 35.50 38.00

Alternative 3 22.00 22.00 23.50 25.50 28.00

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

P a g e | 16

Figure 8: Estimated capital requirements

The required level of capital can easily be covered by the available accumulated surplus, even under

the scenario where contributions are left unchanged and the accumulated surplus is reduced by

subsidising contributions. The ratio of accumulated surplus to capital required remains healthy

under both scenarios, despite the significant reduction in accumulated surplus if contributions are

left unchanged, requiring a subsidy from the accumulated surplus. This is illustrated in table 1 below.

Table 1: Ratio of accumulated surplus to capital required

An alternative method of illustrating the Burial Society’s ability to cover the prescribed capital

requirements is to consider how total assets will be split between reserves, required capital and free

assets (the balance of total assets after providing for reserves and required capital). Figures 9 and 10

show the split of assets under base scenario contributions and break-even contributions

respectively.

0

500 000

1 000 000

1 500 000

2 000 000

2 500 000

3 000 000

3 500 000

4 000 000

4 500 000

5 000 000

2013 2014 2015 2016 2017

Base scenario

contributions

Break-even contributions

2013 2014 2015 2016 2017

Base scenario contributions 16.5 14.3 11.6 8.5 4.5

Break-even contributions 16.8 15.6 14.3 13.1 12.1

P a g e | 17

Figure 9: Split of total assets between reserves, required capital and free assets for the base scenario

contributions

Figure 10: Split of total assets between reserves, required capital and free assets for break-even

contributions

0

10 000 000

20 000 000

30 000 000

40 000 000

50 000 000

60 000 000

2013 2014 2015 2016 2017

Free assets

Required capital

Reserves

0

10 000 000

20 000 000

30 000 000

40 000 000

50 000 000

60 000 000

70 000 000

2013 2014 2015 2016 2017

Free assets

Required capital

Reserves

P a g e | 18

6. Policy lessons for microinsurance framework

Overall, there appear to be few areas of the proposed microinsurance regulatory framework that

will present significant barriers to the OAC Burial Society to becoming a microinsurer, the exception

being the proposed market conduct regulation (although it must be noted again that the impact

does not result from the proposed microinsurance regulation).

Requirements of FAIS Act in their current form will be a major barrier to entry. As previously

discussed, compliance with the FAIS Act requirements in their current form will increase operating

costs substantially (roughly doubling expenses from R5m to R10m). It is clear that this level of

additional expense will be a major barrier to potential microinsurers. In the Burial Society’s case, it

actually makes the “multiple co-operatives” compliance strategy very attractive despite its practical

implications. In the final analysis, the Burial Society’s major strength, namely that it penetrates

underserved markets through its wide geographic reach, is ultimately driving the cost of complying

with the FAIS Act by way of the number of branches (congregations) and required key individuals

and representatives. This is counter to the microinsurance policy objective of extending access. We

therefore recommend that these considerations be taken into account in determining the FAIS levy

structure and compliance officer requirements applicable to microinsurance.

A potentially simple solution to the high annual FAIS levies (both for fee based on the number of key

individuals and representatives and the ombud fee) would be to cap the levies, either in terms of an

absolute amount or as a percentage of annual premium income. The solution to reducing the costs

of the compliance officer function is less obvious and will probably require a reduced scope of

functions (e.g. visiting a representative sample of branches during a year rather than all branches).

A potentially very informative exercise would be to survey recently joined members of the Burial

Society to assess the effectiveness of the current non-compliant sales and intermediation processes.

The results could be used to inform fit and proper and conduct requirements for microinsurance

business.

Impact of market conduct regulation highly dependent on fit and proper requirements. The major

impact of the proposed market conduct regulation lies in the cost relating to the compliance officer

function and fees and levies, while the impact of the fit and proper requirements are expected to be

low both in terms of cost and practical implications. However, it is critical to note that this view is

based on two assumptions: (i) that fit and proper requirements will be the same as for sub-category

1.1 Long-term Category A (assistance business), and (ii) that few key individuals (only 7) will need to

be registered. If the fit and proper standards are raised for microinsurance, there will likely be

significant practical and cost implications. For example, it would probably be very difficult for

representatives to write a regulatory exam because of their geographic spread.

Longer grace periods have a substantial impact on benefits paid. The grace period structure

proposed by the Policy Document has a substantially bigger cost implication (at least in the OAC’s

case) than originally anticipated. This is because there are a significant number of members who

have between 3 and 6 contributions in arrears and because most members have been members for

many years. Combining these two factors results in roughly 10% more members qualifying for cover

than is currently the case. This combination of arrear contributions and long-standing membership

could very well be encountered with other potential microinsurance licensees if they have existed

P a g e | 19

for many years. We propose that policymakers consider giving microinsurance license applicants the

option to apply the grace period retrospectively, but make it compulsory only for future members.

The grace period proposal as it currently stands may place potential microinsurers into financial

difficulty if they are not easily able to increase premiums in response to the increased benefit costs

or do not have the level of accumulated surplus that the OAC Burial Society has.

Conversion of friendly societies to co-operatives. The Friendly Societies Act provides for a friendly

society to convert to a company if it intends to apply to carry on insurance business, while the Co-

operatives Act provides for the conversion of companies, but not friendly societies, to co-operatives.

The transition from friendly society to co-operative could be simplified if the Co-operatives Act was

to be amended to allow such a conversion as for companies and could be one of the mechanisms

used to encourage friendly societies to transform into microinsurers. For example, it would remove

the need of the existing friendly societies to be dissolved according to the Burial Society Rules.

Transition arrangements are important to limit the potential tax liability to members. A potentially

significant tax burden on members may well arise out of the conversion from friendly societies to co-

operatives if the friendly societies need to be wound up as part of the transition process. In the

event of being wound up, the accumulated surplus would need to be distributed to members

according to the Burial Society Rules. Any distribution would be taxed at a level depending on the

form of the distribution and, if taxable in the hands of the members, on the members’ individual

levels of income. An average tax rate as low as 10% would give rise to a total tax burden of roughly

R5m. This underlines the importance of following through with the Policy Document’s proposals to

provide transitional arrangements that are tax neutral.

Model constitution for microinsurance co-operatives. Since co-operatives are likely to be the

institutional form of choice for microinsurance license holders, the Companies and Intellectual

Property Commission (CIPC) should consider developing a model constitution for microinsurers as

they have for other specific co-operatives such as agricultural, housing and financial services

(deposits and loans) co-operatives.

Institutional, prudential and product regulation generally well designed. Our detailed impact analysis

shows fairly low impact from the institutional, prudential and product regulation provisions

contained in the Policy Document, which implies these provisions have been well thought through

and designed.

Impact on other friendly societies likely to be different. It is important to consider to what extent the

lessons emerging from this assessment are likely to be applicable to other friendly societies. We

expressed the view earlier that the OAC Burial Society is well managed and financially sound. This is

out of the OAC’s own choice rather than due to existing regulation6 and is largely responsible for the

fact that there are likely to be few impacts by the proposed microinsurance regulation. Other

friendly societies may not have similarly high levels of governance and financial controls and are not

as financially sound, which means that the impact of the proposed regulation will be greater. For

example, other friendly societies are likely to have significantly lower levels of accumulated surplus.

6 For example, the Burial Society has chosen to include a section in its Rules that requires an actuarial valuation

in the event that any one of the Affiliated Societies produces a loss or if the contribution rate or benefits are

changed. The Friendly Societies Act requires an actuarial valuation only every five years.

P a g e | 20

Depending on the actual level, they may have difficulty in meeting the prudential requirements.

However, the potentially significant impact of market conduct regulation will be similar for all

potential microinsurance license holders that have a large and geographically spread distribution

infrastructure.

Treatment of existing members must be carefully considered. The funeral services offered by the

Burial Society fit quite well with the proposed microinsurance product standards and there are no

significant product related impacts besides the longer grace period, even for existing members.

Other potential microinsurance license holders may not be in such a fortunate position with existing

products having to change substantially. It will be important to consider the extent to which the

proposed product standards should be applied to existing policyholders. On one extreme, a potential

solution is to make compliance with product standards optional for existing policies. But this could

give rise to significant prudential risk (e.g. via cash back benefits or products with long term

guaranteed benefits), which is contrary to one of the objectives underlying the product standards,

linking to the proposed reduced prudential regulation. On the other extreme all existing policies

could be forced to comply with the proposed product standards, with potentially significant impacts

on existing policies. For example, if a funeral product provides regular cash back benefits, there

should be substantial reserves to meet future benefit payments. The cash back benefit will be

removed to comply with the proposed product standards and, to be fair, the reserves should be

distributed to those who would have been entitled to the benefit. Such a process would have

substantial practical implications. We unfortunately cannot recommend a solution because we do

not have data on the prevalence of non-compliant products in other potential microinsurance

license applicants.

P a g e | 21

7. Appendix 1: Impact assessment

The impact assessment matrix below is structured according to each of the main aspects covered in the microinsurance Policy Document. The policy framework

provisions, the OAC Burial Society’s current status in that regard, as well as the implications of the microinsurance licence alternative are discussed for each of the main

aspects of the Policy Document. In the interest of space utilisation, the expected impact of alternatives 2 and 3 are included in a separate matrix that follows after the

one below.

Microinsurance policy framework

compliance requirements

Current status/position of the OAC Alternative 1: microinsurance license &

transformation to a co-operative

1. Institutional regulation

a. Institutional forms Organisations that provide guaranteed

benefits to members or have membership

in excess of 2,500 lives will be required to

register as a microinsurer or be

underwritten. The institutional forms

permitted to register as a microinsurer are

public and private companies and co-

operatives.

The Burial Society consists of a Central

Society and 6 Affiliated Societies. The

Central Society and the Affiliated Societies

are each registered as a Friendly Society

with the FSB as per the Friendly Societies

Act of 1956 and, as such, are exempt from

registration under the Long-term

Insurance Act7.

Each Affiliated Society must convert to a

primary co-operative and the Central

Society to a secondary co-operative. This

implies the Rules of the Burial Society will

need to be reviewed and changed to

comply with the Co-operatives Act and

adopted as the constitution of the newly

formed co-operatives.

b. Corporate governance

• Board of directors Corporate microinsurers must have a

board consisting of at least 4 directors, of

which at least 2 should be non-executive.

At least 1 of the non-executive directors

must be independent8.

In the case of co-operative microinsurers,

Rule 3 of the Burial Society Rules deals

with the Board of Management of the

Central Society and with the Executive

Committee for each Affiliated Society.

The Board consists of the chairman from

each of the Executive Committees of the 6

Affiliated Societies and an independent

The Burial Society’s existing management

structures fit well with those required for a

co-operative. However, the fact that

directors must be member elected may

pose a problem to the OAC. The Co-

operatives Act provides, as one of its core

principles, that decision making takes

7 Section 7(2)(b) of the Long-term Insurance Act 52 of 1998 exempts registered Friendly Societies that offer benefits not exceeding the prescribed maximum from registration as long-

term insurers. 8 Section 14(1)(dd) of the Co-operatives Act 14 of 2005 requires all directors to themselves be members of the co-operative. This contradiction between the Co-operatives Act and the

Policy Document must be resolved during the legislation drafting process.

P a g e | 22





the board must be elected in accordance

with the constitution of the co-operative

and in compliance with the Co-operatives

Act (i.e. by the members at an Annual

General Meeting9).

Annual General Meetings must be held

within 6 months of the end of the

preceding financial year10

.

member who will also be the chairman of

the Board. The chairman of the Board is

appointed by the Apostolate.

All resolutions of the Board pertaining to

policy, contributions, regulations and the

Burial Society Rules must be approved by

the Apostolate.

Each Executive Committee consists of at

least 4 members appointed by the Forum

of Apostles from the District of the Church

in which the Affiliated Society operates,

with the chairman being the member

assigned to the Board by the Apostolate.

Each member serves for a maximum term

of 4 years, but may be reappointed.

Overarching governance is provided by the

constitution of the church.

place on a strictly democratic basis (e.g.

section 27(2) states that “the highest

decision-making structure of a co-

operative is a general meeting of

members”). This principle is in conflict with

the current situation where Rules can be

amended by the Board of Management of

the Central Society, whose members are

appointed by the Apostolate, rather than

being elected by the Burial Society

members.

Rule 27.1 of the OAC Burial Society must

be amended to reflect that the Annual

General Meeting must be held within 6

months of the end of the previous financial

year.

• Record keeping The Co-operatives Act (S.20) requires each

co-operative to have a registered office

stipulated in its constitution. Furthermore,

under S.21 each co-operative must keep

records at its offices for at least 5 years

after the end of the financial year to which

such records relate, of:

• its constitution

• minutes of AGMs and board meetings

The Central Society and each Affiliated

Society has a registered office.

