Insurance Amendment Bill: hearings & finalisation

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Finance Standing Committee

06 February 2003
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Meeting Summary

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Meeting report

FINANCE PORTFOLIO COMMITTEE
7 February 2003
INSURANCE AMENDMENT BILL: HEARINGS & FINALISATION

Chairperson:
Ms B Hogan (ANC)

Relevant documents
Insurance Amendment Bill [B52-2002]
Financial Services Board Memorandum
COSATU Submission (Appendix 1)
In Duplum Association Submission (Appendix 2)
Black Sash Submission (Appendix 3)
Banking Council Submission (Appendix 4)
Transcript of parts of this meeting (Appendix 5)

SUMMARY
The Financial Services Board replied to concerns about the Insurance Amendment Bill previously raised by the Committee and clarified matters that had been flagged. The Committee also considered the submissions by COSATU, Black Sash, the In Duplum Association and the Banking Council of South Africa. Most submissions dealt specifically with Clause 20 that sought to give exemption to the insurance industry from the In Duplum Rule. Submissions dealt with the history and legislative development of the In Duplum Rule, the need for this rule in view of the current "exploitative and excessive interest charges", the effect of the rule on loan repayment, other policy holders and the level of indebtedness. Members decided not to support the adoption of Clause 20 as they believed that the FSB and the insurance industry were unable to show the committee why policy loans should have a special exemption

The Committee also discussed the problem created by the selling of funeral or death benefits by medical schemes, the reference to "funeral benefits" or "death benefits" in the insurance industry, and whether Clause 18 violates Section 35 of the Constitution and the nature of the indemnification involved.

The Bill was adopted by the Committee as amended, and the IFP abstained.

MINUTES
The Chair stated that, subsequent to the hearings on the Bill, the Committee has received four submissions. She referred Members to the memorandum by the Financial Services Board that replied to concerns that had been raised by committee members and clarified matters that had been flagged and were outstanding.

Financial Services Board memorandum
Response 1: Section 8 of the Short-term Insurance Act
Mr Andrè Swanepoel, Deputy Executive Officer: Insurance from the FSB, informed Members that the first response in the document deals with the concern raised by this Committee regarding the reference to the term "funeral" or "death" benefit in the short-term insurance industry.

The Chair asked whether there is any difference between the meanings of the terms "funeral benefit" or "death benefit".

Mr Swanepoel replied that it is not even referred to as a "death benefit", because the Medical Schemes Act indemnifies against any reference to a hospital.

The Chair stated that this matter has to be revisited, because it has been brought to her attention that undertakers are actually selling funeral benefits.

The Chair contended that there does not appear to be any detrimental impact for the consumer as it currently stands, and Members should be satisfied with this. The funeral benefit industry per se offers these via institutions that are unregulated, especially the undertakers, and this is problematic because the financial prospects of undertakers cannot be ascertained with certainty. It would thus be inappropriate for them to offer such benefits. Has the FSB dealt with this matter, and do such institutions function within a regulatory framework outside the FSB?

Mr Swanepoel responded that the FSB is currently engaged in a work group with members of the industry and academia to research the whole issue regarding the burial societies, and many submissions have been received on this matter. The academia state that there approximately 100 000 burial societies currently operating in South Africa. The goal of this work group is to sort out a cost efficient regulatory framework for this industry. Many problems are caused by unscrupulous dealers who do not present themselves as insurers, and the aim here is to have identified a framework later this year to address this issue.

The insurance industry operates via group schemes, and a discussion paper will be issued to the market which deals with what they would have to do. Attempts will also be made to form a body tasked with storing the names of the people involved in the environment, but it will be costly to have a strong or superior regulatory framework for those members. This body would resemble the Micro-Finance Regulatory Council (MFRC) that operates in terms of the Usury Act, and would also inform people belonging to that body of its Code of Conduct. This body would then also conduct inspections on its member organisations and their operations.

Ms R Joemat (ANC) stated that she is glad to hear that something is being done to address this issue, but sought clarity on the timeframe for the implementation of this strategy and how long it would continue.

Mr Swanepoel replied that the friendly societies will be looked at as well, because they operate in much the same way as the burial societies. It is difficult to provide a timeframe here but it will be done as soon as possible, and suggestions are welcome.

The Chair stated that Parliament should focus on this burial issue as a matter parallel to the issue of the level of indebtedness in the micro-lending industry. Perhaps hearings should be conducted on this issue. The efforts made by the FSB to start the process is appreciated, because it is an unregulated area.

Mr Swanepoel stated that the FSB wishes to invite Members of this Committee to take part in the final proposals of that work group.

Response 2: Section 30 of the Long-term Insurance Act
Mr Swanepoel stated that the second response deals with the concern raised by the Chair herself regarding the current wording of Section 30 of the Long-term Insurance Act. This matter has been deliberated with the State law Advisors (SLA), and a new version has been proposed.

The Chair noted that Members agreed to the revised version of Clause 11, contained in Annexure A of the FSB document.

Response 3: "Funeral policies" under the Medical Schemes Act
Mr Swanepoel stated that the third response relates to the concern with the selling of funeral policies by medical schemes. It is clear that medical schemes cannot offer such benefits but are only allowed to collect funeral premiums. They have in fact released a circular to this effect.

The Chair stated that the fact of the matter is that the medical schemes can still sell funeral policies as the intermediary. Is the FSB aware of this type of abuse?

Mr Swanepoel responded that he is not aware of this type of abuse and the new legislation dealing with intermediaries caters for this concern, and provides that the body has to represent itself and its mandate properly, and the complaints levied will be dealt with by the legislation. The work group will be interacting with the council on medical schemes with regard to the demarcation issue as well, and the FSB can raise this issue with them to again emphasise the policy decision.

The Chair approved and stated that people are under the impression that they are subscribing to a medical aid, when in fact it is an insurance package. This could form part of the hearings on the marketing of funeral policies as a whole, and this matter has to be raised with the medical aim council specifically.

Response 4: Section 18 of the Long-term and Short-term Insurance Acts
Mr Swanepoel stated that the fourth response deals with Section 18 of the Long-term Insurance Act, and a rather lengthy answer has been provided in Annexure C of the document.


The Chair stated that the position of the FSB seems to be that the clause should remain as is, and the SLA has confirmed that it is not unconstitutional.

Mr Swanepoel stated that the SLA are satisfied with the clause, and suggested that the changes could be effected via a separate Act.

Ms Sogoni, SLA, added that the clause, as it stands, does nothing to prevent the Registrar from acquiring information to implicate the director. The Registrar can also use that information because the right in Section 35 of the Constitution does not apply here. It is therefore proposed that the following subclause be inserted to grant immunity to the director should s/he have to provide information that could be self-incriminating, in an attempt to prevent unnecessary litigation:

(3) November information furnished by a director or managing executive in terms of subsection (2) may be used as evidence against him or her in any criminal proceedings.


The Chair sought clarity on the liability of these directors during the interim period.

Ms Sogoni replied that the SLA will identify all those Acts with clauses similar to this one.

The Chair stated that the problem created here is that this Committee will be passing a Bill when immunity has not been granted.

Mr Swanepoel responded that the position of the director in this regard is already contained in the Act, and this aim of this clause is merely to define the position of the managing executive.

The Chair accepted that their positions are the same, but sought clarity on where the indemnity clause would then fit in.

