“Twin Peaks” & Insurance Industry: “Twin Peaks” and the insurance industry: National Treasury & Financial Services Board briefing

Meeting report

Introduction by the acting Chairperson
Mr D Van Rooyen (ANC) apologised for the absence of the Chairperson and said that he would act as chairperson for the session. He remarked that insurance was a highly important financial sector in the context of the broader Twin Peaks reform campaign.

Insurance in South Africa: Overview, policy and regulatory frameworks
Mr Olano Makhubela, Chief Director: Financial Investments and Savings: National Treasury (NT); Mr Jonathan Dixon, Deputy Executive Officer: Insurance (FSB); Ms Reshma Sheoraj, Director: Insurance (NT), and Ms Jo-Ann Ferreira, Head: Insurance Regulatory Framework (FSB).

Both long and short-term insurance were prudential concerns since it guaranteed to pay a certain contracted amount when risk or commitment materialised. The current legislative framework addressed both prudential and market conduct concerns. Review of the framework was necessitated by international standards and local market conditions. The local insurance market was made up of big insurance groups like Sanlam and Old Mutual. The latter was primarily listed in London. There were also systemically important financial institutions (SIFIs). Total assets of the long-term insurance market were R2.4 trillion, and of the short-term market, R118.9 billion. The financial sector had a high degree of concentration and interconnectedness. The top five insurers accounted for 74% of the long-term insurance market. All major banks were affiliated with insurers through holding companies or direct ownership. Insurers were a major source of funding for banks. This gave financial institutions more significant pricing power than in the more competitive economies.

Under the Twin Peaks insurance regulation regime, market conduct would be regulated by the Financial Services Conduct Authority (FSCA), prudential by the Prudential Authority (PA), and financial stability by the South African Reserve Bank (SARB). The Insurance Bill of 2015 would be tabled in Parliament in November 2015. It would give effect to Twin Peaks by providing a framework within which the PA could perform forward looking risk-based insurance supervision. The FSB was drafting a paper on the regulation of an “inclusive insurance market”. There was a new solvency framework: Solvency Assessment and Management (SAM). The aim of SAM was to align capital requirements with underlying risks to insurers. A market conduct policy framework was published in December 2014. It supported a risk-based and proactive approach to supervision. A retail distribution review was published in November 2014. It was a review which was an example of a more interventionist approach to market conduct regulation. Objectives included enabling customers to understand and compare the nature, value and cost of advice and other services. Greater responsibility would be placed on the product provider. Key information documents (KIDs) had to provide customers with information in language that was as far as possible free from jargon and technical language. It would be compulsory across the entire range of retail financial products.

An NT/FSB technical report on consumer credit insurance was published in July 2014, to address increasing concerns about poor market practices and unfair consumer outcomes, especially for those in the lower income bracket. Early termination penalties on life insurance savings and investment policies had to be dealt with.

Discussion
Ms T Tobias (ANC) remarked that the kind of reforms envisaged would not be welcomed by the financial sector. The ANC would be right behind Treasury and the FSB, who were launching a big fight. The last slide was the most important. It referred to questions that had to be asked, for instance about what happened when insurance companies were motivated to extort the maximum amount of money. She wished to draw attention to two cases from her personal experience. She had acquired funeral cover for her mother. A leaflet was received that announced increased coverage. She was not willing to pay the new premium. A consultant told her that if payment fell 30 days behind, there would be deductions. She had written to the Ombud. There was exchange of letters for a year, as she was trying to obtain an outstanding amount. She filed bank statements, because she was worried that the insurer was not keeping records as well as she did. Bank statements had to be filed. She approached the Ombud. In the end she could receive only the outstanding amount when the penalty was paid. It was a raw deal, and time-consuming. She had to explain that she had not defaulted. Insurance companies were trying to pay as little as possible, without consequences for such behaviour.