Membership and accounting records are

currently maintained and are adequate to

produce audited annual financial

statements. The Burial Society Rules are

maintained and any changes are recorded.

Minutes of all AGMs and Board of

The existing registered offices can be

recorded as such in the respective

constitutions.

The newly formed co-operatives will have

to ensure the required records relating to

directors are maintained. Current record

keeping meets the remaining

requirements.

9 Section 29(2)(d) of the Co-operatives Act 14 of 2005.

10 Section 29(1)(b) of the Co-operatives Act 14 of 2005.

P a g e | 23





• a list of members and a register of

directors and their interests where

relevant to the business of the co-

operative

• adequate accounting records including

those reflecting transactions between

the co-operative and its members.

Management meetings are recorded and

kept.

• Public officer All microinsurers must appoint a public

officer to ensure compliance with the

microinsurance regulatory framework.

The Burial Society has a principal officer,

appointed by the Apostolate, as required

by the Friendly Societies Act. The Friendly

Societies Act stipulates only that the

principal officer must be resident in South

Africa and not be a minor11

.

Main implication: appoint a public officer

for the microinsurer. This will simply be a

case of appointing the current principal

officer and completing and submitting the

standard personal questionnaire, provided

the principal officer meets the fit and

proper requirements below (which he

does).

• Fit and proper The Policy Document proposes that all

directors, executive managers and public

officers should be fit and proper and

should fill in a standard personal

questionnaire that will be the same as that

for long-term and short-term insurers.

The institutional form adopted by a

microinsurer (i.e. co-operative or public or

private company) may have different fit

and proper requirements. The more

onerous set of requirements must be

complied with.

The Co-operatives Act (S.33) does not

Rule 3 of the Burial Society Rules requires

members of the Board of Management of

the Central Society and members of the

Executive Committees of the Affiliated

Societies to comply with fit and proper

requirements that exceed those required

by the Policy Document and the Co-

operatives Act.

The Burial Society should have no

problems complying with the fit and

proper requirements since most of the

newly elected co-operative directors, the

executive managers and the public officer

should be existing members of the Board

of Management and Executive

Committees. Where this is not the case,

such individuals will need to meet the fit

and proper requirements as per section 33

of the Co-operatives Act.

All newly elected directors, the executive

managers and the public officer will need

11

Sections 10(2) and 16 respectively of the Friendly Societies Act, 25 of 1956.

P a g e | 24





place specific fit and proper requirements

on directors, but states that nobody of

unsound mind, no unrehabilitated

insolvent and no person convicted of any

offence involving dishonesty in connection

with the formation or management of a

co-operative or other corporate entity may

be elected a director.

All that is required for co-operative

registration is for the names and certified

copies of IDs of directors to be submitted.

to complete the standard personal

questionnaire.

• Annual audit All microinsurers will be required to

undergo an annual audit. The Co-

operatives Act also requires an audit of a

co-operative’s annual financial statements,

which must be considered for approval at

an annual general meeting of the co-

operative12.

Each Affiliated Society and the Central

Society are submitted to an annual audit

by an external auditor. The audited

financial statements are tabled for

comment and approval at the AGMs and

are accessible to all members.

No implications, as there are no additional

requirements over and above current

practice.

• Submissions to

FSB

Audited annual and unaudited quarterly

returns are to be submitted to the FSB.

Audited annual financial statements of the

Affiliated Societies and the Central Society

are submitted to the FSB. Additionally, any

changes to the Burial Society Rules are

submitted to the FSB, together with a

report from the Society’s actuary. A 5-

yearly valuation will be submitted if not

already performed as part of a rule

change.

Unaudited quarterly returns will need to

be submitted in addition to the current

practice of submitting audited annual

returns. It is likely that the Burial Society

will make use of their auditors to submit

the quarterly returns, resulting in an

estimated 50% increase to audit fees. The

increase in audit fees could be saved if this

function is performed internally.

• Annual levy It is assumed that the annual FSB levy for The Burial Society currently pays a fee to The annual levy payable to the FSB of

12

Sections 47 and 48(2) of the Co-operatives Act 14 of 2005 respectively.

P a g e | 25





MI is likely to be set close to that of the

current levy for assistance business

providers, namely R8,000 per annum plus

0.00886% of liabilities under unmatured

policies13

. According to the CIPC,

registered co-operatives will be required

to pay an annual levy together with the

submission of annual returns. The

proposed annual levy is R495 if turnover is

less than R1m, otherwise it is R2,750.

the FSB when rule changes are submitted.

No annual levy is payable.

R8,000 plus 0.00886% of liabilities is a new

cost since friendly societies are exempt

from this levy14

, but will be minimal in

absolute terms (R8,300 per annum). In

addition, an annual levy of R2,750 per

primary co-operative will be payable on

submission of returns to the CIPC (total

cost of R16,500).

2. Prudential regulation

a. Licensing requirements

for microinsurers

Organisations that provide guaranteed

benefits to members or have membership

in excess of 2,500 lives must be licensed to

perform microinsurance business. The

licensing options are:

1. Fully underwritten by an existing

insurer or microinsurer.

2. Purchase a cell captive insurance

license.

3. Register own microinsurance license

under the proposed microinsurance

regulation.

4. Register own full insurance license

under either the Long-term

Insurance Act or the Short-term

Insurance Act.

The Burial Society is exempt from licensing

under the Long-term Insurance Act as a

registered Friendly Society that offers

benefits within the maximum prescribed

level.

Current business planning is limited to the

drawing up of an annual budget.

The chosen compliance route for

alternative 1 is for the Burial Society to

register its own microinsurance license.

This will require:

• A change of name to include the

word “microinsurance” or a

derivative thereof.

• Submission of the standard

application.

• Submission of the constitution of the

secondary co-operative (which will

be the holder of the microinsurance

license).

• Drawing up a business plan with 5-

year financial projections. The

financial model created during this

impact assessment can be used to

13

As per section 9 of the Board Notice 101 published in the Government Gazette number 34322 on 27 May 2011. 14

As per section 7 of the Board Notice 101 published in the Government Gazette number 34322 on 27 May 2011.

P a g e | 26





The licensing requirements for a

microinsurer will include:

• The registered name must include

the word “microinsurance” or a

derivate thereof.

• Submission of the standard

application form for a

microinsurance license.

• Memorandum and articles of

association for a company or

constitution for a co-operative and

the official registration documents.

• A business plan with 5-year financial

projections.

• A personal questionnaire to be

completed by members of the

board, executive management and

the public officer to ensure they are

fit and proper.

• An application for approval of the

appointed auditors.

generate the financial projections. It

will be advisable to use the Burial

Society’s actuary to draw up the

business plan. The estimated cost of

drawing up the business plan is

R10,000.

b. Registration

requirements for co-

operatives under the

Co-operatives Act and

according to the

templates provided by

the Companies and

Intellectual Property

Commission (CIPC)

The registration requirements for co-

operatives are contained in Chapter 2 of

the Co-operatives Act. In addition, the CIPC

website contains detailed requirements,

explanation of steps and template forms

for co-operative registration:

Fees:

• A registration fee of R215 applies per

The OAC Burial Fund was originally

registered in 1977. In 2001 it was

deregistered and replaced by the OAC

Burial Society, consisting of a Central

Society and 6 Affiliated Societies, all

registered as friendly societies.

Documents to be submitted to the FSB on

an annual basis are prescribed in the

Registration fees:

The OAC would want to register 6 primary

co-operatives (the Affiliated Societies),

plus one secondary co-operative (the

Central Society), bringing total registration

fees to R1,505. Additional fees for

amendments to the constitution will be

incurred from time to time, but will be

P a g e | 27





co-operative.

• It costs R17.50 per section up to a

maximum of R245 to amend the

constitution as filed with the CIPC.

“Founder members” must submit the

application and form the co-operative.

Registration process:

Fill out and submit the standard

registration form15

. The CIPC website sets

out detailed registration procedures16. It

explains, amongst other things, the format

and contents of the formation meeting

that should be held to elect board

members, how to decide on a name and

draw up an initial business plan before the

co-operative is formed.

The following must be submitted with the

application form:

1. Two copies of the signed

constitution17

.

2. Application for approval of auditor18

.

Friendly Societies Act. Currently the

Affiliated Societies and the Central Society

submit annual audited financial

statements (in the format as prescribed in

the regulations to the Friendly Societies

Act), annual auditor’s reports and an

actuarial valuation every 5 years or in the

cases as prescribed. If a rule change

involves an increase in contributions, the

application for the rule change must be

accompanied by an actuarial valuation.

The Burial Society operates according to a

detailed set of rules as per the

requirements of the Friendly Societies Act,

covering:

1. Name, objectives and registered office

2. Definitions

3. Management

4. Meetings of board and executive

committee

5. Board’s discretion

6. Principal executive officer and staff

7. Actuary and auditor

minimal.

To identify founder members, it would be

best if the members of the Friendly Society

agree that the Executive Committees of

each Affiliated Society will be the Founder

Members of the co-operative and will have

Power of Attorney to sign all documents

on behalf of the members of the society,

to register the co-operative. The Friendly

Society members will also have to agree on

transferring or selling all the assets and

liabilities of the society to the new co-

operative and that all the existing

members of the society will become

members of the new co-operative after

registration.

Registration process:

The registration form is straightforward

with no information required that the

Burial Society would not be in a position to

furnish.

15

The standard registration form can be found at http://www.cipc.co.za/Coops_files/CR1.pdf. 16

http://www.cipc.co.za/Coops_RegProcedure.aspx 17

The CIPC has proposed using the model constitution for primary non-specific co-operatives, which can be found at

http://www.cipc.co.za/Coops_files/2_PRIMARY_NON_SPECIFIC_COOPERATIVE.pdf. Since co-operatives are likely to be the institutional form of choice for microinsurance license holders,

the CIPC should develop a model constitution for microinsurers as they have for other specific co-operatives such as agricultural, housing and financial services (deposits and loans) co-

operatives. 18

The application form can be found at http://www.cipc.co.za/Coops_files/CR4.pdf.

P a g e | 28





3. Proof of payment of the prescribed

fee.

4. Certified copies of ID documents of

founder members.

5. Business plan.

It is preferable to reserve a name for the

co-operative prior to application for

registration19

. It costs R50 to register a

name. The name of a co-operative must

include the words “co-operative” or “co-

op” and the word “limited” or the

abbreviation “Ltd” must be included as the

last word of its name unless its

constitution does not limit the liability of

its members20

.

At least one general meeting must be held

prior to the application for registration at

which the constitution is adopted and the

first directors elected21.

The dti aims to process applications within

one week, but if there are backlogs it can

take up to 6 weeks.

After registration, a co-operative must

8. Signing of documents

9. Indemnification

10. Fidelity guarantee

11. Banking account

12. Investments

13. Books of account

14. Expenses

15. Admission to membership

16. Information to be provided by

members

17. Member’s right to documents

18. Resignation

19. Contributions

20. Arrear contributions

21. Financial management

22. Actuarial investigations

23. Claims and claim procedure

24. Disputes

25. Amendment of rules

26. Dissolution

27. AGM

28. Special general meeting

29. Transfer of members

Executive committees of the Affiliated

Societies meet regularly (from as

frequently as twice per month to at least

Formation meeting:

Presumably, the MI regime will be

designed so that existing friendly societies

transforming into co-operatives do not

need to go through this process. However,

a general meeting is required to elect a

board of directors from the founder

members, even if it means all founder

members are elected, (i.e. executive

committees of Affiliated Societies become

boards of directors for the new co-

operatives) and adopt the constitution

prior to registration as a co-operative. The

first annual general meeting after the

publication of the MI legislation could be

used for this purpose.

Constitution:

The provisions of the model constitution

overlaps to a large extent with that of the

Burial Society’s rules and, where

necessary, aspects of the model

constitution can be amended to align with

their rules as long as the provisions of S.14

of the Co-operatives Act regarding the

rules are met – which is the case according

to our reading of the Burial Society Rules

19

The form can be found at http://www.cipc.co.za/Coops_files/CR5.pdf. 20

Sections 10(2) and (3) of the Co-operatives Act 14 of 2005. 21

Sections 6(3) of the Co-operatives Act 14 of 2005.

P a g e | 29





submit:

• Names of board members or

changes in board members to be

registered through form CR222. It

only requires names, ID numbers

(and copy of ID) and address, no fit

and proper declaration.

• Annual financial statements and

auditor’s report, along with form

CR7 on lodgement of financial

statements23

.