Mr Swanepoel replied that such a clause can be inserted, but the general consensus is that an omnibus approach is best here.

Mr M Lowe (DP) raised concern with the use of the word "shall" in the proposed Clause 7(2), and asked the SLA to explain whether its inclusion might not be unconstitutional.

Ms Sogoni responded that the act of extracting information is fine and it is indeed the whole purpose of this clause, as the director or managing director should be obliged to furnish such information to the Registrar. The concern her is however with the use of this information once extracted.

The Chair asked whether this means that it is just a question of whether this will be enacted now or at a later date. What are the timeframes envisaged for the introduction of this clause?

Ms Samantha Anderson, Director: Financial Regulation of the National Treasury, replied that the Security Services Bill contains a similar provision. As this matter is a cause of concern to Members, this legislation will be fast-tracked and will be brought before this Committee before the June recess.

The Chair stated that the problem here is that an anomaly is created because, although the need for dealing with indemnification is recognised, it will now be left to be dealt with in another Bill. It should be included in this Bill.

Mr Swanepoel responded that a similar indemnification provision is currently contained in the Insider Trading Act, and in the Bill it more important to include the position of the managing executive. That Insider Trading clause could be inserted in the Bill.

The Chair called for the clause to be amended in line with the proposal of the SLA.

Mr B Mnguni (ANC) sought clarity on the nature of the immunity proposed by the SLA.

Ms Sogoni replied that the immunity extends to information submitted by the director him-/herself which could incriminate that director, and involves information relating to the affairs of the company. Thus the immunity only extends to information relating to the affairs of the company. Furthermore, should additional incriminating information be discovered by virtue of the information disclosed, this would not be covered by the immunity.

Mr Swanepoel added that the formulation proposed earlier by Ms Sogoni would be used here, but the following clause would have to be inserted after the phrase "may be used":


in any later criminal proceedings against such director or managing executive.


The Chair approved of this formulation, and stated that a similar clause has to be included in the Security Services Bill.

Banking Council Submission
Proposed amendments 1 and 2
Mr Deon van Staden, Head: Insurance Registration & Policy from the FSB, informed Members that the FSB agrees with these amendments, as contained in the submission (see document).

In Duplum Rule
Mr Swanepoel referred Members to Annexure D in the FSB document, which is entitled "Clause 20: Abolishment of In Duplum Rule", which motivates for the removal of the In Duplum Rule. The last sentence in Point 6 of Annexure D indicates that the omission of the provision in the 1998 Act that sought to abolish the In Duplum Rule was merely a mistake that now has to be rectified. The 1943 contained two provisions dealing with this issue: the interest on loan premiums and prescription of interest. Both these matters were deliberated by the then Finance Committee.


In 1972 the South African Law Commission (SALC) recommended the abolition the In Duplum Rule on the grounds that the Usury and Prescription Acts offered adequate protection. During the discussions on the 1998 Act the consumer institutions raised objections and it was decided that, rather than throwing out the whole Act, this provision would be included in the prescription section.

It was then argued that the In Duplum Rule be brought back into the Act as was the case under the 1943 Act. Meanwhile the Policyholders Protection Rules were devised, and the "excessive or exploitative rates" as alleged by both the COSATU and Black Sash submissions (see documents attached) are actually dealt with by those rules. The problem here is that people take out policies and do not have the necessary cash to repay the loan immediately.

The Chair sought clarity on how people are able to take out a loan on the basis of a policy, or life insurance policy.

Mr Swanepoel responded that if someone were to take out a R200 000 death cover policy, for example, and the investment amount stood at R50 000, if that person needs R40 000 s/he would sign the insurance company form and get the cash immediately. The person would be able to take out a loan up to the surrender value of R50 000. The insurer would be able to lend up to a high percentage of the surrender value.

The Chair asked how the amount given as the loan is decided.

Mr Swanepoel replied that the insurer would be able to lend up to a high percentage, up to 80 to 90% of the surrender value.

The Chair sought clarity on the position should the person be unable to repay the loan or die, because it seems that the current regime allows interest to accumulate up to R50 000. This loan on the policy therefore seems to be the same as an advance on the policy. What are the circumstances in which the exemption would apply?

Mr Swanepoel responded that it could be a loan, an advance or interest on an unpaid premium. This calculation is related to the prime rate, and is not an "excessive to exploitative rate".

Ms Joemat contended that there is a difference in interest rate between the premiums that are not paid and banks that are not paid.

Mr Swanepoel replied that in this case when one takes a loan, the policy remains intact. If the exemption applies, it would not benefit policy holders, but would create an opportunity for the public to loan funds in an easy way. The repayment of the policy can be postponed until the policy matures, and the person would not have to repay the amount immediately, as is the case with an ordinary bank loan.

The policy will be terminated when the capital amount together with the interest accrued equals the surrender value. All this is spelt out in the Policyholder Protection Rules, in an effort to make people aware of the current position.

The Chair contended that the information contained in those Rules are too complicated for the layman to absorb. Why do the insurers need protection and not the banks?

Mr Swanepoel responded that, in the case of a bank loan, the amount normally has to be repaid immediately.

The Chair suggested that the exemption for the insurance industry has to be looked at especially with regard to the provisions of the Usury Act, as it seems to reinforce indebtedness of the poorer sectors of society in particular, as they are the ones who are least able to access funding.

Mr Mnguni sought clarity on the extent to which the payment of interest would affect the other policy holders.

Mr Swanepoel replied that if the surrender value stands at R50 000 and only R20 000 is needed the person would not pay interest, and if the In Duplum Rule is in place the interest would accrue to R20 000, which amounts to a total of R40 000. Once that threshold is reached the interest would no longer continue to accrue, and the other policy holders would have to pick up the slack, with the result that the returns on the pool would be less, as will the bonuses. In the case of the normal bank loan, however, the other depositors are still guaranteed their deposit return.

Dr G Woods (IFP) referred to the problems with exploitative interest rates, and asked whether there is anything in law to protect against the increase in interest rate to ensure the person makes more than what s/he would have made on the interest.

Mr Swanepoel responded that the interest rate has to be disclosed. The Usury Act takes care of this situation as it offers protection in such cases.

The Chair contended that the degree of protection currently offered by the Usury Act is minimal and it cannot thus be used to protect the poor in an unregulated environment, and these problems are caused by the fact that the industry seeks to apply good practice codes instead of a law.

Mr Swanepoel replied that it is in the interest of the policyholders to apply good practice codes.

Dr Woods referred to the statement made by Mr Swanepoel that the interest levied is related to prime, and this does not make sense to the insurance industry but it does make sense to banks.

Mr Swanepoel responded that this is a market-related charge.

Mr K Moloto (ANC) asked whether any research has been conducted to identify the sectors of society using this facility.

Mr Swanepoel replied that he does not have this information, but it can be obtained from the insurance companies.

Ms L Mabe (ANC) stated that policyholders are not allowed to draw funds from their policies within the first three years, and asked why it is so important to grant this exemption to insurers.

Mr Swanepoel responded that R9b is currently outstanding due to loans granted. With regard to the three year condition, within that period of time the insurers have to bear the costs of setting up the policy, but the premium would only after two to three years.