Ms Tobias referred to an experience she had had with Discovery medical aid scheme. Medication was acquired on the hospital account. The wording was couched in such a manner as to be deliberately confusing. The fine print did not explain the procedure for acquiring medication, and in the end she had to pay a huge bill. It was not just the illiterate who were confused by the language used. Even the most learned could be confused. Ordinary people were not legal minds. It was unacceptable for people to buy products when they did not understand the terms. People assumed that because they were dealing with a person of the same skin colour they could believe that they were being told the truth. National Treasury was in a difficult position as it was responsible for financial stability. There were challenges around retirement annuities. People had to know what was contained in the document that could prevent beneficiation. When one was responsible for ten unemployed people, one had to have insurance. Intermediaries had to explain terms and conditions. She asked about the interest of the sector versus those of government, in terms of the legislation. The consumer had to be protected, without stifling economic activity. Some were saying that there was overregulation. The free market argument was for less government regulation. But it was because the market abused its powers that African Bank had gone down. All policies that considered consumer risk were undermined. Products were sold without affordability being considered. She had seen a person who was unable to operate an ATM, but had a gold credit card. Her insurance paid within 24 hours when she claimed. The insurer did not even check monthly pay slips. They benefited. People were not asked if they were HIV positive when they acquired funeral cover. But later the insurer would say that if there was any medical condition that was not disclosed, it would not pay. Families paid for 20 years and received nothing. The question was what happened to the money that people were paying to insurers.

Ms Tobias referred to the last slide. The question was how to regulate the market. Insurance companies had to disclose their profits. It was not the responsibility of the client to know about details, it had to be explained upfront.

Mr A Lees (DA) said that he was surprised that there was so much generalisation, with no accompanying statistics. It would have to be gone through in due course, before the end of the process in November. He asked if the independence of a regulator like the FSB implied that the regulator would not have to return to Parliament. He himself needed insurance, and had a pension. People could act in an adult fashion, in their own interest. No one went to Checkers for potatoes and came back with bread. Insurance was said to be difficult to understand, but motor cars were also difficult to understand. The presentation made it look as if people were being dealt with who did not understand. Government seemed to think that people needed nannies. He did not understand the intended standardisation. The question was then: when would the buying of motor cars be regulated, because the motor car was a complex product. The pharmaceutical industry had virtually been destroyed, and had become part of supermarkets. Regulations would destroy the industry. Bills had to be looked at carefully. It had been said that consumer credit policies were not paying off. There had to be statistics to support that claim. Medical schemes were expensive because of fraud. People were taking maximum benefits at pharmacies every month. That was not the intention of medical aid. He was astonished at the generality of the comments. Regarding short-term insurance, only AA Mutual failed. It had to be stated how many had failed in the preceding 20 years. It was being suggested that the industry was not benefitting South Africa as a whole, and that was not the case. Statistics were needed on how many complaints were received, and how many policies were available. He himself did not need a funeral policy. He would prefer to be placed in a hessian sack and dumped in the ground. He did not want a fancy coffin, a big party or celebrations.

Ms Tobias was upset at funeral ceremonies being referred to as a party.

The Chairperson remarked that various interests, constituencies and classes were being represented. As the Bill went to Parliament, Members could do well to arm themselves with knowledge of the thinking expressed. Mr Lees would be allowed to articulate his views, but had to be ready to take a punch.

Mr Lees quipped that he would turn his jaw fully to receive the punch, but there would be a counterpunch. He was concerned about generalisations. He did not want to be treated like a child by the State. The majority of South Africans could read policies. He was concerned about the separation of the regulatory body from Parliament. The FSB employed 800 people. 60 people would be moved to the Reserve Bank. He assumed that they had not yet been moved.