A full list of all relevant documents is

available at:

http://www.cipc.co.za/Coops_Forms.aspx

once every 2 months). Board meetings of

the Central Society are held twice a year.

and Section 14 of the Co-operatives Act.

The following areas of the model

constitution for primary non-specific co-

operatives would either need amendment

or the Burial Society’s Rules would need to

be amended to comply:

12. Issue of shares and minimum

shareholding: The Burial Society does not

have any shares, so this part would not

apply and can be deleted from the model

constitution.

13. Certificates of shares and loans: Not

applicable. Delete from model

constitution. The same will apply to any

mention of member shares and loans

throughout the model constitution. It is

sufficient that members pay an application

fee and annual contributions.

19.Withdrawal of membership: The Burial

Society terminates membership when

people leave the church. This is not

explicitly catered for in the model

constitution for primary co-operatives, but

could be included by the OAC in the

constitution submitted to the CIPC.

22

The form can be found at http://www.cipc.co.za/Coops_files/CR2.pdf 23

The form can be found at http://www.cipc.co.za/Coops_files/CR7.pdf.

P a g e | 30





26. Board of directors: Rule 3 of the Burial

Society Rules will need to be changed to

reflect that directors must be elected at

the AGM.

30. Nomination of directors and voting for

directors: This section requires further

changes to Rule 3 of the Burial Society

Rules for candidate directors to be

nominated openly at the AGM.

35. Conditions and processes for the

appointment of the chairperson, vice-

chairperson and acting chairperson of the

board: This section requires the directors

to elect the chairperson, who is currently

appointed by the Apostolate.

46. Quorums: The model constitution

requires that a quorum is at least 20

members plus 1% for co-operatives that

have more than 200 members. For a co-

operative with for example 10,000

members, that would entail a minimum

quorum of 120. Yet Rule 27.4 of the Burial

Society stipulates a quorum of only 15

members for the AGM. The rule must be

aligned to the model constitution. The

Burial Society does not expect the quorum

requirement to present any challenges

since AGMs tend to be very well attended

by members.

P a g e | 31





The requirements for secondary co-

operatives are also not problematic: a

quorum at the general meeting of 2

members is sufficient if the co-operative

has fewer than 10 members, which is the

case for the Central Society.

66. Amendment of constitution: may only

be made by special resolution at the AGM

or extraordinary general meetings. This is

likely to have a significant operational

impact for the Burial Society, as Rule 25.1

currently allows the Board to alter or

rescind any rule or make any additional

rule, provided that any change that affects

the contribution rate or benefits shall be

supported by a report by the actuary. Any

Rule changes must also currently be

approved by the Apostolate as the final

decision-making body. This requirement is

regarded by the Burial Society as a

deviation from the church’s principle that

all rules pertaining to members of the

church (including the Burial Society) will be

scrutinized by the Apostolate and if not

acceptable, it will either not be accepted

or it will be changed24

.

24

The OAC has expressly requested that the new legislation include a provision that the Minister may grant exemptions from certain provisions, such as the election of directors by the

AGM and the making and changing of a constitution by a resolution passed at the AGM – the reason being that the Burial Society has been operating for quite a number of years to the

satisfaction of the FSB and the Burial Society is of the opinion that it is a significant player in the market.

P a g e | 32





The drafting of the new constitutions is

unlikely to have a material impact on costs

since the work will be performed on a

voluntary basis without remuneration.

Approval of auditor:

Should be merely an administrative

process, as the Burial Society already has

an auditor and will also have an auditor

approved as part of the MI licensing

process.

Registration of name:

Straightforward process, nominal fee,

should not have any implication for the

Burial Society.

Business plan:

The Co-operatives Act requirements

should be amended so that the MI licence

business plan will automatically qualify the

candidate for co-operative registration.

Submission of annual financial

statements:

The Burial Society already compiles and

submits annual financial statements,

therefore submitting them to the Co-

operatives Registrar as well should

represent limited additional cost.

c. Capital and reserving

• Reserving The reserves that a microinsurer must hold Reserves consist purely of accumulated Reserving requirements will be small (in

P a g e | 33





requirements for

microinsurers

will be calculated according to prescribed

formulae and consist of:

• Unearned premium reserve

• Outstanding claims reserve

• Incurred but not reported reserve

• Unexpired risk provision

surpluses.

The Burial Society has good prudential

management. It has accumulated

substantial surplus and Rule 21.1 of the

Burial Society Rules explicitly requires the

Burial Society’s actuary to carry out an

investigation if any Affiliated Society

experiences a net negative cash flow in

any financial year. These two factors

contribute greatly to a financially sound

operation.

the order of R3m) relative to the existing

accumulated surplus (R48.4m as at the end

of 2010) and therefore easily met.

• Reserving

requirements

under the Co-

operatives Act

Section 3(1)(e) of the Co-operatives Act

requires 5% of surplus to be set aside as a

reserve fund, which is not divisible

amongst the members.

Section 63 of the model constitution for a

primary non-specific co-operative requires

a further amount to be set aside as a

General Reserve Fund, which shall not be

less than the amount determined by the

Board.

The Co-operatives Act would need to be

amended so that co-operatives licensed as

microinsurers need only adhere to the

reserving requirements stipulated in the

microinsurance legislation. The financial

projections performed have assumed this

is the case.

• Capital adequacy The capital required of a microinsurer is

calculated as 15% of the net written

premium over the previous 12 months (or

the prior 12-month period if higher),

subject to a minimum absolute amount of

R3 million. However, microinsurers will be

permitted to build capital up to the

minimum required level over a 3-year

period starting from the enactment date of

the proposed microinsurance regulation,

subject to a minimum amount of R1.5

million at start-up.

The accumulated surpluses are used to

cover adverse experience and any

unexpected shocks.

The minimum capital requirement of R3m

is expected to apply. Given the high level

of accumulated surplus, the Burial Society

will have no problem meeting the capital

adequacy requirement and the transitional

arrangements will not apply.

• Investments All reserves and capital adequacy

requirements must be invested in cash-like

The OAC Burial Society invests its assets in

compliance with Regulation 29 of the

The current investment approach will in all

likelihood comply with the proposed

P a g e | 34





liquid assets. Free assets (in excess of

reserves and capital adequacy

requirements) may be invested in other

asset classes following approval by the

regulator.

Friendly Societies Act. 95% of all assets are

invested in 12-month fixed deposits, with

the remaining 5% of assets invested in

savings accounts and call accounts (1 to 32

day notice periods). All investments are

held at the big 5 South African banks. The

maturity dates of the fixed deposits are

staggered so as to provide regular liquidity.

investment requirements for

microinsurers. Free assets are expected to

be in excess of R40m, which could allow a

more aggressive investment policy to be

followed on approval by the regulator.

d. Actuarial assessment Actuarial sign-off of the total premium is

required for new products and for any

premium changes.

Any changes to the Burial Society Rules

that impact the contribution rate or

benefits must be submitted to the FSB for

approval together with a report from the

actuary.

According to the MI regime, the Burial

Society would no longer need a fixed 5-

yearly actuarial valuation, only actuarial

sign-off on price changes. This implies a

cost saving estimated to be between

R8,000 and R16,000 every five years.

e. Distribution of profit:

microinsurance

provisions

The board of a microinsurer must sign off

on the distribution of dividends.

Rule 22.5 of the Burial Society Rules

prohibits any surplus to be paid to the

church. Any surplus arising is accumulated

within the Burial Society.

Compliance with the requirements

regarding distribution of surplus should be

a formality. Distribution of profit or

dividends will not apply to the Burial

Society, as all surpluses are simply used to

improve benefits provided and/or reduce

contributions or are accumulated. It would

not seem from the way that the model

constitution is set out that co-operatives

are compelled to distribute dividends.

Rather, the provisions aim to ensure that

surplus, where distributed, is only

distributed in the last instance after all

interests of the co-operative have been

met.

f. Distribution of surplus:

Co-operatives provisions

Section 63 (Surplus) of the model

constitution for primary non-specific co-

operatives states that the amount of

surplus available for distribution to

members shall be used to pay interest, not

exceeding 15%, to members on their

shares or to pay bonuses to members.

g. Share capital: Co-

operatives Act

Section 40 of the Co-operatives Act

provides for all members to contribute

The Burial Society does not have any share

capital. Its reserves are built up through

The provision in S.41 of the Co-operatives

Act that membership shares may be issued

P a g e | 35





provisions capital (entrance and / or membership

fees are sufficient) and section 41 states

that the constitution may provide that

membership shares be issued to members.

monthly premiums/contributions and

admission fees. Its convictions as a faith-

based organisation require that it cannot

issue share capital. Rather, it is a

membership-based organisation that

operates for members’ benefit without the

aim of generating a surplus.

would override the inclusion of a clause on

membership shares in the model

constitution and the Burial Society will not

be compelled to issue membership shares.

3. Product regulation

a. Product categories

• Medical schemes

business

Microinsurers will not be permitted to

conduct the business of a medical scheme

as defined in the Medical Schemes Act,

131 of 1998.

The Burial Society provides only funeral

benefits (burial services) to its members.

No impact

• Risk only Microinsurers may only provide risk

benefits with no surrender values, cash

back benefits or savings elements.

The Burial Society provides only funeral

benefits (burial services) to its members.

No impact

• Sum assured basis All microinsurance policy benefits should

be defined on a first loss or sum assured

basis rather than on an indemnity basis.

The funeral benefits provided are defined

in terms of specific burial services that are

covered up to specified maxima and are

not offered on an indemnity basis.

No impact

b. Product features

• Benefit caps The following benefit caps will be applied

to each product category:

• R50,000 per life per insurer for

death events.

• R100,000 per person per insurer

for asset insurance.

• R50,000 per person per insurer for

all other events.

Benefit payments may be made in

instalments provided the present value of

The maximum funeral benefit provided is

capped at R7,500 per life under the

Friendly Societies regime. The actual cost

to the Burial Society for paying the service

provider may be lower, depending on

services rendered and price negotiated,

therefore the benefit to members is stated

in terms of a maximum value of R7,500.

Positive impact: the Burial Society will

have leeway to increase benefits in line

with market realities and needs of

members. At the same time, the fact that

the ceiling of R50,000 is set well above the

typical cost of a funeral should serve to

decouple the cost charged by undertakers

from the limit for funeral insurance

benefits.

P a g e | 36





the instalments does not exceed the above

caps. While this is not yet on their agenda, the

new framework gives the Burial Society

the option to consider adding additional

benefits such as health trigger related

benefits (e.g. hospitalisation).

• Contract term Microinsurance policies should have a

contract term of up to but not exceeding

12 months. To facilitate uninterrupted

cover, microinsurance policies should be

automatically renewable at the end of the

contract term without the need for a new

policy document or a new waiting period,

provided the policyholder continues to pay

the premium.

The Burial Society Rules and the abridged

rules appearing on the application form

make no mention of a “contract term” as

such. Membership continues for life

provided contributions are paid as

required, while a member may resign

his/her membership voluntarily.

However, the method of managing the

Burial Society complies with the intention

behind the limited contract term provision:

the Board of Management may alter the

Burial Society Rules, including contribution

rates and benefit levels, provided a change

to either the contribution rates or benefit

levels is supported by a report from the

actuary. The adequacy of the contribution

rate is assessed regularly.

No significant impact expected.

• Waiting period Waiting periods are restricted to a

maximum period of 6 months for death or

disability due to natural causes for lives

younger than 65 at entry. Waiting periods

may be longer than 6 months for lives

older than 65 at entry. No waiting period

should apply to accidental deaths and

disabilities.

A 3-month waiting period for both natural

and accident deaths is applied. The waiting

period commences on the 1st

Sunday of

the month following the date on which the

application for membership is signed (i.e.

the membership commencement date).

Burial Society members can feasibly cancel

The current exclusion for accidental deaths

during the 3-month waiting period must

be removed. This will marginally increase

the cost of claims by the accidental deaths

that occur during the waiting period. The

claims assessment process will need

modification to differentiate between

accidental and natural deaths during the

P a g e | 37





Should a policyholder cancel a policy with

one insurer in favour of a policy providing

similar cover with another insurer and

there is uninterrupted cover, the new

insurer must request the previous insurer

to issue a certificate to it, upon which the

new insurer may not impose a waiting

period.

cover with the OAC and take out similar

cover with another insurer, or new Burial

Society members can cancel existing cover

to take up OAC cover. However, the Burial

Society does not currently waive the 3-

month waiting period, except where

dependant members transfer to main

membership, provided premiums are up to

date (e.g. where a child reaches the

maximum age and becomes a main

member in their own right). The Burial

Society does not issue certificates to

leaving members.

waiting period. The cost of any required

changes are expected to be insignificant.

