Insurance Bill: National Treasury & FSB briefing on proposed amendments

Meeting report

Opening Remarks

The Chairperson said the need for financial sector transformation was well-understood. The extent of monopoly within the financial sector was unacceptable. However, at the same time, insurance policyholders needed to be protected. If the financial system collapsed, in most instances, the poor and low-income people suffer the most- they disproportionately bear the burden of such a collapse. Also, the creation of a new strata of elites in the name of transformation at the expense of the poor would not be allowed. On the other hand, such considerations should not be used as an excuse for the slow pace in transformation. Both sides of the divide needed to find each other.

National Treasury presentation

Mr Ismail Momoniat, DDG: Tax and Financial Sector Policy, National Treasury, took the Committee through background of the Insurance Bill. The Bill was built on the Twin Peaks model of financial regulation envisaged in the Financial Sector Regulation Bill (FSRB) in respect of prudential supervision. It provided a consolidated legal framework for the prudential supervision of insurers as envisaged in the FSRB. The Insurance Bill will: promote financial inclusion and insurance sector transformation; enhance safety and soundness of insurers through introducing a new Solvency Assessment and Management (SAM) regime; help maintain financial stability through introducing a framework for insurance group supervision; and facilitate alignment with international standards (adapted to South African circumstances) in accordance with South Africa’s G20 commitments. Also, the Bill entrenched the principle of proportionality and was empowering.

Key issues addressed in proposed revisions

Ms Jo-Ann Ferreira, Executive, Financial Services Board, said a number of amendments had been made to explicitly provide for the realisation of transformation of insurance sector objective. Amendments were as follows:

Clause 1: Definitions

The term “transformation of the insurance sector” had been defined with reference to the Broad-Based Black Economic Empowerment (B-BBEE) Act.

Clause 3: Objective of the Act

The clause had been amended to include a specific reference to transformation of the insurance sector.

Clause 22: Requirements for licence

The clause had been amended to require an applicant to have a clear plan to meet transformation objectives. The Prudential Authority (PA) must take into account the public interest, including transformation when considering a licence.

Clause 26: Variation of licencing conditions

The clause had been amended to require the PA to take account of transformation when deciding to vary a licence.

Clause 66: Exemptions

The clause had been amended to empower the PA to exempt any insurer or a controlling company from, or in respect of, a provision of the Bill to achieve developmental, financial inclusion and transformation objectives.

In an effort to promote financial inclusion through micro-insurance and to address the concern that the Bill sought to distinguish between micro-insurance and macro-insurance business and this would exacerbate lack of transformation in the industry; amendments gave effect to Treasury’s micro insurance policy document released in July 2011. It balanced lowering regulatory barriers to entry, so as to facilitate access and support affordability, while at the same time ensuring that there was appropriate and sufficient consumer protection in place. It would enable access to products by the wider community. Insurance products would be packaged in such a manner that they protect customers.

Commercial insurers may also conduct micro insurance business, but this will be optional. A micro insurance licence facilitated financial inclusion through having more proportionate regulations (including capital requirements) based on the low risk of micro insurance products from a prudential perspective.

Significant revisions per Chapter

Ms Ferreira took the Committee through significant revisions per Chapter.

Long Title & Chapter 1: Interpretation and Objective of Act

The Long Title of the Bill and the objectives clause had been amended to explicitly refer to Constitution.

The definition of “micro insurance” had been amended to include agriculture in the classes of business that may be underwritten by micro-insurers.

The definition of “reinsurer” had been amended to allow reinsurers to conduct insurance business directly with a medical scheme registered under the Medical Scheme Act, 1998.

Clause 3: Objective of Act

The clause was amended to explicitly recognise that the objective of the Bill was to be achieved in a manner that is consistent with the Constitution. The addition of an explicit reference to transformation of the insurance sector was found to be imperative.

Mr D Maynier (DA) sought clarity on the proposal in relation to state-owned insurers. In the original Bill, clause 5(7) (a) and (b), which appeared to have been deleted, would have given the Minister discretion to exempt state-owned insurers from certain provisions without the concurrence of the Prudential Authority. What was the position on exemptions for state-owned insurers?

Ms Ferreira replied that Treasury had agreed with the proposal to delete the special provision. State-owned insurers would be treated in the same manner as any other insurer. They could apply for an exemption but it had to be adequately motivated and justifiable. It was decided to remove the proposal.

Chapter 2: Conducting insurance business & insurance group business

Clause 5: Insurance business and limitations on other business

The clause was amended to remove the requirement that reinsurers must secure the approval of the Prudential Authority to conduct any business outside the Republic.

Furthermore, clause 5(4): “An insurer may not, without the approval of the Prudential Authority, conduct any business other than insurance business in the Republic, including any insurance business performed on behalf of another person,” was retained.

Currently, insurance companies conduct other activities such as asset management, handling pension benefit administration among other, and do that within the same legal entity. The PA felt other ventures impose risks to the insurance business. Going forward, it would assess the risks of the other businesses before allowing them to venture into insurance business. There had been opposition to the clause but Treasury felt strongly about the clause.