The Chair suggested that Ms Mabe is seeking clarity on the reason for excluding only the insurers from the In Duplum Rule. Mr Swanepoel himself has stated that the other policyholders will suffer because the loan is not being paid back , and also stated that this is not that bad because the premium would still have to be paid. Why, therefore, is there the need for the exemption?

Mr Swanepoel replied that it is needed because, in other areas, the loan has to be repaid immediately. Yet, in the case of the insurance industry, it does not have to be paid back immediately.

Mr Moloto asked whether there are any international precedents for the granting of this exemption to insurers. Furthermore, how would the courts interpret this?

Mr Swanepoel responded that he does not have the information regarding the precedents with him. It was in fact held in a court of law that some insurers would be exempt, and others not.

A representative from the Life Offices Association (LOA) informed Members that there are currently only four countries that continue to apply the In Duplum Rule: Namibia, Sri Lanka, Zimbabwe and South Africa.

The Chair asked Mr Swanepoel to explain whether he is saying that the amount of interest accrued would be limited to the amount advanced, and the mere capping of interest rates on loans does not necessarily mean loans will not be offered. There are unequal playing fields between the insurers and banks, and the insurers cannot be allowed to get an exemption so that their actual returns exceed all the possible value they could have gotten out of taking it in the first place.

She said that Part (c) of Point 3.18 of the Explanatory Memorandum to the Bill lists four reasons for the exclusion of the In Duplum Rule. The first three reasons are feasible but the last reason offered is really worrying, because this type of thing must not be included in a piece of legislation submitted to Parliament, as it shows a certain lack of good faith. Thus only the first three reasons will be considered.

A representative from the LOA informed Members that there were three rules under Roman Law that were aimed at protecting consumers in this regard: the first was that interest cannot be charged above 6%, and this rule has since fallen away. The second was that compound interest cannot be charged, and this too has fallen away. The third is the In Duplum Rule, which is still in operation. In fact, the High Court has found it to still be alive and well.

If the exemption rule is not confirmed, the practicality of the interest reaching the duplum stage would include informing the person of the situation and either the interest or loan would have to be repaid or the policy would have to be cancelled. It has to be remembered that the insurer does not want to cancel the policy, because very valuable cover will be lost.

An additional loan could always be granted, but this is unnecessary because the same result can be achieved by borrowing funds somewhere else.

The Chair stated that it has been stated that the policy can be cancelled even though the person is still paying the premiums. Does this make sense? Furthermore, should the exemption be granted, the person would acquire a loan and pay the premiums and the interest would continue to accrue. There would thus be no point at which the cut-off mechanism would be triggered, because previously the cut-off point was the In Duplum Rule.


Mr Swanepoel replied that the trigger effect would be reached when the capital plus the outstanding interest equals the surrender value.

The Chair stated that this would then be the same as the In Duplum Rule.

Mr Swanepoel responded that this also depends on the amount borrowed.

The Chair sought clarity on the percentage of default required here, as also asked what level of lapses have been since 1998 that have warranted the decision to cut-off the life cover or policy.

Ms Anderson responded that she did not know, but informed Members that the total number of lapses have decreased since June 1998, but rose again in 2001.This problem is caused both by the increase in interest rates in the economy and by the difficult times.

A representative from LOA added that he does not think that loans have lapsed yet in the manner proposed by the Chair, for tow reasons: firstly, all the loans granted before 1 January 1998 under the Insurance Act are exempt from the In Duplum Rule in any way. Secondly, those loans granted after 1 January 1998 have not yet reached the stage at which the In Duplum Rule would kick in, and that stage will only be reached now.

In Duplum Association Submission
Mr Rob Turrell, representing the In Duplum Association, presented that submission (see document), and stated that the document is intended primarily as an explanatory document. There is only one concern that can be raised here: both the FSB and LOA have told this Committee that it is good for the policyholder to play more interest. This cannot make sense.

Black Sash Submission
The submission (see document) was presented by Ms Isabel Frye, Blask Sash National Advocacy Manager. She stated that the primary issue here is whether the Bill will allow commercial interests to trump the rights of the consumer. The 2000 Supreme Court of Appeal case of Commissioner for SARS v Woulidge recognised the need for adherence to the In Duplum Rule, and this view is supported. Black Sash can therefore not support the proposed amendments, and members of the industry present today have not argued strongly enough for the abolition of the In Duplum Rule.

COSATU Submission
Mr Sidney Kgara presented the COSATU submission (see document), which outlines the history of both the Long-term Insurance Act and the In Duplum Rule, and ultimately argues against the abolition of the In Duplum Rule.

Mr Neil Coleman, from the COSATU Parliamentary Office, added that it has to be remembered that the FSB is not the would-be regulator, and cannot be allowed to conduct itself as the spokesperson for the insurance industry. This matter has to be considered separately by this Committee.

Discussion on Submissions
The Chair stated that the Policy holders Protection Rules discussed earlier is meant to provide protection for consumers, but it does not deal with the non-payment of premiums, nor does it require insurers to report more than once per year to their clients. Yet in the case of mortgage bonds, whenever the interest rate changes, the client is immediately contacted by the bank and brought up to speed on the latest developments. The Rules do not enforce this level of detailed interaction between the insurer and the client, and thus have to be vastly overhauled to provide for communication on a monthly basis. It is not certain whether the insurance companies would be able to implement this monthly report-back.

With regard to the COSATU statement in terms of the role of the FSB, they do not appear to be pressing the views of the industry. In fact, they have often come out against the industry and are actually saying that consumer interest is damaged if the matter is not addressed properly.

The Chair noted that Members agreed to the amendments proposed by the Bill but not with the In Duplum Rule, as there have not been vigorous arguments from Members that the exemption be reinstated for the insurance industry.

Mr Mnguni recommended that it should not be granted.

Dr Woods stated that, although he sees the merits in the inclusion of the exemption, his party would abstain at this point until more work has been done on the matter. Furthermore, the Bill does not seem to offer protection from exploitative practice, and the IFP would therefore wish to abstain from this amendment Bill.

Mr van Staden stated that the proposed provision should then be deleted.

The Chair noted that Members supported its deletion. The Motion of Desirability was read, and was adopted by the Committee. The Committee Report on the Bill was read and agreed to be Members, and the abstention of Dr Woods was noted.

Committee Annual Report and Inflation Targeting Report
The Chair noted that there are insufficient Members present to constitute a quorum, and these two matters cannot therefore be finalised today, but would have to be discussed at a later date.

There were no further questions or comments and the meeting was adjourned.

Appendix 1: Cosatu submission

1 Introduction

Until 1998, the insurance industry in South Africa was regulated according to the archaic Insurance Act of 1943. Prior to 1977, no sector in the finance industry (including the insurance sector) enjoyed the privileged status of being exempted from the application of the 'in duplum' rule. The in duplum rule provides that the interest stops running when the unpaid interest equals the outstanding capital.

Through the powerful influence of the old South African Law Commission, some amendments were subsequently introduced in 1977. The old Insurance Act was amended by the introduction of section 68A, a provision which expressly entrenched in statutory law the exemption of the insurance sector from the application of an established common law principle, the in duplum rule.

The introduction of this exemption further weakened the protection and the rights of the policyholders in relation to the big insurance companies. Thus, the introduction of the Long-term Insurance Act in 1998 by the democratic parliament (which inter alia removed this exemption) was welcomed as a long overdue intervention heralding stronger consumer protection after more than half a century of the operation of the old Insurance Act.