The Burial Society will need to put a

process in place to waive the waiting

period for members with previous cover

that can prove uninterrupted cover and to

issue certificates of cover for members

who transfer to alternative insurers. We

expect such cases to be very few and any

additional costs insignificant, although

they cannot be quantified at this stage.

• Pre-existing

conditions

exclusion

No exclusions for pre-existing conditions

are allowed, but standard suicide

exclusions are.

The Burial Society Rules do not contain

exclusions for pre-existing conditions or for

suicide.

No impact.

• Grace periods The following grace periods are proposed:

• At a minimum, cover is to continue for

1 month from the premium due date.

The outstanding premium may be paid

anytime during that month without

compromising cover. If the premium is

not paid within the month of grace,

cover will cease after that month.

• For policies that have been in force

(including all renewal periods) for one

year or more, the grace period will be

extended by one month for each

completed twelve month period that

the policy has been in force with no

reduction in cover. The maximum grace

A 2-month grace period is applied.

Outstanding premiums are not deducted

from the claim amount during the grace

period.

Membership of the Burial Society lapses

after 6 missed monthly premiums. Lapsed

members may reinstate cover subject to

payment of the readmission fee and the

maximum entry age limit of 55.

Claims are not paid if death happens after

the 2-month grace period has expired, but

members can restart cover before the

membership lapses (after 6 missed

Burial Society management is open to the

principle of longer grace periods for

longer-standing members, with

outstanding premiums being deducted

from the benefit. The different grace

period structure will require changes to

the administration system which

automatically cancels membership at the

end of the grace period. No additional cost

will be incurred since the system is

developed in-house on a voluntary basis.

The longer grace periods will result in

some of the currently inactive members

(those with 3 to 6 monthly contributions

P a g e | 38





period for a policy will be six months.

Claims submitted during the grace period

may be reduced by outstanding premiums

including interest.

premiums) by paying all outstanding

premiums.

outstanding) qualifying for cover

depending on how long they have been

members, whereas currently they will not

qualify. The additional cost is estimated to

be in the order of R1.5m per year, which

represents a significant increase in the cost

of claims.

Moving to such a system would require an

amendment to Rule 20 of the Burial

Society, which can be implemented

alongside other changes required to move

to the new regime.

c. Group policies

• Selective non-

renewal

Where policies are underwritten on a

group basis, insurers should not be

permitted to selectively cancel (i.e. refuse

to renew) individual policies within the

group.

The Burial Society Rules only permit cover

to be cancelled on an individual member

basis where the Burial Society member is

no longer an active member of the church

(i.e. no longer complies with the

membership criteria). Thus, no selective

non-renewals are permitted.

No impact.

• Rating factors Where group underwriting is applied, no

price discrimination will be allowed

between individuals within a group other

than on the basis of age at entry or level

of cover.

The Burial Society charges the same

premium amount across all members and

all 6 Affiliated Societies, independent of

age or any other rating factor.

No impact.

d. Other provisions

• Notification of Microinsurers will be required to give Current practice is for the Board of Since the AGM will move to within 6

P a g e | 39





premium changes policyholders three months’ notice of

proposed price changes.

Management of the Central Society to

agree contribution changes. Notification of

premium changes is provided at three

levels following notice of the contribution

change at the AGM (which usually happens

in the 2nd

weekend of October). The

contribution change takes effect in January

of the following year.

• The Burial Society treasurer for each

congregation delivers a written notice

of the premium change to all Burial

Society members in that

congregation.

• The same premium change notice is

placed on each church’s notice board.

• Premium changes are announced

during church services following the

AGM.

months of the end of the previous financial

year end25

, sufficient notice of contribution

changes will be provided.

• Binder agreements The binder agreement provisions in the LT

and ST Acts (section 49A of the LT Act and

section 48A of the ST Act), as well as the

provisions in the binder regulations of

2011, will apply to microinsurers.

The Burial Society has no binder

agreements in place.

No impact.

• Right to monetary

benefit

Where microinsurance benefits are

offered in-kind, the policyholder must be

given the option, when claiming, of

receiving a monetary benefit equal to the

stated value of the in-kind benefit had it

been provided. The amounts of the

The Burial Society Rules provide for a

benefit that consists of specified funeral

services up to a maximum value of R7,500.

The funeral services are procured by the

Burial Society from a list of approved

providers and consist of a stipulated set of

There will be a “principles” impact in that

the Burial Society strongly believes in

providing a service rather than a cash

benefit that may be used by beneficiaries

for other purposes or may lead to disputes

between beneficiaries.

25

Required by section 29(1)(b) of the Co-operatives Act, 14 of 2005.

P a g e | 40





monetary benefit option and the in-kind

benefit must be clearly disclosed when the

policy is entered into, although the

policyholder may exercise the right to

make the choice at the claims stage. The

insurer must revise the value of the

monetary benefit over time to ensure that

it keeps track with changes in the value of

the benefit-in-kind.

services. No option of claiming a monetary

benefit is provided (Rule 23.4 explicitly

prohibits cash payments in lieu of the

funeral services).

The value of the funeral services is

frequently less than the maximum value of

R7,500. Differences in cost depend on

whether the deceased is buried or

cremated and wide variations on the cost

of grave sites (the price of a grave site can

vary widely by municipality).

Because the monetary benefit will be

equal to the cost of the in-kind benefit,

there will be no additional cost to offering

the right to a monetary benefit26

.

• Claim payments

within 48 hours

All valid microinsurance claims should be

paid within a period of 48 hours after the

insurer received all the requisite

documentation, with the qualification that

claims may be paid in instalments if this

was provided for in the contract.

In the event of a death of a Burial Society

member, the family will notify the priest of

their congregation who notifies the

Affiliated Society’s administrative office. As

the Burial Society reimburses the

undertakers directly, they do not apply any

maximum claim processing time rule.

The OAC Burial Society is of the opinion

the 48-hour claim payment period is

unlikely to pose a problem.

• Submission to FSB Microinsurers will be required to submit all

new microinsurance products to the

Registrar for review at least 60 calendar

days before launching the products. This

will entail submitting an example of the

proposed policy document as well as a

summary of policy features including the

risk events covered, benefit level, risk rate,

Any change to the monthly premium is

reviewed by the Burial Society’s actuary,

whose report is submitted to the FSB

together with the proposed rule change

for approval. No new products or material

changes are planned.

No expected impact as product offering is

static.

26

This assumes the current practice of providing a funeral service up to a specified maximum value will continue. In practice the policy document will need to clearly state that the actual

value of funeral services may be less than the maximum value and define the standard of funeral services to be provided. Quotes would still need to be sourced for a claim where the

monetary value is chosen in order to establish the monetary value to be paid.

P a g e | 41





premium (with the required actuarial sign-

off on pricing) and commission structure

and level. The product review will take

place on a file and use basis.

4. Market conduct The Financial Advisory and Intermediary

Services Act, 37 of 2002 (the FAIS Act) and

the subordinate legislation issued in terms

of it, shall apply to the provision of

microinsurance whenever intermediary

services or advice is provided. However, a

special dispensation will be created for

microinsurance within the FAIS framework

with regards to:

• Registration of the financial service

provider (FSP), its key individuals (KIs)

and representatives (where not a sole

proprietor27). The FAIS framework does

not prescribe a ratio for number of

representatives to key individuals. The

FSP can motivate the ratio that they

choose: they must be able to

demonstrate that they have the

structures to manage and oversee the

provision of advice and/or

intermediary services.

• the Fit and Proper Determination for

FSPs, key individuals and

representatives;

The Burial Society is not registered under

the FAIS Act as it is of the opinion that

neither advice nor intermediary services

are provided to the Burial Society

members. According to FSB consultation

and consultations with industry experts,

this is in contravention of the FAIS Act

requirements – the moment you collect

premiums and pay claims, you are

rendering an intermediary service.

FAIS registration and ongoing compliance

is likely to be one of the biggest areas of

impact of moving to the microinsurance

regime, although it must be noted that it is

not the microinsurance regime that has

caused the need to comply with the FAIS

Act. The Burial Society is currently

contravening the FAIS Act by not being

registered (the Burial Society disagrees

with this view).

The impact assessment below is based on

the requirements for Category 1.1 Long-

term insurance (assistance business),

based on our assumption that the

microinsurance requirements will be

similar. The market conduct work group is

still deliberating on the exact

requirements.

27

Note: as the OAC will not be a sole proprietor FSP, but one with key individuals and representatives, no description is provided of the requirements applicable to sole proprietor FSPs

below.

P a g e | 42





• the FAIS Code of Conduct applicable to

microinsurance providers; and

• the financial soundness of the

intermediaries dealing with

microinsurance.

a. Registration and annual

requirements

Registration fees and steps:

• The application steps and procedures

are explained on the FSB website28

.

• Application entails submission of 15

application forms (including on KIs,

reps, approval of compliance officer,

financial soundness, operational

capability, etc). Appendix 2 contains an

overview of each form, as well as the

likely implications for the Burial Society

of each.

• Application should be submitted with

proof of payment of registration fees,

namely:

o R1,690 per FSP

o R250 for approval of auditor

o R1,060 for approval of the

compliance officer

o R935 per KI

o No registration fee for


the FAIS Act.

Registration:

FSP registration: The burial society would

need to register as FSP as it does not

represent any other financial service

provider. The FSB provides workshops on

registration and can help through the

registration procedure.

KI and representative registration: there is

substantial uncertainty about who will be

regarded as key individuals and

representatives. In the best case, the

Burial Society treasurers operating at

congregation level will be regarded as

representatives with the key individual

function being performed by an official

from each of the 6 Affiliate Societies and 1

from the Central Society. The OAC has

2,195 Burial Society treasurers who, in this

28

FAIS application steps and procedures can be found at http://www.fsb.co.za/.

P a g e | 43





representatives

• The FSB provides an excel spreadsheet

template for submitting

representatives on their website.

Ongoing requirements:

• Appoint a compliance officer and

submit annual compliance report

• Submit annual financial statements

• Annual levy based on number of KIs

and reps (Note: friendly society

benefits are currently exempt from

annual levies, but it is unlikely that MI

will be. We have assumed the

assistance business levies will apply for

the purposes of impact assessment):

o Annual levy for FSPs providing

only assistance benefits is

calculated as a base amount of

R2,741 plus A x R250, where A

= number of KIs plus number

of reps minus KIs who are also

reps.

o Annual ombud fee: R625 + A x

R234, where A is the same as

above.

• Any change in profile, including

scenario, will be regarded as reps. There

will be 7 KIs29

.

In the worst case scenario, each

congregation will have 3 representatives

(the priest, congregational treasurer and

Burial Society treasurer could possibly all

be regarded as performing “client facing”

functions) and all overseers will be

regarded as key individuals. This scenario

will result in 6,204 reps (the Burial Society

operates in 2,068 congregations) and 299

KIs.

The minimum requirements to be met

(under the best case scenario) will be30

:

• Meeting FSP registration requirements

and paying corresponding registration

and annual fees of R1,690 per FSP,

plus, R250 for approval of auditor,

R1,060 for approval of compliance

officer: total R3,000

• Registering 6 Affiliated Society key

individuals and 1 central key individual

at a cost of R935 per KI: total cost

R6,545, plus associated costs of

ensuring that they meet the fit and

29

Note that this scenario implies that each key individual will be responsible for just over 300 representatives, which is impractical. A more realistic scenario would assume more than 7

key individuals. 30

All fees have been taken from Board Notice 101 as published in Government Gazette 34322 of 27 May 2011

P a g e | 44





changes in KIs and reps, must be

submitted to the FSB within 15 days of

such change.

proper requirements (see below)

• Registering at least one representative

per congregation, probably the Burial

Society treasurer who currently

appears to perform intermediary

services (e.g. signing up new members

and collecting premiums) – no

registration fees. The information

required for the representative

register is not onerous (requires ID

number, address, details of

experience, etc), but would take time

to fill out for a large number of reps.

Ongoing requirements31

:

The fact that the OAC Burial Society will

have to pay annual levies is likely to have a

significant impact:

• Annual FSP levy (for FSPs providing

only assistance benefits): R8,000 plus

0.00886% of liabilities (this is the levy

that was mentioned above under the

institutional regulation section).

• Annual levy based on number of KIs

and reps: approximately R550,000

under the best case scenario and

R1.6m under the worst case scenario.

The financial modelling in this report

assumes the best case scenario.

31

FSB Board Notice 101 of 2011.

P a g e | 45





• Annual ombud fee: approximately

R500,000 under the best case scenario

and R1.5m under the worst case

scenario. The financial modelling in

this report assumes the best case

scenario.

