Funeral Schemes Benefits: hearing

Meeting report

FINANCE PORTFOLIO COMMITTEE
8 August 2003
HEARING ON FUNERAL SCHEMES BENEFITS

Chairperson: Ms B Hogan (ANC)

Documents handed out
Goodall & Bourne Presentation
Goodall & Bourne Oral Submission
Wits AIDS Law Project Presentation
Financial Services Board Presentation
Draft Committee Programme for Third Quarter - as of 5 August 2003
Black Sash Submission (Appendix 1)
Life Offices' Association Submission (Appendix 2)

SUMMARY
The Committee met to look at the funeral schemes benefits, because it had come its attention that there are continual problems around benefits for people who have died, and their related funerals. The Committee will be hosting a separate hearing to deal exclusively with the issue of granting cover, both funeral and life insurance, to people living with HIV/AIDS.

The Black Sash submission focused on types of problems experienced by its clients such as lack of information provided, repudiation of the policy on the grounds of non-disclosure, fraudulent policies, the linking of insurance schemes to funeral parlours and the Black Sash's recommendations. During the discussion on the submission Members raised concerns with whether Black Sash has solved the cases referred to it, how laypersons can distinguish between legal and illegal operators, whether there are any government regulations dealing with unauthorised deduction from social grants, whether Black Sash is proposing that the State establish, run and maintain a funeral cover fund and whether it has encountered problems in failing to prove an insurable interest in some of its cases.

The Wits AIDS Law Project submission outlined HIV/AIDS based discrimination in accessing funeral services, the issues of concern in this area and the Wits AIDS Law Project's recommendations. During the discussion on the submission the Committee sought clarity on the economic risk to the insurance industry in providing cover to people living with HIV/AIDS and whether the abuses are widespread throughout the insurance industry.

The Goodall & Bourne submission outlined the origins of the funeral assistance policy, the specific problems and abuses taking place in the funeral assurance market, the current regulatory framework, the need for effective consumer education and suggested regulatory action and also clarified the link between insurance schemes and funeral parlours. During the discussion on the submission Members raised concern with whether the FAIS Act and PPR provide adequate protection to policy holders and whether Goodall & Bourne provides consumer education.

The Financial Services Board submission highlighted the background to the assistance business in South Africa, the long-term insurers, burial societies, problem areas and risks, the developments made thus far and the way forward for the industry. During the discussion the Committee sought clarity on the reasons for the FSB's failure to move in on illegal operators, the powers currently available to it to bring them to book and when the FAIS Act regulations will be finalised.

The Life Offices' Association submission outlined the basics of the assistance business and its characteristics, the functions of administrators, the abuses taking place and the development to address this, especially by the LOA, and addressed some of the concerns raised by the presenters. During the discussion the Committee raised concern with whether the current position is that persons living with HIV/AIDS are excluded from cover, the position of voiding the policy of a person living with HIV/AIDS on the grounds of non-disclosure and the concerns with the waiting period for HIV positive people.

MINUTES
Introduction by Chairperson
The Chair stated that the purpose of this meeting is to look at the funeral schemes benefits, because it has come to this Committee's attention that continuous problems are arising around benefits for people who have died, and their related funerals.

Black Sash
Ms Isobel Frye, Black Sash National Advocacy Manager, presented the submission (see Appendix 1), which focused on types of problems experienced by its clients such as lack of information provided, repudiation of the policy on the grounds of non-disclosure, fraudulent policies and the linking of insurance schemes to funeral parlours. The presentation also dealt with the development of tailored alternative funeral cover, the current regulatory environment and concluded with a summary of the Black Sash's recommendations.

Discussion
The Chair whether the reference to "savings club" in Point 1.1 of the submission means that people believe that they are buying into a "stokvel" type of savings club.

Ms Frye answered in the affirmative. The idea of "insurance" is not familiar to many people, so they are foreign to the idea of buying into a scheme that would cover risks as and when they arise. There is thus an understanding that they should be getting their money back at the end of it. The same is occurring with regard to the Unemployment Insurance Fund (UIF), where people contend that they have contributed to the UIF all their lives, and they are thus entitled to some kind of payment. Again people's reasons for entering into the contract also has to be questioned. If people believe they are putting money aside each month to get something whether or not they fulfill the terms of the contract, this leads people to rely on a payout which does not materialise in the end.