2 The Long Term Insurance Act

The Long-term Insurance Act brought into law a suite of measures designed to protect the policyholders whose rights were hitherto by and large neglected. These measures include amongst others;

- a choice for an insurer and financial intermediary if a new policy is needed

- an option of an endowment policy instead of a life policy

- the right to be informed and consent to a policy in writing instead of being coerced, etc.

Thus, it is clear that with the 1998 repeal of the old Insurance Act as amended in 1977 and therefore the termination of the insurers' exemption to the in duplum rule, the policyholders rights were better protected by the regulatory regime of the Long-term Insurance Act. To some extent the Long-term Insurance Act and other statutes in the financial industry such as the Bank Charges, Micro-lending and the Usury Act and the Prescription Act complement each other in beginning to protect individuals against the powerful finance companies.


3 The In duplum rule

The In duplum rule is a common law principle well established in the English and South African jurisprudence with wide application across the finance industry. In other financial sectors (and the insurance sector itself since 1998) the in duplum rule has been applied and echoed in various case laws such as Standard Bank of South Africa Ltd v Oneate Investment (Pty) Ltd 1995(4) SA 510 C, Bellingan v Clive Ferreira & Associates CC and Others 1998 (4) SA 382 (W), Sanlam Life Insurance Ltd v South African Breweries Ltd 2000 (2) SA 647 (W), etc.

The Zimbabwean High Court gave a comprehensive definition in a decided case when it outlined the in duplum rule as follows;

"Interest, whether it accrues as simple or compound interest, ceases to accumulate upon any amount of capital owing once the accrued interest equals the amount of capital outstanding, whether the debt arises as a result of a financial loan or out of any contract whereby a capital sum is payable together with the interest thereon at a determined rate. Upon judgement being given, interest on the full amount of the judgement debt commences to run afresh but will ceases to accrue when it reaches the amount of the judgement debt, being the capital and interest thereon for which cause of action was instituted".

For some working people life insurance tends to be the main investment they have or are able to make. Thus, from a personal finance and broader economic point of view, life insurance policies constitute assets available to working people that could be leveraged for their economic empowerment as well as improvement in their standard of living. Since life insurance policies are such important economic assets, to subject the loans they are able to take in the insurance sector to such onerous terms as proposed in clause 20 (which provides for the exemption to the in duplum rule) is to negate the developmental potential that could be harnessed. The abolition of the in duplum provision in the insurance sector could discourage the use of policies as means to access finance.

The inequity that would arise in the operation of the exemption to the application of the in duplum rule between consumers or debtors in the insurance sector and commercial banking sector could be constitutionally unsustainable. It would be grossly unfair that a consumer taking a loan through the commercial banks enjoys the protection of our common law whereas on the other hand there would be no such protection in the insurance sector.

It is important that the regulatory dispensation in the financial sector apply its laws consistently across the board in order to facilitate better integration or linkages amongst the different components of the industry. The introduction of a special exemption for the insurance sector on the application of the in duplum rule sets a precedent and potentially opens the possibility for other sectors to make their own claims.

4 The Insurance Amendment Bill

When the Long-term and Short-term Insurance Acts were passed, the Finance Ministry and committee members hailed them and expressed their hopes that the repeal of the old Insurance Act would be an important development towards "ensuring enhanced consumer protection" in South Africa. Thus, the fact that the Long-term Insurance Act did not include or had done away with the old Insurance Act's section 68A (which enshrined the exemption to the application of the in duplum rule in the insurance sector) was not an 'omission' as claimed by the Financial Services Board. The reintroduction of the in duplum rule in 1998 should be understood as part of the stated objective of the Long-term Insurance Act, establishing greater protection of the consumers.

Given the fact that the Life Offices' Association is primarily behind the bid to introduce this exemption (through the proposed clause 20), it is necessary that it backs its claims with some empirical evidence. Since the promulgation of the Long-term Insurance Act in 1998, the LOA could prove or at least empirically show that;

- there has since been an increase in the lapse of policies, and

- how other policyholders are beginning to subsidise those who do not pay their loans

The fact that these vested interests want not only to introduce an exemption to the in duplum rule but also want such an amendment apply retrospectively raises some concerns. It is disturbing that the insurance industry refers to the operation and application of the Long-term Insurance Act in this respect as merely a "window period", demonstrating its contempt for our democratic parliament. This attitude explains their request for the retrospective operation of their proposed exemption, if clause 20 is passed. This appears to be a way of condoning the brazen defiance of this principle, a defiance that is also occurring in some commercial banks and micro-lending sectors as established by the Ombudsman Charl Cilliers. Similarly, there have been critical media reports against the Debt Administrators who in term of section 74 of the Magistrate Court Act have not been executing their court appointed functions, where they are expected to take the in duplum interest rule into account. The In duplum rule cannot be waived by a borrower and may not be varied by any agreement between the contracting parties.

5 Conclusions

Consumer protection is a central theme of the principal legislation, the Long-term Insurance Act of 1998. In its deliberations over the matter, the Finance Committee would have to at least provide a tenable justification (both politically and empirically) for effectively overturning the 1998 decisions. The Finance Committee cannot merely echo a claim made by the LOA and the FSB that the 1998 decision on the in duplum rule was an omission. As far as Cosatu is concern, there could be no credible basis for such a departure from the 1998 decisions. Therefore, we hope in its judgement the committee will demonstrate some continuity and a principled stand in its formulation and endorsement of this Insurance Amendment Bill.


Appendix 2: In Duplum Association Submission

Submission on Clause 20 of Insurance Amendment Bill 2002

Clause 20, as it reads now, exempts 'policy loans' from the effect of the in duplum rule.

1. What is the in duplum rule?

The in duplum rule has long been part of our law. It is a common-law principle that protects borrowers from paying excessive amounts of interest. It is a principle of equity that allows a money-lender to make a profit but caps the amount of interest chargeable at a reasonable level. We do not determine the interest rate, but we do determine that when money-lenders extract interest beyond a certain amount they exploit their clients.

The in duplum rule provides that interest stops running when the unpaid interest equals the outstanding capital.

When a debtor repays a part of the interest, the quantum of the outstanding interest reduces below the amount of outstanding capital. Interest again runs until it equals the capital amount.

The rule applies not only to money-lending transactions, but also to any transaction that involves the payment of interest on an amount due in terms of the transaction.

2. What purpose does the in duplum rule serve?

The rule serves two fundamental purposes in modern South Africa.

First, it ensures that debtors are not endlessly consumed by interest charges.

Second, it ensures that debtors in despair are not entirely drained dry by money-lenders.

The rule is based on public policy. It is a rule this Committee should support. It is not a rule that should be suspended as a special favour to the insurance companies.

3. What is a 'policy loan'?

The insurance companies will tell you that a 'policy loan' is not a loan in the commercial sense of the word. Rather they will tell you that a 'policy loan' is an advance payment on the policy, that is, a deduction from the sum the insurer must ultimately pay or an advance of funds against the eventual cash surrender value or reserve of a life policy. They will also tell you that there is no obligation on the borrower to repay the loan.

But this is precisely why 'policy-loan' holders should be protected by the in duplum rule.

'Policy-loan' holders feel as if they are under no obligation to pay back the loan, but the interest ticks and tocks and before the policy is out of time the interest has eaten up the capital sum invested.