Ms P Kekana (ANC) remarked that the previously disadvantaged were challenged by insurance jargon. Treasury and the FSB would have to go a long way. Insurance language could not only be for the literate. Treasury and the FSB were taking the right steps. The regulation regime standardised key issues. Language had to be easy to follow and understand. She agreed with Ms Tobias that all had been victims of insurance companies. There had to be sanity. She asked if insurance companies were preparing themselves for regulation. She asked about the state of readiness. There was a gap regarding household and housing insurance. There were people in the rural areas who owned big houses. Insurers had to reach out to them. Rural people had to have access to insurance. Micro-lenders had not been discussed. They were relevant. People were falling prey to them.

Dr B Khoza (ANC) remarked that it was understood that the financial services industry was complex. It could not be divorced from the historical development of the country. Capital in South Africa was racially stratified. Expressions of superiority from some groups emerged naturally from time to time The State had to offer protection to consumers and ensure fairness. South Africa had emerged from a system that was extremely brutal, especially to blacks. There were people who spoke isiZulu who had not been transformed.

Mr Lees called on the Chairperson for protection, as he was being attacked.

Dr Khoza retorted that his name had not been mentioned.

The Chairperson endorsed that. There were many people in the country who spoke isiZulu. Mr Lees had implied that people were stupid, and he was not.

Mr Lees denied that he had said that.

Dr Khoza remarked that the superiority complex of other groups manifested in the current platform. The Standing Committee was there to transform Parliament as an institution, the economy, and the way things had been run previously, and spoke from the strength of its mandate. Social cohesion had to be strengthened. Funeral cover had to be regulated. Two worlds had to be brought together. Contradictions that surfaced, had to be dealt with. Brutally, if need be. Twin Peaks was not just a nice thing to do. It was a response to the crisis that occurred in 2008. It was not just South Africa or even the ANC that was involved with that. The international community was insisting that gaps be closed, to prevent the collapse of the financial sector. South Africans were being pro-active. Treasury had to be specific to sectors. It would not do to deal with banking as if it were homogenous. She asked what Treasury's definition of financial inclusion was. It would not do to call it inclusive when it was still exclusive. Black mamas were excluded when funeral stokvel societies were taken over. Banks were now operating in a space that the black mamas ran perfectly well. Funeral cover and funeral parlours had to be regulated. Her constituency was black African, which was also stratified. People acquired funeral cover from a parlour, paid R150 per month for 15 years, and then could not even get a coffin of their choice. There was a legislative vacuum. When a product was offered, there had to be a company record system. Parlours were taking money, and there was no legislation. Those who offered insurance products had to say what was on offer, in the language of the person. Legal jargon was confusing to those who did not know English. There had to be a focus on the most vulnerable. Funeral cover had to look at solvency at all times. People did not know when a family member would die. There had to be legislation. Compound interest had to be considered. Insurance bought could affect a house or a car. One did not know what happened to deposits paid. People did not know how compound interest was calculated. People were coerced into buying cars they could not afford. People had to know what to take care of, and what was required of them. Many South Africans did not have a capital base. Some started from a zero base. Legislation had to take that into account. Retirement annuities were problematic. It was hard to transfer a retirement annuity when one was retrenched. People became unable to pay for the annuity. If one stopped paying, there had to be interest on the money. There were creative solutions to life cover problems. The value system of society had to be spoken to. If one did not claim, it had to be possible to get something out. Outsurance was doing that. One could lose everything with certain life cover schemes, if premiums were not paid. There had to be a portion that accumulated. Cross subsidisation was needed, to make schemes viable, but also safe. South Africa did not have an entrenched culture of savings. A person who was unemployed could lose all the money given for life cover. Different sectors had to be broken down. Even when prudential was being dealt with, there had to be classification, to avoid ambiguity.

Dr Khoza apologised for the length of her contribution.

The Chairperson replied that he enjoyed it when Members raised their views.

Ms S Nkomo (IFP) said that she had missed out on the previous meeting. She noted that people were allowed to disclose their party affiliation. Her party, the IFP, would be supportive of the issues at hand. Her constituency was black African. She was appreciative of the role of women in African politics. Energy from women was much needed. South Africa was part of the G20 agreement, but still was not fully adhering to it. She referred to funeral parlours and micro-lenders. Micro-lenders were unscrupulous, and had a hold on mostly black people. IDs and bank cards were left with them. Funeral parlour practices caused concern. When she was growing up, African mothers ran societies, which met every month in someone’s house. Many Africans could go to school and study further because of such societies. Those areas had to receive attention, as they were dear to the hearts of African people.