Mr N Nene (ANC) asked Ms Frye to explain Black Sash's experiences with the Ombud, when assisting the vulnerable. Was Black Sash able to solve the cases that were referred to the Ombud?

Ms Frye replied that the majority of the cases received by the Black Sash Advice Centres do get solved. Once people are able to access the insurers and become familiar with the terms of the contract, there is a high rate of resolution of the cases. This means that the cases are not necessarily solved in favour of the Black Sash's clients, and this is where the dissatisfaction arises. This is the realisation that the client has been paying in the money but because the client has not been able to keep up the payments, they are not able to access the money. The insurers are good in interacting with Black Sash, once it has found the actual details of the contract.

Mr Nene asked Black Sash to recommend means by which the layman can identify between registered and unregistered or illegal operators.

Ms Frye responded that the only solution here would be a massive education drive, because it is very difficult to prosecute an unregistered lender. It would also be costly for any of Black Sash's clients to institute legal proceedings against an unregistered lender. People need to know that registration of lenders is in their favour, and Section 32 of the Financial Advisory and Intermediate Services Act (FAIS) provides for the education of beneficiaries for consumer protection. People need to know that a certain certificate states that that person has been accredited, and they also have to be made aware of the dangers in going to someone who is not registered.

People will always be tempted to go for a cheaper product and they will be told by unregistered lenders that it is cheaper for them, but unless people can make that informed choice the success against unregistered lenders will be minimal. Here again rights education through civic organisations and advice offices is crucial. It is not sufficient to do it on behalf of the person, it has to be ensured that the actual individual is empowered to make that decision on their own.

Mr Nene asked whether there is any government regulation dealing with the deduction from social grants.

The Chair stated that there does not seem to be any such regulation at the moment.

Ms Frye replied that Section 11 of the Social Assistance Act provides that no monies may be deducted or pledged from social pensions. The interpretation of this clause is however very contentious. Some argue it means simply that money should not go into the hands of creditors, should a beneficiary die or perhaps be sequestrated. Cash Payment Services (CPS) in Kwazulu-Natal has taken a case to court in an attempt to get the court's interpretation on this. CPS believes that Section 11 does not outlaw deductions in terms of when the payment to the beneficiary is made from the State, but believes that it is still able to continue with the deductions.

This does depend on various factors though. As the administration of the Social Assistance Act has been assigned to the provinces, each province would have a different situation. For example, the Western Cape province refuses to allow any deductions, whereas Kwazulu-Natal and the Northern Cape do allow deductions. Thus at the moment the situation is completely non-uniform throughout the country. It also depends on different interests that are operating within the payment services.

Ms R Joemat (ANC) proposed that this Committee have a meeting with the Social Development Portfolio Committee to ensure a uniform position is adopted.

The Chair proposed that this matter be taken to the Budget Council itself, so that the MEC's for Finance can be made aware of this.

Dr W Odendaal (NNP) asked whether Black Sash is proposing that the State should run the awareness programme?

Ms Frye responded that Black Sash is proposing that the Ombud and the Registrar be responsible for the rights education programme, but would draw in partners in communities.

Dr Odendaal asked whether Black Sash is proposing that the State should not only establish a funeral cover fund and supervise it, but also run it and maintain it?

Ms Frye replied that Black Sash calls for an investigation into the feasibility of the State either running or supervising this fund. She stated that the draft legislation she has read out to the Committee makes provision for both these functions. It is clear that to operate such a scheme is not one of the priorities of government. On the other hand, government could perhaps regulate a not-for-profit funeral scheme. At this point in time Black Sash does not come down firmly in favour of one or the other, but it is looking for a commitment to the regulation of a not-for-profit funeral scheme.

This fund should now, at the outset, deal with social assistance beneficiaries because it is a defined target. If it could be extrapolated to include other people that fall within a certain income bracket, then so be it. Black Sash would suggest that the fund begin with social assistance beneficiaries.

Mr Nene referred to Point 7 in the submission and stated that he is aware that schemes are being linked to other industries, such as the retail and furniture industries as well. Has Black Sash picked up on these problems and, if so, how has it dealt with them?