Policy-loan holders often invest their life savings in these financial instruments, find themselves locked in when they need cash urgently, find an apparent escape in a 'policy-loan', and then find themselves unable to pay back the loan. Very soon there is nothing left of their investment. The cumulative, monthly-capitalised, interest has consumed the sum invested. It would have be much better for the policy-loan holder if she had gone to a lender and ceded her policy as security, rather than have been induced into what has the appearance of an easy and apparently cheap loan.

4. The reasons the insurance companies want you to pass this clause

The Memo to the Bill contains the following:

3.18 Clause 20: Substitution of section 61 of Act 52 of 1998

(a) Current position

The Act is silent on the working of the in duplum-rule and therefore the common law

principles apply in respect of cases mentioned in section 61, namely, that unpaid interest

on a capital amount due only accumulates up to an amount equal to the capital.

(b) New approach

The application of the rule must be excluded in the case of loans against long-term

policies.

(c) Reasons

A provision corresponding to the provision proposed in the new section 61(1), was

included in section 68A(1) of the now repealed Insurance Act, 1943, following

recommendations by the South African Law Commission during 1970. The current

Long-term Insurance Act was promulgated without the provision. The Life Offices'

Association made representations to the Advisory Committee on Long-term Insurance

regarding this matter and the Committee resolved that an amendment should be made.

The reasons for this amendment are that:

— an adversarial relationship may develop between insurers and policyholders if

policy loans are not repaid;

— other policyholders have to subsidise those who do not repay the loans;

— a high level of lapsed policies may occur; and

— insurers can circumvent the common law rule quite easily by implementing

certain system changes which will have huge cost implications and which will

ultimately have to be borne by policyholders.

Not one of these reasons holds water.

An 'adversarial relation' exists at present. The insurance companies have created this 'adversarial relationship' by extracting exorbitant interest from vulnerable consumers. The insurance companies are very careful to lend money that is adequately secured. They employ actuaries for this purpose. They calculate precisely how much money to lend so that, if the loan interest is not serviced, the maturity value of the policy is sufficient to cover the accumulated interest.

Consequently, no subsidy from other policyholders is required.

What circumvention of the law is threatened? Is this avoidance or evasion of the law? This is a disturbing assertion to find in a Memo to a Bill.

These reasons are clearly shareholder-friendly and not consumer-friendly.

5. Retrospective legislation is bad in principle and practice

In 1943 a war-time Parliament, whose democratic legitimacy was severely compromised, passed the 'Old Act' and granted a special exemption to the insurance companies, no doubt for serious 'national-interest' reasons and spurred on by members who had special insurance interests at heart.

In 1998 this Committee abolished that special exemption, recognizing it as the special favour it was.

If you pass Clause 20 now, you will not only exempt the insurance companies from the provision of the in duplum rule, but you will also condone their failure over the past four years to comply with the law.

There is room for legal debate as to precisely when the in duplum rule is triggered. The best view is that both 'old' loans contracted before 1 January 1999 and 'new' loans contracted thereafter are subject to the 'New Act'. The question is not what the law was at the time when the contract was struck - it is the law at the time when the interest accrues that is definitive.

The clause as it is now phrased is retrospective. It closes what the insurance companies are pleased to call the 'window period', that is, the period between the coming into force of the 'New Act' (1 January 1999) and the passage into law of the current Bill.

At common law there is a strong presumption against the retrospective operation of a statute. This presumption has found wide recognition in both statutory and constitutional interpretation. It ensures the fair treatment of those who are affected by the legislation. It also supports the presumption against unjust, inequitable and unreasonable legislation.

Clause 20, proposed by the insurance companies, is a cynical attempt to rub out the liability of the insurance companies, that is, to take money out of the pockets of policy-loan holders (the consumers) and to place it in the pockets of their shareholders.

6. Conclusion

I leave the Committee with two points:

  1. Insurance companies should not be singled out for special treatment in relation to the in duplum rule; and
  2. Retrospective legislation is bad in principle and should be avoided.

I recommend that clause 20 be replaced with the following:

 

 

61(1) Interest on an unpaid premium, or on a loan made by a long-term insurer on the sole security of a long-term policy, or an advance made by a long-term insurer in respect of an amount which is to be payable under a long-term policy, shall [not] cease to accrue when that interest accumulated to, or exceeds, an amount equal to the amount of that unpaid premium, loan or advance.

Rob Turrell

(In Duplum Association)

Monday, February 03, 2003


Appendix 3: Black Sash Submission

 

Black Sash Objection to Proposed Section 20 of the Insurance Amendment Bill 2002

We write to you in connection with the above matter. Unfortunately we will not be able to attend the Portfolio Committee hearing on Friday 7th instant, and we request that you bring the contents of this objection to the attention of your full committee. We shall send a copy of this letter to the chair of the Select committee with a similar request.

Objection

The Black Sash objects to the draft section 20 of the above amendment bill which seeks to amend section 61 of Act 52 of 1998 by introducing an exemption to loans against long-term policies from the operation of the "in duplum" rule, for the following reasons.

Motivation

1. Protection of common law

The in duplum rule is a common law rule that seeks to protect debtors from excessive usury charges by creditors. This rule has been stated as follows:

"Interest, whether it accrues as simple or compound interest, ceases to accumulate upon any amount of capital owing once the accrued interest equals the amount of capital outstanding, whether the debt arises as a result of a financial load or out of any contract whereby a capital sum is payable together with interest as a determined rate".

This protection provides that a creditor can never charge in excess of the capital amount of a loan in interest charges. This means, inter alia:

  1. A creditor can not profit from charging excessive interest since once the interest equals the capital amount, the amount stops increasing. Given the relative inequalities in the contracting positions between creditors and debtors in our largely unregulated market, such protection would also assist in protecting debtors against abusive demands from a dominant creditor party.
  2. If a debtor falls into a position of being unable to repay the capital amount, there is a cap placed on the accumulating interest. This seeks to ensure that where a debtor in future does have the means to begin to satisfy the outstanding amount due, it is not an unrealistic or unreasonable task that lies ahead of him or her which may very well be impossible to perform if the interest is never capped.

Policy considerations:

Clearly the above suggests that there has been a clear choice in our society to protect debtors, even at the expense of creditors, in certain circumstances. Both the Roman and Dutch roots to our legal system were developed in countries which had extremely developed trading practices, to the extent that most of the principles underpinning our legal system have existed virtually unchanged since their inception. Our law has provided both for the need for credit and the acceptance that money-lenders have a right to charge for the use of their money, but it has also seen fit to allow for protection of debtors in the guise of the in duplum rule and prescription.

In the matter of The Commissioner for South African Revenue Service/ R.M. Woulidge, case 24/2000 heard in the Supreme Court of Appeal, Acting Justice of Appeal Froneman held that observance of the in duplum rule is clearly a question of policy.

 

"It is clear that the 'in duplum' rule can only be applied in the real world of commerce and economic activity where it serves considerations of public policy in the protection of borrowers against exploitation by lenders" (Paragraph 12).

In this case the court ruled that the in duplum rule could not be invoked on the facts only because there was in fact no real transaction for value, but merely a generous (gratuitous) gift or disposition. It is important for the Committee to note that the Court distinguished the case from the protection of the rule only because of the "unreal" nature of the transaction in question - basically because no money in FACT changed hands, the court said that when the parties actually had to calculate the money that should have been paid, they were not allowed to invoke the protection of the rule since no intention existed for the debt to arise or be repaid - SARS was just insisting that tax be paid on the sum that should have been paid.