Ms Nkomo asked about outcomes related to the 117 position papers mentioned. She asked what outcomes and challenges were identified. Mention was made of various workshops. She asked how much information had reached the public. Everybody had to be informed. High profile insurance companies used to oppress the people. People were proud of life cover, compared with the previous dispensation. But they were deliberately pushed towards high profile cover. People had paid and their children got nothing. Information had to be supplied to people. The Competition Commission had to look at poor disclosure of products. There was a TV channel were people were marketing themselves, and one did not know what to choose. Information had to get to the poorest, to clear up the insurance mess.

Ms D Mahlangu (ANC) noted that it was not required to state which party one represented. She did not understand the role and mandate of Parliament, when it came to the intended regulation. Parliament represented different classes and sectors. When people received older person’s grants in the rural areas, money was debited from the grant as soon as they received the grant. She wanted to know who was behind that. The process had to be regulated so that the people behind such debits could feel the pain. It would not do to have a stereotyped view of fraud. It was not restricted to a single sector. Members of Parliament were there on account of the voters. The majority of South Africans had to be represented. The majority of South Africans were disadvantaged. Insurance regulation had to be part of the story of South Africans standing together.
 
Dr Khoza asked how Old Mutual in London managed cross-border risks.

The Chairperson referred to financial inclusion and soundness. He asked about the role of government in re-insurance. Government played a role elsewhere. He asked if premium retention could be promoted. In East Africa and Namibia re-insurance companies were state driven. The question was how to address the issue of concentration of ownership. There had to be a broadening of ownership. People spoke of the Big Four. Big companies had a monopoly. He asked if there were changes in the offing. Work could be done with the National Credit Regulator (NCR) and the Department of Trade and Industry (DTI). The inclusion of the relevant  parliamentary committees should be considered.

Mr Makhubela replied that there were broader regulatory issues. The 2008 financial crisis had plunged the entire world into depression. The question was what had triggered it. There were failures around market conduct. Even a liberal country like the US had begun to realise that the financial sector had to be regulated. South Africa was not out of the ordinary. The country had fared well in the crisis, because of good supervision and prudent policy. An unregulated financial sector was bound to be abused. Treasury did not want overregulation. The question was how to strike a balance between protecting the largest number of people, whilst not hampering business. The UK was struggling with similar problems some years before. There were similar challenges in the most advanced countries. South Africa had a legacy of protecting the most vulnerable. The concern of the Committee with accountability was noted and appreciated. It was not the intention to take regulation away from Parliament. Supervisors would be empowered, but there would still have to be accountability. Regulators would be closer to the issues and would be given powers to respond rapidly to issues. The regulatory entities were still state entities. Parliament would not lose its role.

Mr Dixon responded that there were key challenges in insurance that needed regulation. The central challenge was that companies had to pay out on claims, but it made it less profitable for them. There was no incentive to pay out. An ombud had to be a last resort. It had to be unnecessary to hear many ombud complaints. Insurance companies had to treat people fairly. There was a new market conduct approach. The view that regulation was not needed, was an extreme and minority view. It was not really the industry view. The industry understood the role of finance regulation. The approach of having light-touch regulation was discredited through the financial crisis. Protective regulation was understood. The purchase of financial products could not be likened to the buying of bread. It was a complex process with uncertain outcomes. The financial sector needed a higher standard of consumer protection. There were sectors of insurance that the FSB could not regulate, like medical schemes, for which the Council for Medical Schemes (CMS) was responsible, and micro-lending. Regulation had to be coordinated and cooperative. The DTI and Treasury had to work together closely.