Ms Frye responded that one area in which Black Sash has found this to operate across the board is in the area of the linking of life insurance cover to micro-loans. Here both are usually provided by the same lender, and the premiums are exorbitant. If people fail to pay their premiums the micro-lender simply extends them another micro-loan in order to cover those premiums. The situation is thus really rotten. Black Sash tries to report such micro-lenders to the Micro Finance Regulatory Council (MFRC). The problem here is that most of these practices are contained in the clauses in the contract for the micro-loan, and Black Sash is still struggling to get around these clauses because of the well-established principle of freedom of contract in South African law. But what kind of freedom can exist when there are two such unequal bargaining parties? Perhaps this Committee should investigate this matter further, and the ongoing work done by Black Sash in this area can be fed into those investigations.

Mr Nene referred to Point 1.2 of the submission and stated that the other common problem here is the failure by the person to prove insurable interest at the claim stage. Has the Black Sash picked up such problems and, if so, what exactly is the magnitude of such problems and how does Black Sash deal with it.

Ms Frye replied that this really does happen and there is nothing that Black Sash is able to do about it. Another situation is where two or three different people have taken out a policy on the same person, such as their parent, and some providers refuse to pay out more than once for that interest. Black Sash has argued in one such case that the policy was taken out with the same provider and it knew exactly what was being insured, and if it had any problem with what was being insured it should have raised these concerns at the outset. In many of these instances one can only try and find out the facts and explain them to the client, this is as far the client's recourse goes.

The Chair asked whether Black Sash has had experience with the purchase of furniture, for example, which is linked to a funeral policy.

Ms Frye answered in the negative. She stated that she imagined that this would happen in a particular geographically limited area. Black Sash can certainly investigate this for the Committee.

Wits AIDS Law Project
Ms Teboho Motebele, Attorney for the Wits AIDS Law Project, conducted the submission (document attached), which dealt primarily with HIV/AIDS based discrimination in access to funeral services, the issues of concern in this area and the Wits AIDS Law Project's recommendations.

Discussion
Mr Nene asked whether the Wits AIDS Law Project shares the same view expressed by Black Sash that insurance schemes and funeral parlours should be separated

Ms Motebele responded that the Wits AIDS Law Project does not really have a position one way or the other, as long as people living with HIV/AIDS are not discriminated against.

Mr Nene asked whether operator mentioned in the Wits AIDS Law Project presentation is the only one of its kind that has been engaged in these types of abusive practices. If so, what is the magnitude of the problem with regard to other companies that are involved in the same practices?

Ms Motebele replied that the Wits AIDS Law Project has received a few complaints regarding other funeral insurance service providers, but the majority of the complaints have been received regarding AVBOB Mutual Assurance Society (AVBOB). Yet the Wits AIDS Law Project is situated in an area where a vast number of people do not necessarily have access to the Project's services. Those instances sketched in the presentation are merely examples, and the problem is thus greater than the presentation demonstrates.

Dr P Rabie (DA) asked whether the AVBOB's practice of charging the family of the deceased R5000 for the storage of the body for only four days is common practice, as outlined in the presentation? He stated that this is completely unacceptable.

Ms Motebele responded that she has recently heard of a case in Cape Town where a family was asked for something like R5000 to get the body back. Yet in the case sketched in the presentation it was not necessarily two or three days. It tool much longer than that because the family was trying for some time to raise the necessary funds, but the eventual amount was R5000.

Dr Rabie stated that this is unacceptable, because the storage cost is almost as much as the total cost of the funeral.

The Chair stated that it was a protracted struggle to get the body released, as indicated by Ms Motebele, but the trauma enough is a problem.

Mr B Mnguni (ANC) asked whether it is not unfair to say that businesses must insure people living with HIV/AIDS if they are aware that the risk involved could run the business into the ground.

Ms Motebele replied that the industry would not necessarily be crippled if insurance cover were to be provided to people living with HIV/AIDS. She stated that her problem with the situation is that these service providers advertise that their clients do not have to have undergone a medical examination, and that it would provide cover irrespective of the person's age or health. People then take this statement to mean that they will be provided with cover even if they are HIV positive. It is only when the person then dies that the family has to put through a claim stating that they realised that HIV/AIDS was not necessarily covered. Wits AIDS Law Project is thus saying that if this is the case, it should expressly state so in its advertisements.