At the same time it is important to accept that the court states that in the real world, the in duplum rule does serve "considerations of public policy in the protection of borrowers against exploitation by lenders". In other words the court acknowledges the need for such protective policy.

We should accordingly continue to respect the common law in duplum rule which was developed to protect debtors against excessive interest charged, including in area of loans granted by Insurers to long term policy holders as envisaged in the draft amendment before the Committee.

  1. Prescription Act 68n of 1969
  2. The in duplum protection is specifically necessary to debtors who have taken out loans against long-term policies if one considers that the current provision of Section 61 make specific provision for the fact that interest due on inter alia a loan secured by a long term policy shall not prescribe before the policy has finally been paid out to the insured/ debtor. This is, very broadly speaking, an artificial exemption of the running of prescription to enable the insurer/ creditor to set off amount due by it under the policy against amounts due to it by the insured/ debtor. Thus the normal protection provided in Section 11(d) of the Prescription Act that provides that debts prescribe after three years is specifically excluded from the provisions of the Act. Given that the position of insurers who seek to recover interest from such loans is specifically protected in this manner, we submit that it is equitable that such debtors continue to benefit from the protection of the in duplum rule.

  3. Legislative intention in current Act:

In accordance with the rules of legislative interpretation, one must assume that all laws are rationally enacted in accordance with the will of the Legislature, in the absence of any indications to the contrary. The current Long-Term Insurance Act was promulgated without the exemption from the operation of the common law protection. It is not appropriate to suggest that the Legislature left out the exemption by mistake.

4. Retrospectivety of effect of amendment

We believe that there is a possibility that if passed, the amendment may well have retroactive/ retrospective effect on contracts that were entered into prior to such potential promulgation of the amendment. In other words, people will be detrimentally affected by an onerous clause introduced by statute that did not exist at the time of their entering into a contract with an insurance provider. This offends one of the essential principles of good jurisprudence, namely that in the absence of any compelling cause, laws should only have prospective effect. We do not believe that such compelling cause has been shown to justify such a radical departure from established jurisprudence.

  1. Equality of Treatment

It would appear that someone who applied for a loan from any other creditor, such as a commercial bank and who chose to use their long term policy as security for their loan, would be afforded the protection of the in duplum rule at the expense of the creditor, and yet were that creditor to be an insurer who issued the long term policy, this proposed amendment would have the effect of robbing the debtor of the protection, and placing the insurer-creditor in a more favorable position than the non-insurer creditor. We do not believe that such unequal treatment is warranted.

6. Conclusion

Accordingly we call strongly for the deletion of the proposed Section 20 to the Insurance Amendment Bill which seeks to amend section 61 of the Long Term Insurance Act. From the perspective of protection of the rights of consumers, we do not believe that the departure from the normal application of the protection inherent in the common law in duplum rule is justified. We call on the Committee to respect the intention of the Legislature as it was expressed in 1998, and accordingly we call on the committee to delete the proposed clause.

Please do not hesitate to contact the writer for further information or any clarification.

Yours sincerely

 

Isobel Frye

National Advocacy Manager


Appendix 4: Banking Council Submission

HEARINGS ON THE INSURANCE AMENDMENT BILL
With reference to your invitation dated 17 January 2003 to address the Committee on the abovementioned Bill, thank you for this offer. As noted in the Memorandum to the Bill, the Banking Council was one of a long list of stakeholders which did not comment on the first draft of the Bill. Our position essentially remains the same, subject to the technical amendment and proviso given below.


1. Technical Amendment

Clause 18 of the Bill amends section 47 of the Long Term Insurance Act, 1998, to exclude the regulated banking sector from the requirement of having to issue detailed cash receipts (as specified) where cash deposits are made into an insurer's account. The Memorandum makes it clear that this exclusion is necessary, as the section was never intended to encompass the banks. We obviously fully support this amendment.

However, the amendment only refers to "a bank as defined in section 1 of the Banks Act, 1990 (Act No. 94 of 1990)." For the sake of completeness, and to ensure a level playing field, this section should be amended to also include registered mutual banks, as follows:

"…(Act No. 94 of 1990), or by a mutual bank as defined in section 1 of the Mutual Banks Act, 1993 (Act No. 124 of 1993)."

2. Proviso

We believe that certain parties may have objected to the amendment proposed by clause 18 (relating to the exemption for bank-issued receipts). The arguments were rejected by the FSB.

Should any parties wish to raise their concerns before the Portfolio Committee, about the proposed exemption for banks as set out in clause 18, we would request an opportunity to address the Committee on the practical difficulties, and the reasons underpinning, the exemption.

Given the minor and technical nature of the amendment, and the limited request to defend clause 18 of the Bill should it be contested, the Banking Council has no other submission to make to the Portfolio Committee on Finance concerning the Insurance Amendment Bill, 2002.

Once again, thank you for the invitation to address the Committee.


Yours faithfully

STUART GROBLER
General Manager


Appendix 5: Transcript of parts of this meeting

Transcript of part of the Finance Portfolio Committee meeting of 7 February 2003:

Mr Andries Swanepoel : Look, can I just ask or confirm that the Committee is not of the opinion as your Members said that the industry must sponsor loans and grant people the opportunity not to pay interest. Now, what we say is that if that's the case and as soon as matters then come to a point where you need to now repay the interest, we believe it's to the detriment of the policy holders that these policies will be surrendered before unnecessarily, because you might still have an opportunity to repay the loan at a later stage. And the insurance industry allows you the opportunity to make your arrangements and come back later and repay it and still then keep your policy in place. I just want to give the facts...

Chairperson B Hogan: I think we musn't get things confused here. By granting the... by not granting that exemption you're not saying that the industry can't give loans...

Mr Swanepoel: No...

Chair: ... that loans will not be made available...

Mr Swanepoel: ... that will still be made available.

Chair: ... all you're just saying is that the amount of debt that will be accumulated will be limited to the amount of capital advanced. Now that is what pertains in Common Law, and it's got a very common sense feel to it, you know, why should you pay in excess of what you have loaned? And it applies to all the other institutions in the financial services sector. So when you're saying it's going to mean that people are will not have a facility to borrow on their policy's medical plan can get access to their policies, that's not absolutely correct. The insurance industry might threaten and say okay well we won't get into the core business of loans anymore, well that would be their business then that they do that. But merely capping the amount of interest that can accumulate does not signify that loans cannot be made available. So I think we must be very, very clear on that.

Mr Swanepoel: The problem is that policies will be surrendered earlier now than necessary, people might lose some cover, and maybe insurers will demand that people start repaying those loans earlier than what is currently the case.

Chair: But it still isn't strong grounds to talk about unequal playing fields between the banking sector and the insurance sector and other people who are in the business of making loans.

Mr Swanepoel: I'm not sure what's the exact situation...

Chair: I mean if you're industry's structured in such a way that there are certain hazards in making loans and if it is not your core business in making loans, then why should you want to require an exemption that finally, in any common person's understanding, becomes exploitative, you know. The interest will just accumulate, and accumulate and accumulate so the value to you of the policy which you finally take out becomes meaningless because it has no value because the interest has accumulated to such an amount that it exceeds all possible value that you could have got out by taking it in the first place.