Clause 10: Designation of insurance group and licensing of controlling company

The clause was amended to oblige the PA to, as part of designating an insurance group, also designate the holding company or juristic person that must apply for a licence as a controlling company of that insurance group.

Chapter 4: Licensing, suspension and withdrawal of licence

Clause 22: Requirements for licence

The clause was amended to allow reinsurers and all insurers to also be co-operatives registered under the Co-operatives Act. This will allow for the establishment of mutual insurers.

Clause 25: Licence conditions

The clause had been amended to allow the PA to impose conditions in a manner that sought to facilitate the progressive or incremental compliance with the Bill by a specific insurer to promote developmental, financial inclusion and transformation objectives.

Chapter 7: Reporting and public disclosures

Clause 47: Auditing requirements

The clause was amended to clarify that the audited annual financial statements of the controlling company need not be made available to the public.

Chapter 10: Administration of Act

Clause 62: General Powers, and functions and duties of Prudential Authority

The clause was amended to explicitly provide that the Promotion of Administrative Justice Act applies to any approval, determination, designation, decision, exemption or other administrative action taken by the Prudential Authority.

Clause 63: Prudential standards

The clause was amended to explicitly provide for specific matters that must be considered (i.e. the objective of the Bill, international regulatory and supervisory standards, to the extent practicable and with due consideration to the South African context and the nature, scale and complexity of different kinds or types of insurers and controlling companies).

Clause 66: Exemptions

This is a new clause that included specific matters that must be considered when granting exemptions (such as practicalities, proportionality and developmental, financial inclusion and transformation objectives).The section on delays and exemptions in the tabled Bill had been moved to Schedule 3.

Discussion

The Chairperson asked whether big players could be excluded from micro-insurance. He was worried that they might marginalise smaller players as they would be able to easily undercut them. Was there something regulators could do to ensure that big players engage in cooperative business agreements with emerging players?

Mr Momoniat replied that, currently, big players largely catered for the better half and must also reach out to low-income earners for the greater good. Insurance penetration in the low income segment was particularly low.

Commercial insurers may also conduct micro-insurance business, but this will be optional.

Ms Ferreira said comments received on the Insurance Bill expressed concern that the PA may direct a capital add-on if the risk profile of insurer or governance framework deviated from underlying solvency capital requirement calculations. The premise was that this may result in small black-owned businesses being taken over by big insurers. She emphasised that the capital add-on was a measure of last resort. Capital requirements were R15 million for mainstream insurers and R4 million for micro insurers. More so, the requirement was that a micro insurer could start off with R1.5 million and progressively build up over a period of time. The capital requirements were very low as compared to other developing African countries. Capital requirements were meant to ultimately protect the insurer and consumers if something went wrong.

Mr D Hanekom (ANC) commented that the capital requirements were seemingly reasonable. However, what were the major barriers to entry and growth for emerging black-owned companies seeking to penetrate the micro-insurance market. How could opportunities be created and equalised? The Committee and stakeholders had to critically assess this and device measures in the legislation to address same. 

The Chairperson indicated that stakeholders had dissected issues raised by Mr Hanekom before he was a Member of the Committee. Concrete proposals were brought forth and amendments had been proposed. He pointed out that as part of a raft of proposals, emerging players suggested the establishment of a fund to enable them to raise the capital required to start micro-insurance companies. 

Ms Ferreira replied that the PA had the ability to offer transitional arrangements for companies seeking to enter the insurance market but unable to raise sufficient funds to meet the capital requirements. Such arrangements were allowable on a case by case basis, under certain conditions.

The Chairperson asked if there were prospects of establishing a fund as requested by some emerging micro-insurance players.

Mr Momoniat emphasised that venturing into the insurance business was not for everyone as it required some level of sophistication. No fund was available.

Ms Ferreira pointed out that capital requirements were meant to protect consumers in the event that the micro-insurance company failed. It was important that such capital is unencumbered. The industry did not currently have a policyholder protection scheme. The capital requirement was necessary.

Clause 4- Principles

The Chairperson emphasised the need to strengthen obligations for both insurers and the Prudential Authority. Policyholder exploitation with little or no recourse could not be tolerated. He suggested that Members look into the clause before approval.

Mr Maynier agreed that the clause be put on hold for discussion at a later date as he needed to look into the transparency of the PA.

The Chairperson pointed out that transparency of the PA was discussed during deliberations on the FSR Bill.

Ms Ferreira said the PA viewed its guiding principles as critical to avoid past challenges pertaining to market failure.

The Committee approved the definitions, save for “cell insurer” and “cell captive insurer” which would deliberated upon on a later date.

The Chairperson commended the Bill as transformative. The spirit of transformation and many of its elements were encompassed. The effort towards the protection of insurance policyholders and increasing access of insurance to all South Africans was commendable.

The meeting was adjourned.