The Chair stated that she is sure that the whole issue of HIV/AIDS and the affordability of life cover will be addressed by members in the industry. She stated that she is not convinced that it is a dead end, but that there are ways in which it can be dealt with. It would thus be useful for this Committee to have an entirely separate hearing on the issue of HIV/AIDS and insurance, and the input from the industry here is eagerly awaited.

The abuse of the exclusion clauses is an important issue, and the Life Offices' Association (LOA) has taken steps and has recommended to all its practitioners that exclusion clauses are not recommended. There has been a movement in the industry to deal with this, but it will require much dialogue between all concerned. The issues raised by the Black Sash and Wits AIDS Law Project submissions alone are extremely worrying.

Goodall & Bourne Funeral Insurers and Undertakers
Mr Chris Shone, Managing Director: Goodall & Bourne, conducted the presentation and submission (documents attached), which outlined the origins of the funeral assistance policy, the specific problems and abuses taking place in the funeral assurance market, the current regulatory framework, the need for effective consumer education and suggested regulatory action. He made the following additional comments:

Link between insurance schemes and funeral parlours
The undertakers and agents caught onto the fact that they are collecting premiums but claims won't always be paid out, because the mortality rate is better than expected, and this resulted in a surplus. This is the critical moment where there was a change between an insurer underwriting a scheme and an undertaker underwriting a scheme. At this level it really went from a retail policy to a wholesale policy.

The vast majority of the 200-odd undertakers in the Western Cape sell some form of policy, some underwritten and some not. There is a very simple reason for this. It is understood that death is inevitable, but as an undertaker it is very difficult to market this service in advance. If the English and American tradition is to be followed then the pre-paid, pre-need funeral plan was designed so that the undertaker could exist and essentially build a backlog of funerals in the future. In this way the undertaker guarantees himself a funeral. This was really the concept.

It has changed in recent times. One of the major problems in the market place is what the consumer thinks he is actually buying. This concern has also been raised by the previous two presenters. Many people in the marketplace who buy these policies think they are pre-paying their funeral, this is another problem. There is no need to disclose medical information if one is pre-paying something, which means when one dies you receive a service. The clauses in these types of contracts make no mention of the amount of money involved, but only provides that the service provider will be paid every month and on death the service provider will provide the client with a coffin, a hearse etc. The clause in most cases is also clear in that it states should the service provider not provide the service, the client would get nothing. To the extent that this is an insurance policy, this last clause is illegal in any event.

The point however is that the funeral plan or "doodboekie" in the Western Cape at any event, is directly related to the funeral. The perception of people especially when buying through an undertaker, is that they are buying a funeral. This is not the case despite what the policy says, because it is not possible to do this. The description of the service then becomes a problem. This does reinforce the fact that the medical disclosures, insurance concepts and principles are ignored by people because they do not see it as relevant for what they have actually bought.

Discussion
Mr Nene asked asked Mr Shone to explain whether he believes that the FAIS Act and Policy Holder Protection Rules (PPR) are of any assistance to policy holders.

Mr Shone responded that he has attempted to steer clear of using the FAIS Act and PPR because his issue is really with what an insurance policy is, and when does the Long-Term Insurance Act operate. He stated that at this stage he is more concerned with regulating the person offering the benefits. Protection is in place for the consumer and the consumers can deal with that, but it is the person who is taking the risk that causes the problem if s/he does not pay. Thus PPR, FAIS and every other piece of legislation does apply. If service providers cannot comply with these pieces of legislation they have to think very carefully about whether they should be underwriting that business at all.

This is a very different position from trying to pre-sell a funeral in the guise of a policy. Mr Shone stated that he is trying to show that they fall within the Long-Term Insurance Act as it stands today, and this is the mechanism that is used to deal with it. Requiring additional disclosures will not solve the problem, and creating more legislation will not solve the problem. The person doing this in the first place has to be stopped, and when this is dealt with and some standards have been set, then it is possible to start looking at educating people properly. These kinds of service providers have to be taken out of the market first.

Ms Joemat asked whether Goodall & Bourne does provide consumer education.