It's just that, you know, I think what we're asking for is more cogent reasons as to why the exemption should apply. I just want to draw Members' attention to the Memorandum of Explanation, which is at the back of this Bill, which spells out the four reasons given.. where is it, on page... and I'll take... it's on page 22. And the four reasons... it's on page 22 of the Bill on the Memorandum of Explanation at the back of the Bill, and there are four reasons that are being argued for the point. And it says, and we must break for tea, I'll just go through it and then we'll just discuss the way forward, it says an adverse... the reasons why what would happen if you don't allow for an exemption, is that "an adversarial relationship may develop between insurers and policyholders if policy loans are not repaid". Well that holds for anybody if you lend, an adversarial relationship...

Mr Swanepoel: Ja...

Chair: ... I don't understand the logic of that argument. "Other policyholders have to subsidise those who do not repay the loans". I think that is probably warrants the most merit that this Committee would have to consider. "A high level of lapsed policies may occur". Yes, that is one has to look at, but one then also has to look at the consequences of allowing interest to just accumulate without any restriction on that, weigh that against that. And "insurers..."... now this is a thing that really, really worries me. "Insurers can circumvent the common law rule quite easily by implementing certain system changes which will have huge cost implications and which will ultimately have to be borne by [the] policyholders". So we're saying that we're under a threat if the insurance industry says if you don't grant us this exemption we'll just find ways to go around the law and the policyholders will then carry the can for that. Now I'm embarrassed to say that I just don't think that this should not be a thing that should come in a Memorandum of Explanation to Parliament, where the insurance industry or a regulator is saying to us that methods will be found to circumvent the law and the policyholders will circumvent the law... will carry the cost. That should not be an argument used by anyone coming before us in Parliament, because it shows a certain lack of good faith on the people putting forward that argument.

So I think there are three issues that we do need to just consider, and that is the adversarial relationship. I would submit that that is the weakest point possible before us, the lapsing of the policies, and the subsidisation of other policyholders. I think at this stage what we haven't yet is maybe from the people from the insurance industry who I think came unawares that this In Duplum Rule would become a matter of contention. I was warned by the LOA before the hearings started that it might come up as an issue. It didn't come up while we were having the hearings. So the insurance industry is clearly at a disadvantage at the moment in not being able to their position, it's only argued through yourself. We also havn't been able to consider the submissions coming from the Black Sash and COSATU at this stage, and also from Mr Turrell, who made submissions...

>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>

Adv Abri Meiring (Life Officers Association): Thank you for the opportunity Madame Chair to shed some light on an issue which is probably generating more heat than is deserved, as consumer issues should. And as the LOA we are certainly sort of aware of the fact, and it is also healthy to see the robust civil society inputs from COSATU, the Black Sash and the In Duplum Association on this particular issue. It is the view of the LOA that...

Chair: I think that sounds wonderful: the In Duplum Association. I think it should be the new forum name of the alliance in civil society: the In Duplums.

Adv Meiring: One wonders if their membership doubles....

Chair: Carry on

Adv Meiring: As a point of departure the LOA would state that we fully support the sentiments that was put forward today by the regulator, by the FSB, in that the In Duplum Rule which is a Roman Law rule, and I don't want to go into any of the history here, is one that fits uncomfortably in terms of its original purpose to protect the borrower of money in the case of a policy loan. And to explain this one's got to really look at the sui generis or the special nature of a policy loan. Policy holder takes out a policy with the Life Office with the expectation of paying premiums on that policy and ultimately getting a valuable benefit in the form of cover or some endowment policy that's going to pay out in the future after a term.

The life assurers apply actuarial skills to fine tune exactly when premiums must be paid and exactly what the benefits are going to be at the end of that particular period. It happens in practice, and we see it in the LOA and this is one of the great concerns of the LOA, that people fall on hard times and that they cannot afford the premiums on a policy which they have contractually entered into two, three years ago when their financial circumstances were difficult. It is in those circumstances that they approach us, and as we said here today Madame Chair thousands of people are approaching Life Officers, saying "I need the money that's in my policy".

That puts us in a situation where we have got to in all honesty say to that policy holder that to surrender your policy now is getting rid of a very, very valuable benefit for which you have already paid upfront cost in the form of administration, commission and the like, and actually will lead to a lose-lose situation for the life office, for yourself and also for the systemic health ultimately of the whole financial services industry in the country.

In those circumstances the policy holder is then given the choice to instead of surrendering this valuable benefit to take out an advance, and I want to call it an advance, on this policy. There is a certain surrender value which is always less than the ultimate value, against which the insurer can then hedge this advance, and interest of course has to be paid on the advance, like in any commercial transaction. So this policy loan carries interest into the future. Unlike a bank, Madame Chair, the insurance company will then not demand interest at the end of the month on this outstanding loan, but will add the interest to the loan for as long as the tie-over provision, and that is where I want to position this, is needed by the policy holder. So the longer the insurer is prepared to live with the situation, leniency is granted to the policy holder to get his financial affairs in order to be able to repay the loan plus interest, and restore his full ultimate payment to what it would've been.

Important to remember that while this loan is outstanding it sits almost as it where, if I can use layman's language here, in a separate kitty. Your core benefits under this policy contract are still accruing to you, but separately from that in a kitty is a policy loan plus interest. If the interest on that loan is not paid because in the duplum level is reached, somebody has got to fund for this outstanding debt. And it either would come from your benefits, which is growing without noticing this policy loan and interest in a separate kitty, or other policyholders would have to carry. So it would lead to an unfair situation to other policyholders if interest is not paid on this amount, which is what the in duplum rule would have to mean in practice. Now the only thing the insurer can do under those circumstances, and any actuary would immediately realise this, is to call up the loan which would lead to surrender of the policy and which would lead to the ultimate loss of the benefits. That is where the in duplum rule sits very uncomfortably with the policy owner and which essentially is granted as a matter of leniency to people to tie them over in hard times, and why should we only be lenient up to the level of when the interest equals the relatively small amount that might have been left on that policy and then close down and basically confiscate something which potentially could have been a massive benefit at the end.

It is in that context, if I've put it sort of... I've tried to put it in terms that I think, you know, is perhaps not as scientific as an actuary would have put it, that the insurance industry would argue that the In Duplum Rule unlike the, or contrary to the statement that was made is definitely not a failure to a special interest group, namely insurance companies and shareholders to the extent of consumers, but is really operating to the benefit of insurance.

And there are four points I would just like to make in addition, Madame Chair, in... from the LOA's submission which I am not quite sure whether it is available, but there is a written submission. If insurers should apply the rule it would force them to demand immediate repayment of interest when the interest is close to the capital amount. That would just be sound commercial practice insurers would do. This is the only way to ensure equity amongst all policyholders, as it prevents borrowers from being subsidised by other policyholders. It would result in policies with loans having to... policyholders with loans having to find cash to settle their debt, or part thereof, either by taking out a loan elsewhere or by part or full surrender of the policy, which is not ideal.

The LOA is concerned, and I want to stress this, about the rate of lapses and surrenders in the life... in life policies in the industry, and we are of the view that every possible step must be taken to avoid the situation where policies are unnecessarily surrendered to comply with an artificial Roman-Dutch rule.