• Appointment of compliance officer and

compiling of compliance report. It is

likely that an external compliance

officer will need to be appointed, since

the fit and proper requirements are

onerous (broadly speaking, a law or

commerce degree, 3 years experience

in a risk management / compliance

position and 1 year’s experience in

financial services). An “impossibly low”

monthly outsource cost is estimated to

be R200 per branch (congregation in

the Burial Society’s case). With 2,068

congregations in which the OAC Burial

Society operates, the total monthly

cost will be R413,600, giving an annual

cost of outsourcing the compliance

officer function in the order of R5m.

The alternative is to appoint internal

compliance officers. A compliance

officer is required to visit each branch

(i.e. congregation) at least once a year.

Optimistically assuming a compliance

officer can visit 500 congregations per

year, the Burial Society would require

P a g e | 46





4 compliance officers at an annual

salary of about R500,000. Adding

travel costs will probably bring the

total cost for the compliance officer

function to between R3m and R4m per

annum. We have assumed the annual

cost of the compliance officer function

will be R3.5m for the financial

modelling. Completion of compliance

reports is not particularly onerous.

• Submission of AFS: limited additional

impact, as already undergoing annual

audit and submitting AFS.

• Reporting on change in profile: this is

likely to have administrative impact for

the Burial Society, as volunteers

operating at congregation level may

rotate/change fairly regularly, implying

changes to the representatives

register. However, the Burial Society

has indicated that turnover of its

treasurers is low (estimated to be in

the order of 2% or 3% per annum) due

to the selection criteria applied

(stability and living in the same area

for some time). Therefore the

additional reporting requirement is

unlikely to be onerous.

b. Fit and proper Fit and proper requirements comprise:

1. Experience requirements

2. Qualification requirements

No fit and proper requirements are applied

currently.

FAIS registration will entail meeting a

substantial number of fit and proper

requirements, implying administration and

P a g e | 47





3. Regulatory exams

4. Continuous professional development

requirements

A distinction is made between the

requirements for advice and/or

intermediary services provided by KIs and

representatives, respectively. Each type of

fit and proper requirement is unpacked

below.

compliance costs. However, as the Burial

Society is likely to have fairly few KIs

(assuming that each of the 6 primary co-

operatives will have only one KI as well as

one for the secondary co-operative) and

the requirements for reps are relatively

low, it’s unlikely that the fit and proper

requirements will pose an insurmountable

or overly costly barrier.

• Experience KIs and reps:

• 6 months experience when providing

advice and intermediary services

• 2 months if only intermediary services

• Representatives who are providing

intermediary services under

supervision are exempt from the

experience requirement as experience

is built up under supervision


the FAIS Act as the Burial Society is of the

opinion that neither advice nor

intermediary services are provided to the

Burial Society members.

Experience requirements are unlikely to

have implications for the Burial Society (2

months experience required if only

providing intermediary services and

representatives under supervision are

exempt).

• Qualifications KIs for Cat 1.1 A:

• Must be in possession of a recognised

qualification when evaluated against

the prescribed qualifying criteria.

Recognised qualifications must be at

NQF2 level (Grade 8 equivalent) or a

recognised skills programme of 30

credits at NQF2 level.

• List of accepted qualifications is

published in Annex 2 of BN105 of

2008.

• For qualification or credits to be

The Burial Society currently applies no

minimum qualification requirements for

individuals who would be classified as key

individuals or representatives in the event

that either advice or intermediary services

were provided (e.g. priests, church

treasurers and management of the

Affiliated Societies).

We expect the KIs that the Burial Society

will register will already have recognised

NQF 2 level qualification. In practice, the

Burial Society will have to appoint KIs that

already meet fit and proper qualification

criteria because the qualification criteria

must be met at the time of appointment.

P a g e | 48





recognised, they must be verified by

INSETA.

Representatives for Cat 1.1 A:

• Must have proven ability to read and

write in English and perform basic

calculations, or must have an ABET

level 1 or Grade 3 equivalent

education. It is up to the KI managing

a representative to satisfy him/herself

of the representative’s ability (e.g. by

completing an English application

form and calculating a simple

premium).

• Regulatory exam KIs:

• If MI requirements are designed to be

similar to that for Cat. 1.1 A, would

need to pass level 1&2.

• Current requirements for tasks,

knowledge and skills criteria to be

tested in regulatory exams are set out

in BN105 of 2008:

o The purpose32 of the regulatory

exam level 1 is to ensure that all

key individuals and

representatives fully

understand their regulatory

role, and the accountability and

responsibility they have in

No individuals who would be classified as

key individuals or representatives in the

event that either advice or intermediary

services were provided (e.g. priests, church

treasurers and management of the

Affiliated Societies) have sat the regulatory

examinations.

All KIs would need to pass level 1&2

examinations before they can be approved

as KIs and, depending on where the MI

requirements are set, representatives may

have to complete level 1 examinations.

However, we have assumed the regulatory

exam requirements will be in line with

those for Category 1.1. reps (i.e. no

requirement to write regulatory exams). In

any case, it would be highly impractical for

all representatives to sit a regulatory exam

due to their geographic spread. According

to the FSB’s website, it costs R900 (incl.

VAT) per person to take a regulatory exam.

It is estimated that the cost of preparing

32

Quoted directly from FAIS note on background and information on the regulatory examinations available from www.fsb.co.za.

P a g e | 49





terms of this role. For example,

it requires providers to know

and understand the General

Code of Conduct that, inter alia,

requires providers to furnish

clients with adequate and

correct information.

o The regulatory level 2 exams

are product specific. A person’s

experience in dealing with the

relevant financial product may

assist him/her in successfully

completing these examinations.

In addition, if a person has a

“specifically” recognised

qualification, then such

qualification can exempt that

person from having to write the

level 2 regulatory examination.

• The FSB realises the need to be

pragmatic in determining the exact

requirements for MI and that a

written exam may not be the best

indicator of whether the person is

competent to fulfil the functions

required.

for the regulatory exams is in the order of

R1,000 to R2,500 per delegate. This gives a

total estimated cost for preparing and

writing the regulatory exams of R40,600

(assuming the best case scenario number

of KIs).

P a g e | 50





Representatives:

• Cat 1.1 A: not required to write

regulatory exams.33

Regulatory exams can be taken from any

of the four approved examination bodies

whose details and exam registration steps

are provided on the FSB website.

• Continuous

professional

development

(CPD)

KIs:

• 15 hours of continuous professional

development (CPD) over a three-year

cycle.

• The FSB FAIS department stressed in

consultation that this can be quite

flexibly designed to entail business and

other training of relevance to the Burial

Society and can be conducted in-house.

A fee of R300 is applicable for

recognition by the FSB of a CPD

programme.

Representatives:

• No continuing professional

development requirement applies.

There are currently no accredited CPD

providers (the FSB has recently published

the draft Determination of Continuous

Professional Development Requirements).

However, estimates for obtaining

externally provided CPD range between

R250 and R350 per hour. This gives an

estimated CPD cost per KI of between

R3,750 and R5,250 per 3-year cycle.

c. Code of conduct A dedicated FAIS Code of Conduct will be

developed for microinsurance FSPs, key

individuals and representatives that will

No current compliance. See below for impacts regarding suitability

analysis and record of advice respectively.

33

Under BN106 of 2008 Cat1.19 reps did not need to meet any exam requirements, but this was amended through BN 60 of 2010. However, the FSB has indicated that Category 1.1

representatives do not need to write any regulatory exams.

P a g e | 51





cover all aspects in the General Code of

Conduct34

, but will be tailored to the

specific characteristics of microinsurance

where Part VII, Furnishing of Advice, is

concerned.

The FAIS work group is currently engaging

with the issue of what basic advice

scripted questions and record of advice

could entail for MI.

The main aspects of Code of Conduct that

will be tailored to microinsurance are:

• Suitability analysis

• Record of advice

• Suitability analysis An authorised financial services provider

(key individual or representative) who

provides advice must perform a

streamlined suitability analysis before

providing the advice. The format of the

streamlined suitability analysis is yet to be

finalised.

The Burial Society is of the opinion that

neither its employees nor any church

officials provide advice. A suitability

analysis is therefore not performed before

members join the Burial Society.

The process for enrolling new members is

as follows:

• all new church members hold a financial

discussion with an appointed official of

their local congregation (usually the

priest);

• existing church members have the same

financial conversation with the church

official on an annual basis;

It is difficult to determine the impact

before the streamlined format for MI is

established. However, it is likely that it will

entail a fairly simple template that the

person signing up a new member would

need to fill out and keep on record. This

will cause some additional administrative

burden, but probably not beyond what

Burial Society systems can handle.

34

See Board Notice 80 of 2003 (General Code of Conduct for Authorised Financial Services Providers and Representatives) issued by the Financial Services Board.

P a g e | 52





• the official will ask a limited number of

financial questions during the

conversation. Example questions

include whether the church member

has a will, whether they have funeral

insurance and, if they own property,

where the documentation is held;

• where the member’s financial situation

is not in order, the official will explain

where the member could obtain the

required services;

• if the member does not have funeral

insurance, the official will explain the

funeral services offered by the Burial

Society and the cost of membership;

• if the church member opts to join the

Burial Society, they will be referred to

the congregation’s Burial Society

treasurer who helps fill out the

membership application form and takes

payment of the application fee and the

first monthly premium.

• Record of advice An authorised financial services provider

(key individual or representative) who

provides advice must maintain a record of

the advice furnished. The microinsurance

policy document proposes reduced

requirements for the record of advice,

with the exact requirements yet to be

finalised.

As indicated above, the Burial Society is of

the opinion that neither its employees nor

any church officials provide advice. A

record of advice is therefore not

maintained.

As with the suitability analysis, a simplified

record of advice requirement is expected

not to have a significant impact.

d. Financial soundness of

P a g e | 53





intermediary

• Separate bank

account

Microinsurance intermediaries must hold a

separate bank account for insurance

monies. For example, if the intermediary is

a funeral parlour, funeral and insurance

business monies should not be mixed.

Monthly contributions are paid to the

Burial Society treasurer of the local

congregation at church gatherings. The

treasurer then deposits the contributions

into the Affiliated Society’s bank account.

No impact.

• Issue receipts The microinsurance intermediary must

issue the policyholder with some kind of

storable receipt, be it in printed or

electronic format, as soon as a premium

payment has been made.

The Burial Society treasurer immediately

issues a paper receipt on payment of

contributions.

Each congregation’s cash book is sent to

the Affiliated Society’s district office for

reconciliation against the bank account.

No impact.

• Submit financial

statements

A microinsurance intermediary with an

annual premium income in excess of R1

million, will be required to submit audited

annual financial statements to the

Registrar.

The Burial Society does not have a

separate entity that collects contributions

on its behalf.

Not applicable.

e. Commission

• Commission levels Commission on microinsurance products

will not be capped, although the proposed

commission levels must be disclosed as

part of the file and use process.

The Burial Society does not pay

commission.

Not applicable.

• Structure The regulatory framework proposes that

commission be paid as a level percentage

of each premium paid, with a once-off

policy initiation fee up to a proposed

maximum amount of R200.

The Burial Society does not pay

commission.

Not applicable.

• Embedded

consumer credit

insurance

Commission on all “embedded” insurance

policies, where access to credit is made

subject to the purchase of an insurance

The Burial Society has no embedded

insurance products.

Not applicable.

P a g e | 54





policy sold through the credit provider, will

remain capped at the existing rates as

contained in the Regulations passed under

Section 72 of the Long-term Insurance Act,

52 of 1998 and as amended in

Government Notice R952 in Government

Gazette 31395 of 2008.

f. Disclosure requirements

• Plain language Microinsurance policy documents should

be in plain language, avoid uncertainty or

confusion and not be misleading. The

disclosure requirements in this regard as

contained in Part VI of the FAIS Code of

Conduct for all authorised FSPs other than

direct marketers, and in Part III of

respectively the Short-term and Long-term

Policyholder Protection Rules for direct

Marketers will apply. These rules require:

• PPR: factually correct, plain language

information that will avoid uncertainty

or confusion and not be misleading

and must be adequate and

appropriate, taking into account the

level of knowledge of the policyholder.

Disclosure in writing must be in clear

and readable print size, spacing and

format. Any amounts, sums, values or

fees referred to must be stated in

specific monetary terms (or its basis of

calculation must be clearly stated).

The policy terms and conditions are

contained in the Burial Society Rules. Each

applicant for membership of the Burial

Society receives a copy of the application

form and an abridged version of the Rules.

The copy of the application form and

abridged Rules is retained by the member

and serves as the certificate of

membership.

The abridged Rules need to be redrafted to

comply with the plain language

requirements, but no significant impact is

expected.

No significant impact is expected from the

PPR and Code of Conduct plain language

requirements.