Mr Shone replied that Goodall & Bourne has approximately ten branches now. It runs quarterly newsletters which are fairly simple and clear on what people should look out for. Goodall & Bourne did an enormous amount of advertising on advertising in the local paper. But the problem here is that the people are really being told what they do not want to hear: that they have taken out a policy which is probably not worth anything, and they should cancel it and get something else. This is the gist of what has to be said in order to educate people. Nobody wants to know that they have made a bad decision, and nobody wants to act on that. Given that they trust in the people they deal with and that they believe they are pre-paying their funeral, education has not been a great success.

Great value in education has however been achieved in wills and estates, where people have been educated on planning their estates. The policy is however a difficult education drive. Goodall & Bourne has provided training and consumer education, but it has not made a significant enough difference.

Financial Services Board
Mr Andre Swanepoel, FSB Deputy Executive Officer, conducted the presentation (document attached), which focused on the background to the assistance business in South Africa, the long-term insurers, burial societies, problem areas and risks, the developments made thus far and the way forward for the industry.

Discussion
The Chair contended that surely sophisticated legislation is not needed to move in on the illegal operators in the industry.

Mr Swanepoel replied that the FAIS Act places quite a bit of responsibility on the administrators and brokers to deal with this aspect, but often the illegal operators function on their own. They receive premiums and they pay the benefits. It is very difficult for the FSB at the moment, with the powers available to it, to tackle these illegal operators. Successes in bringing such operators within the scope of the law have been few and far between.

The Chair asked Mr Swanepoel whether he is saying that the FSB is basically not in a position to deal with illegal operators. Surely they can be made subject to the Long-Term Insurance Act as well.

Mr Swanepoel replied that they should be registered, but they are not.

The Chair stated that the Long-Term Insuranc Act deems them to be such operators.

Mr Swanepoel agreed that they should be registered then, or take on an underwriter to underwrite their scheme. The problem is that very often they comply with these requirements, but then pack up shop and move on. There are no financial penalties for such operators, and they simply start up again in another area. The FSB must be able to levy a financial penalty on those illegal operators.

Mr Nene stated that there should be a crackdown on such illegal operators, because the problems they cause affect the entire industry. Surely they can be reported to the law enforcement agencies, so that they can be dealt with.

The Chair stated that she does not understand how the FSB can say that it is not able to deal with an illegal business. If this is the implication of the FAIS Act and the Long-Term Insurance Act then the legislature has failed, because the FSB now has no legal backing to deal with an illegal business. Is this the implication of what Mr Swanepoel is saying?

Mr Swanepoel answered in the negative. These illegal operators cannot register as insurers because they are too small, and they have to get an insurer to underwrite the scheme. The problem is that they disappear, and they are sometimes only found again after quite some time has elapsed. The FSB's only power at the moment is to conduct an inspection of the operation, take it through the normal judicial process. This is a long process, and the system is not interested in dealing with these people. Furthermore, the fines imposed on illegal operators are so small that they gladly pay the fine and simply continue to operate illegally. Whenever these illegal operators are found the FSB "force[s] them into the net".

The Chair asked whether there are currently no provisions which allow such operators to be shut down.

Mr Shone replied that there are a number of powers that the FSB has at the moment. The first stage is obtaining information, which the Act allows. If a person is deemed to be an insurer the Act would then apply, and winding up of the illegal business would then be possible. Judicial management would also be possible, and curatorship is also possible in terms of the Protection of Funds Act. If such illegal operators are not deemed to be registered but they are otherwise breaching the Act, in addition to the penalties, there is also a mechanism by which the FSB can instruct a discharge arrangement. This is a very broad concept, but it essentially allows the FSB to require somebody to enter into an underwriting arrangement.

The powers currently available to the FSB may not be the best powers out there, but there are definitely at least four steps the FSB can take with the existing Act. A requirement of the Long-Term Insurance Act is that the FSB may request information from an operator who would then be obliged to provide it, but that operator cannot be interrogated under oath. The operator can however be interrogated under oath in terms of the Inspection Act. Mr Shone stated that in his opinion the Inspection Act is a very simple concept: the operator is either underwritten or it is not. If the motive for the inspection here is criminal prosecution, the illegal operators will receive R600 fines. Yet if the motive is to protect the interests of the policy holders then illegal operators have to be forced to enter into discharge arrangements and, to the extent that they do not, winding-up options or curatorship has to be looked into.