A loan from an insurer against the security of the policy, the point I have made, can be differentiated from normal loans by commercial money lenders. Policy loans must be regarded as advances made by the insurer in respect to the policy benefits, rather than loans in the normal strict sense. And then of course there is the bigger argument also that the In Duplum Rule has been identified by the South African Law Commission and by numerous senior counsels' opinions and also in our case law as being outdated in general, but certainly in the insurance industry inappropriate. And since the introduction of the Policyholders Protection Rules the disclosure of policy loans has also been significantly enhanced from a very low base, admittedly, and whether we are ultimately at the point we want to be is another question that I think then legitimately be asked.

That would be the position of the LOA on this one, Madame Chair, and we are seriously concerned that if an artificial rule is going to be in the place of a practice that has been a practice in the insurance industry since '77, that this would be extremely disruptive in terms of system changes which would then be necessary. But much much more importantly than that is that, on balance, it would be an anti-consumer measure to introduce the In Duplum Rule to policy loans. Thank you Madame Chair.

Chair: Would anybody else from the LOA would like to raise anything further?

Mr Gillie Gehle [LOA]: I'm Gilbert Gehle on behalf of the LOA. Maybe just one or two points. Somebody asked whether the In Duplum Rule applies elsewhere in the world. This is a Roman Law protection rule that developed many centuries ago. There were three consumer protection rules that developed in Roman times: the one was that interest mustn't... that you cannot charge interest above 6%. That clearly has fallen along the wayside. The other one is that you cannot charge compound interest, you can't compound interest, that's clearly also gone by. And of the trio on the In Duplum remained. At some stage there were... it was seriously questioned in our law whether that still applies, but the High Court has found that it's still alive. And as has been said the Law Commission in 1972 said it should be abolished, that the law-makers found it necessary only to abolish it at that stage regarding the policy loans for very good reasons which still apply.

The In Duplum Rule, being part of our Roman Law inheritance... heritage, to my knowledge applies only in four countries in the world at the moment. That would be South Africa, Namibia, Zimbabwe and Sri Lanka. I'm not aware that it applies in any other country, not being from that origin.

Just on a practical level, Madame Chair, if the exemption of the rule is not continued, as it has applied since 1977, the position practically will just be that if a policyholder has borrowed money and the interest now reaches the duplum stage, we will have to... the insurer will have to approach the policyholder and say well this is now the situation, we'll have to do something: either you will have to start paying interest or you have to repay the loan, and if you don't we'll just have to cancel the policy which will... which is we... what we don't want to do because you might lose very valuable cover in that process.

Alternatively, we can just give them another loan. For argument's sake if you borrow R20, the interest has now run up to R20, so he owes the insurer R40, the insurer can just give him another loan... new loan for R40, he uses that loan to repay the existing loan and then we just start afresh. So the reason why we don't want to go through all of that is just an extra cost which the consumer must bear in the end, it's just unnecessary to have all of that, and you can achieve exactly the same thing legitimately. Or the policyholder can go and borrow money somewhere else and achieve the same thing. But... he... sometimes... often have the situation that you have a very valuable policy which might have, say, R1m life cover and disability cover and trauma cover, and say R300 000 investment... accumulated investment level, and the last thing one would want to see is that a person who is.. needs money and wants a bridging... some bridging finance having to cancel that policy and cancel that life cover, he might die the next day and its all gone. Or for him to come and have to repay, and if he cannot repay, to have the policy cancelled. We would much rather keep the policy going some how or other and retain that cover because we've got to go through all of that again, apply for a policy again, pay all the commission again, pay all the costs again, and every policy in South Africa must run for a period of five years before it can take any of the investment money out of the policy. Then if he takes out a new policy the whole five year period starts afresh. So there are so many benefits that the policyholder will simply lose if he is some how or other forced to have the policy cancelled, wholly or partly.

Chair: Can I just ask one question before we go from that, are we saying... I just want to understand the logic of this... if someone takes out a loan and in a situation where it can't exceed... the interest can't exceed the amount borrowed... the amount that is advanced, it is at that point that the insurance company would then want to cancel that policy? Now that person has continued to pay premiums up to that point, so the person has taken out a loan but is continuing to pay premiums on the actual policy. So you're saying that the insurance industry would then say that, regardless of the fact that the person is still paying premiums, that once... that... that the point at which you have reached saturation point when the In Duplum Rule comes into place, you would then cancel that... that premium... that policy. Does that make absolute sense? Now that... that's just my first question because you're still paying a premium.

But the second issue that I want to ask is in a situation where you are granted an exemption, and you get the loan and you continue to pay the premiums, and the interest just accumulates and accumulates and accumulates, are you saying that there's no point at which the cut-off is triggered? In the former circumstance the cut-off is triggered once you've reached the parity with, you know, the interest is at parity with the amount advanced. Are you saying, in the instances where you have an exemption, there is no point at which the trigger * snaps fingers * is... point at which the insurance company would be triggered into cancelling that policy? All they would do is just allow the interest to accumulate and accumulate. I'm just trying to understand why you say that in the one circumstances where the interest can only reach a certain level that would mean that the policy would be cancelled, and in circumstances where the interest just accumulates and accumulates and accumulates that the policy would not necessarily be cancelled, that would be to the advantage. Because that seems to be the implication of what you are arguing, or have I got the wrong end of the stick there?

Adv Meiring: Madame Chair, an actuary can explain this better than a mere lawyer, but I think it connect with time, timing is the issue. If the In Duplum Rule applies, then there comes a point in time where the insurer will not be allowed to accrue further interest, and at that point in time the only choice the insurer have is then to call up the loan, to make good for the fact that a free and gratis loan cannot continue to exist into the future. So its a matter of time.

Chair: Okay.

Adv Meiring: As far as the policy value is concerned, of course there is a surrender value in the policy which backs the loan, not the 100%, that would be unwise and imprudent, normally 80- 90% of that surrender value back to the loan, the ultimate capital that's advanced in the beginning. As you quite rightly say, premiums are still being paid, so notionally the surrender value does increase. But if the outstanding amount plus interest ultimately reaches the amount of the intrinsic value of the policy, you have the situation where the surrender value of the policy gets exhausted and the insurer will in the case like that, depending on the insurer's particular policy, be in the position to say to the policyholder that unless the loan is now repaid, we must make other arrangements.

Chair: When would... when would that happen in the situation when the In Duplum Rule does not apply? When would the insurance... insurer cancel the policy when the interest in allowed to accumulate eternally.

Adv Meiring: This is where the lawyer in me would hesitate to reply, because of the nature of life insurance policies and their various components, Madame Chair, and the rates that various insurers apply obviously has an impact on when that point is reached. Maybe the... the Regulator has got a better idea...

Chair: I know the life industry did a massive research into lapsed policies and things, do they have any information in that regard, of what could be particularly attributable to lapsed policies because of loans advanced.

Mr Gihle [LOA]: Madame Chair I can try and give a preliminary answer. I don't think any policies have lapsed to date due to policy loans being called up because of the In Duplum Rule applying, for the following two reasons: all the loans entered into before the first of January 1999 when the new Insurance Act came into being is exempt from the In Duplum Rule in any event, so the... so that carries on as it was under the old Act. The loans that were issued from the first of January 1999 has not yet reached the stage where the in duplum kicks in. Generally, I understand in the industry its now about to happen, and the problem of policy lapsing will only now begin.

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