Mr Dixon continued that many complaints were received about funeral parlours. It was a key issue in some constituencies. Complaints were received from people who knew who to complain to. Many people simply did not know where to complain. Products were being sold to the most vulnerable people. There were 500 people employed by the FSB, not 800. The 60 employees had not yet been moved to SARB. There was readiness for Twin Peaks. The Insurance Bill would guide insurers to prepare for SAM.

Mr Dixon noted with regard to house insurance in the rural areas, that there was a lot of engagement around inclusion. The industry was being encouraged to look at areas where services were not provided. If everyone were to compete in the same segment, there could not be growth. Access had to be broadened, and the question was how regulation could assist with that.

Mr Dixon referred to the re-insurance framework. SAMS addressed unintended consequences in the current regulatory framework. The amount of capital one had to hold against re-insurance depended on the credit rating of the re-insurer. The anomaly was that it was subject to sovereign caps. The re-insurer could be as good and sound as those offshore, but if there was a sovereign cap there would be downgrading. The question was whether the re-insurer had to be viewed as if South Africa were a sovereign capitalist state. The playing field had to be levelled between South Africa and foreign re-insurers. There had to be cooperation between South Africa and foreign re-insurers. Ownership had to be broadened to encourage entry into the system, through the issuing of micro-lending licences, for instance.

Ms Sheoraj responded that research had been done about consumer credit and insurance reforms. There was a quarterly technical report, which was a quantitative and qualitative impact report. Claims and ratios were looked at. The reports would be shared with the Committee. The vulnerable were exposed to abuse. People did not understand what they were covered for. The CMS would benefit from changes in the financial sector. People had to know what they were covered for. The role of government in re-insurance was important. SASRIA was a state owned re-insurer that offered protection against political risks like terror. Some countries had state owned re-insurers, especially in the BRICS context. Foreign re-insurers were not to be crowded out. The question was how to retain offshore premiums, with regard to the role of government.

Mr Makhubela added that there was concern about reaching out to communities for consultation. Their issues had to be brought to Parliament. Vulnerable individuals had to be reached out to. Ways had to be found to encourage consultation with communities. It was a struggle to reach out to working class communities about retirement insurance. There was a move away from old generation retirement annuities to new generation collective investment schemes and unit trusts. The problem with retirement annuities was that people got locked into it. People were retrenched without having been told that they were locked into the annuity. It could be due to poor disclosure, with people not told upfront. There was currently no flexibility in retirement annuities. The Tax Laws Amendment Act spoke to the ability to transfer retirement annuities. Possibility issues had to be considered, with people being told if they would be able to transfer the annuity. Micro-lending was not in the Treasury and FSB regulatory space. There had to be coordination between the DTI and the NCR. There was a project that looked at housing deficits. It fell under the DTI and NCR mandate.

Ms Sheoraj added that there were initiatives under way. The DTI, the NCR, the Department of Justice and regulators cooperated. Cabinet encouraged a joint approach.

Ms Ferreira noted that Treasury and FSB were working with the South Africa Social Security Agency (SASSA) on a code of conduct to address issues like micro-lenders collecting at the older person’s grant pay points. The NCR would clamp down on micro-lending at pay points. The FSB and the NCR were regulators and supervisors, and were already attending to such matters. Advertising and claims handling would be looked at. There would be supervising engagements with insurers. People did not know that 50% of initial premiums paid for were without bonus. People had to know that if they could not afford it at a specific time they would not receive any benefits. There had to be engagement about communicating full disclosure about what people were paying for with the initial premium. Traditional community structures had to be included. Some community structures were too big. It had to be asked if 700 members was still good. Regarding funeral parlours it had to be known when a funeral parlour could regulate itself, and when the government had to help. 99.9% of South Africans had funeral policies. It was critically important to deal with abuses around funeral parlours. People who had a bad experience with one insurer were liable not to buy another insurance product. Supervision of funeral cover was needed.

The Chairperson adjourned the meeting.