The difficulty here is that if a winding-up application is launched the Insolvency Act will damage the creditors, whereas under the old Insurance Act policy holders came first ahead of creditors. This position "got lost in the wash" and the current Insolvency Act provides that the policy holders are creditors after the Receiver of Revenue, for example. There is thus motive to avoid a winding-up, but for the wrong reasons.

Mr Shone stated that he disagrees with the FSB when it contends that it is incapable of dealing with anything. There are more than enough provisions to get information from such operators, to react to that information and to put illegal operators out of business. Then the issue of fines and criminal action can be considered. There are sections in the Act that provide for the imposition of a R1m fine, but this is of no effect. The illegal operators do not have R1m, nor does this fine protect the interests of the consumer in any event. It is taking control of their business, putting it under a licence and dealing with the rest of the non-compliance which is the answer.

A representative from the Group Administrators Forum (GAF) informed Members that as far as the tracing of illegal operators is concerned, the GAF has operators throughout the country which assists it to trace both illegal administrators as well as illegal operators. The GAF already has lists of names of illegal operators and it is awaiting the FAIS Act's registration, at which time all these names will be placed on a website and they will all be traced. He stated that it is not yet sure when the Act will fully come into operation, and that he believes that the market can be cleaned up quite well with the assistance of the recognised bodies. Once an illegal operators is brought to book, it is preferable that it be brought into the network rather than penalised. Those who do not wish to be registered should be heavily penalised, as suggested earlier by the Black Sash, and should be taken out of the market. There should be means to stop such operators, because the only people suffering are the people in the street.

The Chair asked when the FAIS Act regulations will be finalised.

Mr Swanepoel responded that a date is to be announced, after which all intermediaries must be registered. At the moment the FSB has recognised bodies to assist it with the registration, and this date would most probably be in the second quarter of 2004.

The Chair stated that the Committee could spend quite some time wrangling about just how effective the FSB can be in dealing with these issues, as well as what barrage of legislation is available. Unfortunately the Committee time does not allow for this. She stated that this issue is becoming more and more prominent when Members do their constituency work, especially as the mortality stages of HIV/AIDS is reached.

It comes across very clearly that those South African mostly affected here are the poor, who have their social assistance grants affected, as well as their relationship with retailers and micro-lenders. It has become evident that it is those at the periphery, the poor and the vulnerable, that are not being catered for in the financial services industry. She stated that she hopes that the FAIS Act will equally regard the poor and the vulnerable, as should the MFRC and other bodies. Focus has to be placed on how the financial services industry very often is prejudicing the poor and vulnerable South Africans.

The impact of HIV/AIDS on both society and the financial services industry as well cannot be overlooked. She stated that this Committee will be engaging in the major roleplayers during these last few months of its existence, to ensure that some of these interests are being addressed. The frustrations of the FSB and its partners are understood, but this matter has to be put on the agenda very forcefully.

Mr Swanepoel stated that there is a will to do something about this from the FSB's side. The FSB wants to and has to focus on this area now. The upcoming legislation will play an important role here, and hopefully in one year's time the FSB will report significant progress. People also have to be educated so that they can understand who they are dealing with.

Life Offices' Association
Ms Anna Rosenberg, LOA Legal Advisor, presentation the submission (see Appendix 2) which outlined the basics of the assistance business and its characteristics, the functions of administrators, the abuses taking place and the development to address this, especially by the LOA. She made the following additional comments:

Black Sash Submission
Most of the concerns raised in this submission would ideally be covered by the FAIS Act. In Point 1.2 Black Sash recommends that the onus be shifted to the insurer, yet Section 59 of the Insurance Act does place the onus on the insurer to prove non-disclosure. Point 1.2 would also be covered, because the PPR requires insurers to provide a copy of the contract to clients. The Long-Term Insurance Ombud as well as the FAIS Ombud is there to guard against incorrectly repudiated claims, as contained in Point 2 of the Black Sash submission. The Black Sash's recommendation in Point 5 is be cured by the fact that the provider does usually bear the risk for fraudulent policies, if they are underwritten by the insurer. The FAIS Act also caters for more control of intermediaries, as contended in Point 6 of the Black Sash submission

Wits AIDS Law Project
The holding of separate hearings on the relationship between funeral insurance and HIV/AIDS is welcomed, as it is an important issue that has to be addressed comprehensively.