P a g e | 55





• FAIS Code of Conduct: “must provide a

reasonable and appropriate general

explanation of the nature and material

terms of the relevant contract or

transaction to a client, and generally

make full and frank disclosure of any

information that would reasonably be

expected to enable the client to make

an informed decision”.

• Summary Each microinsurance policy document

must contain a policy summary, in English,

of no more than one page. This should

form the first page of the policy document

and be in a clear and readable print size,

spacing and format. It must clearly state

the name of the microinsurer and that it is

registered with the FSB as a

microinsurance provider. In addition, it

should state the following six questions

and the answers to each:

• What am I covered for?

• What are the exclusions (if any)?

• How much are my premiums and

where do I pay them?

• What will happen if I do not pay my

premium?

• When, where and how can I claim and

what documents will be required?

• When and where can I complain? This

The abridged Burial Society Rules provided

to members covers only membership

criteria, admission rules, contribution

requirements, the definition of

dependants eligible for cover and the

benefits provided.

The practice of providing the member with

a copy of the application form and

abridged Rules can continue. However, the

abridged Rules will need to be redrafted to

include the name of the registered

microinsurer, to state that it is registered

with the FSB and to contain the prescribed

six questions and answers. This is expected

to result in a once-off cost of R109,750 to

redesign and reprint a new application

form book for each Burial Society

treasurer.

P a g e | 56





should state both the microinsurer’s

and the Ombudsman’s contact details.

• Treating

Customers Fairly

requirements

Microinsurance will be subject to the

Treating Customers Fairly regime once

finalised.

Not applicable. The Treating Customers Fairly regime is

still in the process of being developed. We

therefore cannot yet assess the potential

impact.

• Contact for

complaints

All microinsurance policy documents

should clearly state the contact details or

client care number of the microinsurer for

the purpose of lodging a complaint and

shall also set out the procedure for lodging

a complaint. In addition, the policy

documents should also state the contact

details of a dedicated ombudsman’s office

and the procedures for making a

complaint, should the insurer be unable to

resolve the matter.

The copy of the application for

membership that is retained by the

applicant contains the Affiliated Society’s

physical address and contact details.

The application form or policy summary

needs to include the procedure to follow

for lodging a complaint and the

ombudsman’s details when it is redesigned

and printed.

• Duty of disclosure The duty of disclosure on the policyholder

will be limited to questions pertinently

asked by the insurer. The insurer or

intermediary must keep a record of the

questions asked.

No health or underwriting related

questions are asked of applicants.

No impact.

g. Group schemes

administered by 3rd

party

• Acceptance

confirmation

The individual persons paying premiums

under the group scheme policy will be

deemed by law to be the policyholders,

rather than the administrator or any other

entity on behalf of the individual

policyholders. The individual policyholders

Administration of the Burial Society is

performed by the Burial Society itself. This

section therefore does not apply.

Not applicable.

P a g e | 57





should therefore receive confirmation

from the insurer of the fact that they are a

policyholder and of the policy

requirements and benefits.

• Right to cancel The individual policyholders will have the

right to cancel their cover at any time.

• Licensing

requirements

The administrator must be licensed as a

FSP in terms of the FAIS Act or must be a

representative of the insurer within the

terms of that Act.

h. Other provisions

• Client care system Every microinsurer shall maintain a client

care system through which clients can

lodge complaints and receive redress.

The Burial Society has a help desk where

members can lodge a complaint. The

complaint is logged in a complaints

register. Response to the complainant is

via written letter, telephonically or in

person.

No impact.

• Acceptance

confirmation

New policyholders must receive

confirmation from the insurer that he/she

is a policyholder within thirty days of

paying the first premium or signing up for

the insurance policy.

A copy of the application, with the

abridged Burial Society Rules printed on

the rear, signed by the applicant is left

with the policyholder at the time of

application.

On acceptance of an application for

membership, the new member will receive

confirmation of acceptance in the form of

an envelope with a sticker that provides

details of the member’s cover (e.g. who is

covered and entry date). The envelope is

intended for the safekeeping of receipts

for monthly contributions paid. The

Furnishing of confirmation whether the

application has been accepted or rejected

cannot always be given in 30 days –

logistical problems may prevent that. As

part of the Burial Society’s efforts to keep

overheads like postage low, documents

are normally distributed to congregations

by hand. The documents (such as the

confirmation of membership) will only

reach the new member after the first

Sunday of the month following the

commencement of cover, unless it is

posted directly to the member. In the case

of rural areas, there are no postal

P a g e | 58





acceptance confirmation envelope is

handed to the principal member on the

first Sunday of the month following the

commencement of cover (which will be

the first Sunday of the previous month).

deliveries and many members living in

Tribal Areas do not have a street address.

Postage may vary from Affiliate to Affiliate

and if registered post is used, the total cost

for 2010 could have been as high as R111

230 (7 176 new applications and renewals

x R15.50 for each individual letter).

• Missed premium

confirmation

If a premium is skipped, the fact that the

premium is in arrears should be

communicated to the client.

Monthly status reports are generated by

each Affiliated Society district office and

provided to the Burial Society treasurer at

the local congregation level. The treasurer

will then discuss missed premiums

individually with each member who is in

arrears.

No impact as the Burial Society is already

compliant.

5. Taxation35

a. Transition of

institutional form

Section 65 of the Co-operatives Act

exempts transfers of property from

transfer duty, stamp duty, or other fees in

the event of an amalgamation, division,

conversion or transfer of a co-operative,

but is silent on transitions to a co-

operative from other institutional forms.

However, the Policy Document proposes

transition arrangements “to ensure the

change in institutional form bears no tax

consequence”. We have assumed this will

be the case in practice.

The Burial Society has a substantial value

of assets invested in cash and money

market instruments (the accumulated

surplus at the end of 2010 was R48.4m).

There will be no impact provided changes

in institutional form bear no tax

consequence as proposed in the Policy

Document. A capital gains tax would only

be relevant in the event that this

transitional arrangement did not apply and

if assets were invested in instruments that

give rise to a capital gain (e.g. equities or

fixed property).

Members may incur a tax liability if the

accumulated surplus must be distributed

to members because of the change in

institutional form. This is covered in more

35

This discussion draws on an opinion sourced from a tax accountant.

P a g e | 59





detail below.

b. On-going taxation

• Corporations tax Co-operatives are taxed at normal income

tax rates (28% of taxable income) and the

normal income tax inclusions and

exemptions apply. The Income Tax Act

provides for reduced income tax on small

business corporations, where the gross

annual income does not exceed R14m for

the tax year.

Investment returns on assets will be taxed

either as income (e.g. interest) or capital

gains (e.g. the gains on equities).

The Income Tax Act considers friendly

societies to be “benefit funds”, which are

exempt from income tax.

The newly formed co-operatives will be

liable for income tax at 28% of their

taxable income. However, it is the Burial

Society’s policy to keep contribution rates

as low as possible, resulting in relatively

small surplus arising. Thus the income tax

liability will generally be very small.

The bulk of investment returns will be in

the form of interest, which will form part

of the taxable income of the co-operatives.

• Dividends tax Surplus distributed in the form of

dividends is subject to dividends tax,

currently at a rate of 15% of the amount of

dividend distributed.

Any bonuses distributed to members are

not regarded as dividends. Bonuses are

deductible from taxable income, but will

be taxed in the hands of members.

Any surplus arising is not distributed, but

rather retained by the Burial Society as

security against future adverse experience.

No impact, because it is the Burial

Society’s policy not to distribute any

surplus.

• VAT Co-operatives are subject to the same

requirements under the VAT Act as

companies and will be required to register

for VAT if their turnover exceeds the VAT

threshold of R1m, unless they provide a

service that falls under one of the VAT

exempt sections. The Policy Document

proposes that the current exemption for

Friendly societies are exempt from VAT. The Policy Document proposes that

microinsurers writing only life

microinsurance business be exempt from

VAT. It is therefore likely that the Burial

Society will not be required to register for

VAT and there will be no change in the tax

liability with respect to VAT.

P a g e | 60





long-term microinsurance premiums is

retained, while short-term microinsurance

premiums continue to be subject to VAT.

6. Existing members The Policy Document does not explicitly

address how existing members /

policyholders should be treated in the

transition to the new microinsurance

regime. Potential impacts could arise from,

amongst other things, a change in

institutional form requiring the existing

legal entity to be wound up and replaced

by another entity, or existing products not

meeting the proposed microinsurance

product requirements.

The burial services provided by the Burial

Society generally comply with the

proposed product requirements, but the

existing friendly societies will need to be

transformed into alternative institutional

forms.

The existing friendly societies will change

institutional form to co-operatives. Existing

legislation makes no allowance for friendly

societies to convert to co-operatives36

.

Thus, as legislation stands, the friendly

societies will need to dissolve (Rule 26 of

the Burial Society rules provide for

dissolution of the Central and Affiliate

Societies), which could have a number of

implications, including:

• The accumulated surplus will be

distributed to existing members if it

cannot be transferred to the newly

created co-operatives. This may have

tax implications for members, the

level of which will depend upon the

form in which the accumulated

surplus is distributed and on the

financial circumstances of individual

members (if taxed as personal

income).

• Existing members should be issued

with new contracts of insurance /

certificates of cover in the name of

the newly formed co-operatives

36

Section 38A of the Friendly Societies Act, 25 of 1956, provides for a friendly society to convert to a company if it intends to apply to carry on insurance business. Sections 64 and 66 of

the Co-operatives Act, 14 of 2005, provides for the conversion of companies to co-operatives but not friendly societies.

P a g e | 61





unless the members can be

“migrated” to the newly formed co-

operatives (i.e. grandfathering). This

in itself may have substantial practical

implications if existing members are

difficult to find and potential cost

implications.

It is strongly advised that the

microinsurance regulatory framework be

drafted to incorporate the necessary

transition arrangements to avoid the tax

and other implications from dissolution

of friendly societies, as it would place an

unnecessary burden on friendly societies.

The microinsurance product

requirements will have no impact other

than the increased benefit payments

arising from the longer grace periods

that has already been mentioned.

P a g e | 62

The following table is a continuation of the previous table and shows the expected impacts under alternatives 2 and 3. The items listed in the first column are the same

as those contained in the previous table for alternative 1.

Microinsurance policy

framework

Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance

threshold

1. Institutional regulation

a. Institutional forms The Policy Document proposes that all Friendly Societies

providing insurance benefits falling within the microinsurance

definition should convert to an alternative institutional form, in all

likelihood a co-operative, since the Friendly Society institutional

form will be phased out. This applies irrespective of whether the

newly formed co-operative will obtain a microinsurance license

itself or will be fully underwritten by an existing licensed insurer.

Thus, as for alternative 1, each Affiliated Society must convert to

a primary co-operative and the Central Society to a secondary co-

operative. This implies the Rules of the Burial Society will need to

be reviewed and changed to comply with the Co-operatives Act

and adopted as the constitution of the newly formed co-

operatives.

The Central Society will convert to a secondary co-operative,

while the 6 Affiliated Societies will split into smaller co-operatives,

each having a membership below 2,500. With approximately

70,000 principal members, the Affiliated Societies will need to

split into at least 28 individual co-operatives. Each co-operative

will need to adopt the amended Burial Society Rules as their

constitution. The split will have major administrative implications,

probably rendering this alternative impractical. For example, each

co-operative is required to have its own registered office and its

own bank account. Major reorganisation will be required to split

the membership. The accumulated surplus will need to be split

appropriately between the co-operatives.

b. Corporate governance

• Board of directors As for alternative 1, directors must be elected by members at a

general meeting and Rule 27.1 of the Burial Society must be

amended to reflect that the Annual General Meeting must be

held within 6 months of the end of the previous financial year.

The microinsurance specific requirements will not apply (i.e.

minimum of 4 board members, 2 of which must be non-executive

and 1 independent).

As for alternative 1, directors must be elected by members at a

general meeting and Rule 27.1 of the Burial Society must be

amended to reflect that the Annual General Meeting must be

held within 6 months of the end of the previous financial year.

The microinsurance specific requirements will not apply (i.e.

minimum of 4 board members, 2 of which must be non-executive

and 1 independent).

• Record keeping As for alternative 1. As for alternative 1, although each co-operative will need a

registered office and the administrative burden of maintaining

the required records will increase substantially due to the roughly

fivefold increase in the number of co-operatives. These additional

indirect costs have not been included in the financial model.

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threshold

• Public officer No need to appoint a public officer. No need to appoint a public officer.

• Fit and proper Each co-operative will require a board of directors consisting of

the number of persons as the co-operative’s constitution

requires. Each director will need to meet the fit and proper

requirements as per section 33 of the Co-operatives Act and their

names and certified copies of their IDs must be submitted with

the application for registration of the co-operative.

Each co-operative will require a board of directors consisting of

the number of persons as the co-operative’s constitution

requires. Each director will need to meet the fit and proper

requirements as per section 33 of the Co-operatives Act and their

names and certified copies of their IDs must be submitted with

the application for registration of the co-operative. Once again,

the administrative burden will be increased, but there is nothing

overly onerous in these requirements. These additional indirect

costs have not been included in the financial model.

• Annual audit As for alternative 1, each co-operative will need to prepare

audited annual financial statements to be approved at the Annual

General Meeting which is part of the current process. There will

therefore be no impact.

Each of the 29 co-operatives will need to prepare audited annual

financial statements to be approved at the Annual General

Meetings, unless exemption is obtained under section 55 of the

Co-operatives Act. This is likely to increase audit costs five-fold in

comparison to alternatives 1 and 2.

• Submissions to

FSB

No requirement to submit microinsurance returns to the FSB. No requirement to submit microinsurance returns to the FSB.

• Annual levy No need to pay an annual levy to the FSB as the levy only applies

to a microinsurance license holder.

However, the co-operatives levy must still be paid with the

submission of annual returns. The cost will be the same as for

alternative 1 (i.e. R2,750 per primary co-operative, giving a total

cost of R16,500).

No need to pay the annual FSB levy as the levy only applies to a

microinsurance license holder.

However, each registered co-operative will be required to pay the

stipulated annual levy on submission of the annual returns. Since

the membership of each co-operative will be less than 2,500, the

annual turnover of each co-operative will not exceed the R1m

threshold giving a lower annual levy of R495 per primary co-

operative (i.e. R13,860).

2. Prudential regulation

a. Licensing requirements

for microinsurers

No need to apply for a microinsurance license. No need to apply for a microinsurance license.

b. Registration

requirements for co-

Impact will be the same as for alternative 1. The impact will largely be the same as for alternative 1, except

that 28 separate primary co-operatives will need to be registered

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threshold

operatives under the

Co-operatives Act and

according to the

templates provided by

the Companies and

Intellectual Property

Commission (CIPC)

in place of the 6 Affiliated Societies in order to ensure the

membership of any co-operative does not exceed the 2,500 level

above which the co-operative must register its insurance business

or be fully underwritten by a registered insurer. A secondary co-

operative must also be registered.

Registration fees: The total cost of all the registrations will be

R6,235. The cost of future amendments to the constitution will be

roughly five times higher than under alternative 1.

Existing Executive Committee members cannot simply become

the founder members as for alternative 1. Founder members for

each co-operative will have to be agreed at a general meeting

prior to submitting the application for registration.

Registration process: as for alternative 1, but repeated for each

primary co-operative.

Formation meeting: as for alternative 1, but repeated for each

primary co-operative.

Constitution changes will be as for alternative 1, noting that each

registered co-operative will require a constitution.

Approval of auditor: each co-operative must appoint an auditor

to be approved by the CIPC.

Registration of name: this is a straightforward process requiring

only a nominal fee and should not have any implication for the

Burial Society.

Business plan: will need to develop for each co-operative. Since

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there will be no application for an MI license under this

alternative, there will be no MI business plan that the co-

operatives can use. The business plans for each co-operative will

have to be drawn up from scratch. We have assumed the

business plans will be drawn up by the Board of each co-operative

at no additional cost to the Burial Society.

Submission of annual financial statements. The Burial Society

already compiles and submits annual financial statements.

Therefore submitting to the Co-operatives Registrar as well

should represent limited additional cost, other than the increased

audit costs already highlighted and the indirect costs related to

the additional administrative work relating to the multiple co-

operatives.

c. Capital and reserving

• Reserving

requirements for

microinsurers

There will be no legal requirement to hold any insurance reserves. There will be no legal requirement to hold any insurance reserves.

• Reserving

requirements

under the Co-

operatives Act

Section 3(1)(e) of the Co-operatives Act requires 5% of surplus to

be set aside as a reserve fund, which is not divisible amongst

members. Surplus is expected to remain relatively small because

of the non-profit objective of the Burial Society and this

requirement will have a marginal impact.

Additional reserve requirements must be determined by the

Board of the co-operative. We have assumed there will be no

additional reserves required by the Board.

Section 3(1)(e) of the Co-operatives Act requires 5% of surplus to

be set aside as a reserve fund, which is not divisible amongst

members. Surplus is expected to remain relatively small since

contributions are generally set at a break-even level because of

the non-profit objective of the Burial Society and this requirement

will have a marginal impact.

Additional reserve requirements must be determined by the

Board of the co-operative. We have assumed there will be no

additional reserves required by the Board.

• Capital adequacy Capital adequacy requirements do not apply. Capital adequacy requirements do not apply.

• Investments Investments must be made in compliance with the co-operative’s

constitution. Rule 12 of the Burial Society Rules, covering

Investments must be made in compliance with the co-operative’s

constitution. Rule 12 of the Burial Society Rules, covering

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investments, will be adequate. Therefore, there will be no impact. investments, will be adequate. Therefore, there will be no impact.

d. Actuarial assessment There is no requirement for actuarial sign-off of premiums since

pricing is performed by the underwriter. This represents a cost

saving relative to alternative 1.

There is no need for actuarial sign-off of premiums. This

represents a cost saving relative to alternative 1.

e. Distribution of profit:

microinsurance

provisions

Not applicable. Not applicable.

f. Distribution of surplus:

Co-operatives provisions

The approach of the Burial Society to not distribute surplus to

members or the church (not permitted by the Burial Society

Rules) is likely to continue indefinitely. Any surplus arising will

probably continue to be accumulated within the Burial Society.

However, surplus is likely to be significantly reduced because any

underwriting profit or loss will be for the underwriter’s account.

Thus, there is likely to be little or no impact.

The approach of the Burial Society to not distribute surplus to

members or the church (not permitted by the Burial Society

Rules) is likely to continue indefinitely. Any surplus arising will

probably continue to be accumulated within the Burial Society.

There is likely to be little or no impact.

g. Share capital: Co-

operatives Act

provisions

As for alternative 1, the new co-operatives will not be compelled

to issue membership shares.

As for alternative 1, the new co-operatives will not be compelled

to issue membership shares.

3. Product regulation

a. Product categories

• Medical schemes

business

No impact. No impact.

• Risk only No impact. No impact.

• Sum assured basis No impact. No impact.

b. Product features

• Benefit caps As for alternative 1, the Burial Society could increase benefit

amounts and / or provide additional types of benefits. Their

ability to do this will depend upon the willingness of an

underwriter to underwrite the increased risks and / or additional

types of benefits on satisfactory terms. Different underwriters

could be used to underwrite different benefits.

As for alternative 1, the Burial Society could increase benefit

amounts and / or provide additional types of benefits, provided

the benefits are not guaranteed and that a co-operative’s

membership does not exceed the prescribed limit (proposed to

be 2,500 members).

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• Contract term Not applicable because funeral benefits are underwritten by

another entity, whose responsibility it is to comply with

applicable regulation.

Not applicable because microinsurance provisions do not apply.

However, funeral benefits may not be guaranteed.

• Waiting period The microinsurance restrictions do not apply, unless the

underwriter is a registered microinsurer. However, the Burial

Society waiting period rules will follow those of the underwriter.

We have assumed that the current waiting period rules will be

retained by the underwriter. Any changes in the waiting period

rules should be reflected in a change to the insurance premium

payable by the Burial Society.

No changes required because microinsurance provisions do not

apply.

• Pre-existing

conditions

exclusion

Pre-existing conditions exclusions will follow those of the

underwriter. We have assumed no change for the purposes of the

financial projections.

No impact.

• Grace periods Grace period rules will follow those of the underwriter. We have

assumed that the current grace period rules will be retained by

the underwriter. Any changes in the rules should be reflected in a

change to the insurance premium payable by the Burial Society.

No impact.

c. Group policies

• Selective non-

renewal

No applicable unless the underwriter is a registered microinsurer,

in which case the onus of compliance lies with the underwriter.

No impact.

• Rating factors The rating factors used will be as negotiated with the

underwriter.

No impact.

d. Other provisions

• Notification of

premium changes

Notification of premium changes will be as agreed with the

underwriter, but assumed to follow current practice since the

Burial Society is likely to continue performing current

administrative duties.

No impact.

• Binder agreements If the burial society enters into a binder agreement with the

underwriter, it will have to abide by the various regulations in this

regard.

No impact.

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• Right to monetary

benefit

No impact on the Burial Society since the onus of compliance lies

with the underwriter. If the underwriter expects an increase in

the average claim amount, this will be reflected in a higher

insurance premium. We have not allowed for increased claim

costs in the financial modelling.

No impact.

• Claim payments

within 48 hours

Claim payment turnaround times will be subject to the claims

process of the underwriter.

No impact.

• Submission to FSB All submission or compliance requirements rest with the

underwriter. Therefore no impact on the Burial Society.

No submissions to the FSB are required since the co-operatives

will not hold a microinsurance license.

4. Market conduct We are assuming for alternative 2 that the Burial Society will

continue performing the administrative functions it is currently

performing and the distribution model will be unchanged (i.e.

member sign-up and contribution collections will continue via the

Burial Society treasurers at congregation level). This means that

the Burial Society and its volunteer church officials will be

performing “intermediary services”, requiring registration under

the FAIS Act.

Under this alternative, the Burial Society will not fall within the

formal insurance net and will continue offering its burial services

to its members without impact by the proposed microinsurance

regulatory framework. The Burial Society will not be offering a

financial product as defined by the FAIS Act and will therefore not

be subject to FAIS registration and other requirements of the FAIS

Act.

a. Registration and annual

requirements

Registration fees and steps:

The Burial Society will be required to register as an FSP with key

individuals and representatives and will also be required to have

its compliance officer and auditors approved. As with alternative

1, we have assumed the best case scenario for performing the

financial modelling, namely that all Burial Society treasurers will

have to register as reps and that there will be 1 KI per primary co-

operative and 1 for the secondary co-operative. The worst case

scenario remains the same as for alternative 1, namely that each

congregation will register 3 representatives and all overseers will

be regarded as key individuals. The associated registration costs

will be as for alternative 1.

Ongoing requirements:

The Burial Society will not be required to register as an FSP with

key individuals and representatives and will not be required to

appoint a compliance officer. Thus there will be no impact.

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These are again the same as for alternative 1.

b. Fit and proper All fit and proper requirements will be as for alternative 1. Fit and proper requirements are not applicable.

• Experience

• Qualifications

• Regulatory exam

• Continuous

professional

development

(CPD)

c. Code of conduct The code of conduct will apply as for alternative 1. The code of conduct is not applicable.

• Suitability analysis

• Record of advice

d. Financial soundness of

intermediary

• Separate bank

account

The existing Burial Society bank accounts can be retained to

comply with this requirement.

Not applicable.

• Issue receipts The current practice will be sufficient to comply. Not applicable.

• Submit financial

statements

The annual contributions collected by the Burial Society will be

well in excess of the R1m level, requiring audited annual financial

statements to be submitted to the registrar. There will be no

additional cost since audited financial statements are required by

the CIPC.

Not applicable.

e. Commission

• Commission levels Any commission that is paid will be subject to the Long-term

Insurance Act commission regulations (assuming the underwriter

is a registered long-term insurer). The onus for compliance lies

with the insurer.

Commission is not applicable under alternative 3.

• Structure

• Embedded

consumer credit

Not applicable. Not applicable.

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insurance

f. Disclosure requirements

• Plain language The abridged Rules need to be redrafted to comply with the plain

language requirements, but no significant impact is expected.

Not applicable.

• Summary The practice of providing the member with a copy of the

application form and abridged Rules can continue. However, the

abridged Rules will need to be redrafted to include the name of

the registered underwriter, to state that it is registered with the

FSB and to contain the prescribed six questions and answers. This

is expected to result in a once-off cost of R109,750 to redesign

and reprint a new application form book for each Burial Society

treasurer.

Not applicable.

• Treating

Customers Fairly

requirements

The Treating Customers Fairly regime is still in the process of

being developed. We therefore cannot yet assess the potential

impact.

Not applicable.

• Contact for

complaints

The application form or policy summary needs to include the

procedure to follow for lodging a complaint and the

ombudsman’s details when it is redesigned and printed.

Not applicable.

• Duty of disclosure There will be no impact provided the underwriter does not

introduce underwriting questions.

Not applicable.

g. Group schemes

administered by 3rd

party

The Burial Society will be administering the scheme on behalf of

the underwriter. The Burial Society will comply with the

requirements for group schemes provided the current

administrative practices are continued.

Not applicable.

• Acceptance

confirmation

Current practice will be adequate for compliance.

• Right to cancel Current practice will be adequate for compliance.

• Licensing

requirements

The Burial Society will be a licensed FSP as required above.

h. Other provisions

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• Client care system It is the underwriter’s responsibility to maintain the client care

system.

Not applicable.

• Acceptance

confirmation

The underwriter must provide the required acceptance

confirmation.

Not applicable.

• Missed premium

confirmation

Current practice is sufficient compliance. Not applicable.

5. Taxation

a. Transition of

institutional form

As for alternative 1. As for alternative 1.

b. On-going taxation

• Corporations tax As for alternative 1, the income tax liability is expected to be

small.

As for alternative 1, the income tax liability is expected to be

small.

• Dividends tax No impact, as for alternative 1. No impact, as for alternative 1.

• VAT The VAT exemption as a friendly society will fall away, but the

annual turnover of the co-operatives will be less than the VAT

threshold of R1m (income will be restricted to administration

fees). The co-operatives will therefore not need to register for

VAT and there will be no financial impact.

The VAT exemption as a friendly society will fall away. The co-

operatives will not be carrying on long-term microinsurance

business and the R1m turnover threshold will be exceeded. The

co-operatives would need to register for VAT and pay VAT on

contributions. However, VAT paid on funeral services purchased

can now be used to reduce the VAT liability, provided the service

providers are VAT registered. This could ultimately reduce costs

for the Burial Society since the VAT currently paid on funeral

services may well be higher than the future net VAT liability. We

have assumed no impact due to VAT in the financial projections.

6. Existing members The impacts of the change in institutional form will be the same

as for alternative 1.

The microinsurance product requirements are not applicable

under this alternative, but existing members will be impacted by

any changes in the underwriter’s policy terms and conditions

relative to the current terms and conditions.

The impacts of the change in institutional form will be the same

as for alternative 1.

The microinsurance product requirements are not applicable

under this alternative, and existing members’ policy terms and

conditions will not be impacted.

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8. Appendix 2: FAIS registration requirements

The following application forms need to be filled out (all available on the FSB website):

Form Requirements Burial Society implications

FSP 1 Business information of FSP Only basic information required,

should not be onerous for the

Burial Society to provide.

FSP 2 Licence categories for which applying and indicating whether

advice and/or intermediary services will be provided

Straightforward, no impact

anticipated.

FSP 3 Directors, officers & applicable shareholders: name, address,

ID, etc for each


anticipated.

FSP 4 Key individuals. Complete separately for each KI:

• Name, address, ID, role

• honesty and integrity questions

• list qualifications, body obtained from and date obtained

• indicate regulatory examinations passed

• employment history

• evidence of experience in oversight/management and

references for it

• experience in the relevant categories applied for and

references

Passing of regulatory exam and

making sure that each proposed KI

has relevant qualification and

experience will be prerequisite.

See discussion of fit and proper

requirements for assessment of

impact.

FSP 5 Representatives. Name, ID, address, details of the responsible

KI, category registered for, qualification and regulatory exam

details (n/a for Cat 1.1 A reps)

Limited impact expected beyond

administrative costs of completing

the paperwork.

FSP 6 Compliance officer. Name and details (separate form for

approval – see FSP13)


anticipated.

FSP 7 Operational ability. List of operational questions to be

completed, incl. on FICA compliance.

Various requirements for internal

control procedures and staff

training. Likely to have some cost

implications.

FICA-related procedures: as the

OAC will not be conducting long-

term insurance business and will

not be an investment-related FSP,

it will not be regarded as an

accountable institution under

Schedule one of the Financial

Intelligence Centre Act of 2001.

Therefore no FICA requirements

will apply.

FSP 8 Financial soundness. Info on history of operations, list of assets

and liabilities, whether internal control systems

The Burial Society would already

meet all requirements, so no

impact anticipated.

FSP 9 External auditor. Name and contact details Straightforward, no impact

anticipated as the Burial Society

already has an external auditor.

FSP 10 Nominee company of discretionary or administrative FSP n/a to the Burial Society

FSP 11 Forex service providers n/a to the Burial Society

FSP 12 Application for specific exemptions. If any FSP wants to apply

for exemptions from certain provisions in the Act or

subordinate legislation, they can do so with proper motivation

and completion of this form. Must also pay exemption

application fee of R4,550.

Unlikely to be applicable to the

Burial Society.

FSP 13 Compliance officer approval. Compliance officer function may

be in-house or outsourced. If in-house, need name, ID,

address, honesty and integrity questions, qualifications,

categories of financial services to be provided, employment

The cost of compliance was

estimated in the detailed impact

assessment section.

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history and references.

FSP 14 Attachments, list of all completed forms and declarations.

Checklist plus template for calculation of application fees.

No additional cost or impact.

FSP 15 Hedge fund application form n/a to the Burial Society

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9. Appendix 3: Expected financial position under each compliance

strategy

9.1. Base scenario

2011 2012 2013 2014 2015 2016 2017

Principle members - opening balance 66 673 67 074 67 478 67 884 68 292 68 703 69 116

Principle members - closing balance 67 074 67 478 67 884 68 292 68 703 69 116 69 532

Assumed monthly contribution rate 22.00 22.00 22.00 22.00 23.00 25.00 27.00

Contributions 16 767 649 16 868 533 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609

Operating expenses 4 104 516 4 514 967 4 966 464 5 463 111 6 009 422 6 610 364 7 271 400

Application income 397 129 399 518 401 922 404 340 425 262 465 023 505 246

Net expenses 3 707 387 4 115 450 4 564 543 5 058 771 5 584 159 6 145 341 6 766 154

Insurance premiums 0 0 0 0 0 0 0

Benefits paid 12 138 334 13 066 160 14 064 907 15 139 996 16 297 263 17 542 988 18 883 933

Surplus before investment income 921 928 -313 077 -1 659 427 -3 126 644 -3 925 910 -4 054 044 -4 317 478

Investment income 3 661 091 3 962 949 4 191 046 4 331 176 4 394 410 4 425 183 4 444 066

Operating surplus before tax 4 583 019 3 649 872 2 531 619 1 204 533 468 500 371 139 126 587

Income tax 0 0 0 0 0 0 0

Transfers to reserves* 0 0 0 0 0 0 0

Surplus after tax and transfers to reserves 4 583 019 3 649 872 2 531 619 1 204 533 468 500 371 139 126 587

Accumulated surplus - opening balance 48 400 000 52 983 019 56 632 891 59 164 509 60 369 042 60 837 542 61 208 681

Accumulated surplus - closing balance 52 983 019 56 632 891 59 164 509 60 369 042 60 837 542 61 208 681 61 335 269

Microinsurance reserves (end of year) - - - - - - -

Required capital (end of year) - - - - - - -

Co-operative reserves (end of year) - - - - - - -

Business ratios and indicators

Expense ratio (expenses/contributions) 24.5% 26.8% 29.3% 32.0% 33.5% 33.7% 34.1%

Expense ratio (expenses/benefits) 33.8% 34.6% 35.3% 36.1% 36.9% 37.7% 38.5%

Surplus before investment income (% of contributions) 5.5% -1.9% -9.8% -18.3% -21.9% -20.6% -20.2%

Ratio of benefits paid to contributions 0.7 0.8 0.8 0.9 0.9 0.9 0.9

Ratio of accumulated funds to benefits paid 4.4 4.3 4.2 4.0 3.7 3.5 3.2

Average net expenses per member 55.44 61.17 67.44 74.30 81.52 89.18 97.60

Ratio of accumulated funds to required capital - - - - - - -

* This represents the transfers to microinsurance reserves (for alternative 1) and the transfers to the reserve required by the Co-operatives

Act (alternatives 2 and 3).

Base scenario: current business

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9.2. Alternative 1: microinsurance license

2013 2014 2015 2016 2017

Principle members - opening balance 67 478 67 884 68 292 68 703 69 116

Principle members - closing balance 67 884 68 292 68 703 69 116 69 532

Assumed monthly contribution rate 22.00 22.00 23.00 25.00 27.00

Contributions 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609

Operating expenses 10 137 015 10 688 348 11 484 611 12 421 774 13 336 574

Application income 401 922 404 340 425 262 465 023 505 246

Net expenses 9 735 094 10 284 008 11 059 349 11 956 752 12 831 328

Insurance premiums 0 0 0 0 0

Benefits paid 15 444 374 16 656 909 17 964 574 19 374 827 20 895 711

Surplus before investment income -8 209 445 -9 868 794 -11 068 410 -11 697 293 -12 394 431

Investment income 3 991 165 3 393 108 2 873 568 2 240 110 1 508 168

Operating surplus before tax -4 218 279 -6 475 686 -8 194 843 -9 457 183 -10 886 262

Income tax 0 0 0 0 0

Transfers to reserves* 3 123 760 -75 151 -20 472 31 133 24 297

Surplus after tax and transfers to reserves -7 342 040 -6 400 535 -8 174 371 -9 488 316 -10 910 560

Accumulated surplus - opening balance 56 632 891 49 290 851 42 890 316 34 715 945 25 227 629

Accumulated surplus - closing balance 49 290 851 42 890 316 34 715 945 25 227 629 14 317 069

Microinsurance reserves (end of year) 3 123 760 3 282 891 3 508 637 3 802 917 4 112 434

Required capital (end of year) 3 000 000 3 000 000 3 000 000 3 000 000 3 199 891

Co-operative reserves (end of year) 0 0 0 0 0


Expense ratio (expenses/contributions) 59.7% 62.6% 64.0% 63.3% 62.5%

Expense ratio (expenses/benefits) 65.6% 64.2% 63.9% 64.1% 63.8%

Surplus before investment income (% of contributions) -48.4% -57.8% -61.6% -59.6% -58.1%

Ratio of benefits paid to contributions 0.91 0.98 1.00 0.99 0.98

Ratio of accumulated funds to benefits paid 3.19 2.57 1.93 1.30 0.69

Average net expenses per member 143.84 151.04 161.46 173.51 185.09

Ratio of accumulated funds to required capital 16.4 14.3 11.6 8.4 4.5

* This represents the transfers to microinsurance reserves.

Alternative 1: microinsurance license

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9.3. Alternative 2: fully underwritten

2013 2014 2015 2016 2017




Contributions 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609



Net expenses 9 633 055 10 174 489 10 923 719 11 808 368 12 668 911

Insurance premiums 16 174 643 17 410 996 18 741 852 20 174 436 21 716 523

Benefits paid 0 0 0 0 0



Operating surplus before tax -4 870 573 -6 960 246 -8 718 153 -10 031 501 -11 509 086

Income tax 0 0 0 0 0

Transfers to reserves* 0 0 0 0 0

Surplus after tax and transfers to reserves -4 870 573 -6 960 246 -8 718 153 -10 031 501 -11 509 086



Microinsurance reserves (end of year) 0 0 0 0 0

Required capital (end of year) 0 0 0 0 0

Co-operative reserves (end of year) 0 0 0 0 0



Expense ratio (expenses/benefits) - - - - -


Ratio of benefits paid to contributions - - - - -

Ratio of accumulated funds to benefits paid - - - - -


Ratio of accumulated funds to required capital - - - - -

* This represents the transfers to the reserve required by the Co-operatives Act.

Alternative 2: fully underwritten

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9.4. Alternative 3: multiple co-operatives

2013 2014 2015 2016 2017




2.46 0.70 -0.27 -0.50 -0.89

Contributions 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609



Net expenses 5 088 501 5 602 380 6 123 005 6 727 101 7 376 124

Insurance premiums 0 0 0 0 0

Benefits paid 14 064 907 15 139 996 16 297 263 17 542 988 18 883 933



Operating surplus before tax 2 007 233 571 915 -219 860 -411 653 -743 003

Income tax 562 025 160 136 0 0 0

Transfers to reserves* 100 362 28 596 0 0 0

Surplus after tax and transfers to reserves 1 344 846 383 183 -219 860 -411 653 -743 003



Microinsurance reserves (end of year) 0 0 0 0 0

Required capital (end of year) 0 0 0 0 0

Co-operative reserves (end of year) 100 362 136 485 146 721 157 725 169 554



Expense ratio (expenses/benefits) 39.0% 39.7% 40.2% 41.0% 41.7%


Ratio of benefits paid to contributions 0.83 0.89 0.91 0.89 0.89

Ratio of accumulated funds to benefits paid 4.12 3.85 3.57 3.29 3.02


Ratio of accumulated funds to required capital - - - - -

* This represents the transfers to the reserve required by the Co-operatives Act.

Alternative 3: multiple co-operatives

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