Conclusion
Many of the negative aspects of the funeral service provider industry have been highlighted today, but it has to be remembered that there are also a vast number of people whose funeral insurance claims are paid out.

Discussion
The Chair clarified that her intention was not to exclude any discussion on HIV/AIDS and the insurance industry, especially as it relates to the funeral benefits industry. She asked whether the current position regarding exclusion clauses is that persons with HIV/AIDS are not entitled to funeral cover?

Ms Rosenberg responded that an HIV test is usually required for individual policies. If the person tests positive, they would normally not be able to take out the policy. There are policies for HIV positive people, but the normal policy would not offer this cover.

The Chair stated that there are then specific life policies for HIV positive people but it is very limited, offering cover of only about R50 000. Is the situation at the moment then that HIV positive people cannot take out either life insurance or funeral cover.

Ms Rosenberg replied that funeral cover is not underwritten, so HIV tests and medical examinations are not requested. The insurers normally have a waiting period, which is their way of sort of excluding people.

The Chair asked the LOA to comment on the Wits AIDS Law Project's concern with insurers that advertise that no medical examination is needed, but then refuse to pay out when the person dies of AIDS. Surely the point that the Wits AIDS Law Project is making is relevant?

Ms Rosenberg responded that she is not that familiar with the AVBOB policies referred to by Ms Motebele, but as long as it does not fall within the waiting period it should be covered.

Ms Motebele stated that AVBOB currently has a medical questionnaire asking the person whether or not they have been tested for HIV, and most of the time people either do not know that they are HIV positive or they simply do not want to disclose it. If they do not provide this in their application form when they do die of an HIV-related illness, the insurer refuses to pay on the grounds of non-disclosure. This is not really non-disclosure, but really a means for the insurance industry to exclude persons living with HIV/AIDS from receiving cover.

AVBOB also has a paragraph in the contract stating that as soon as the person becomes aware that he is HIV positive, he has to inform the insurer. It further provides that a failure to inform the insurer amounts to non-disclosure.

The Chair asked whether persons also do not receive payouts if they die from an HIV-related illness, such as meningitis or tuberculosis, irrespective of whether there is definite proof that the person in fact had HIV/AIDS.

Ms Motebele replied that in such cases an inquiry is usually held. Here the opinion of a doctor will be sought to reveal that the person was in fact tested, and that the person was HIV positive. Based on this, irrespective of what the person's actual cause of death was, the insurer would exclude that person.

Mr Shone stated that there is a different between the waiting period in funeral insurance and the AIDS exclusion. The funeral insurance is generally three or six months based on age, no claims are accepted other than accidental, which is pretty uniform even with the illegal operators. The AIDS exclusion varies as the window period is generally up to two years, no claim is accepted for AIDS deaths or cancer, and this is an almost accepted wording in the industry which is now used. This is done because experience has shown that asking medical questions does not always elicit an answer. Thus to avoid the issue of trying to argue misrepresentation, the simplest underwriting basis is used: the insurer excludes what he does not know about and then pays out after two years, whatever the cause of death. There is thus effectively a waiting period on HIV/AIDS of two years.

The reason for this approach is anti-selection. If this is not done "there is no doubt that the bad lives will put up the cost for the good lives". It thus tries to avoid the situation in which a person, knowing that they are ill and that they will die soon, applying for and being granted cover. The debate now is whether the window period should be one, two or three years. It has become generally applied that the period for AIDS in the funeral insurance market is two years.

Ms Motebele stated that her problem here is that this would not be an issue if the extended waiting period were applied to all other life-threatening illnesses, such as cancer or tuberculosis. The problem here is that AVBOB only applies its extended waiting period of three years to persons living with HIV. Thus a person who dies of cancer and who knew he had cancer before applying for cover from AVBOB, would only have a waiting period of six months. This is unfair.

The Chair agreed that this is certainly discriminatory. The problem here is with persons who do not disclose that they have HIV/AIDS and only die six years later. Here clearly even the waiting period does not apply to them.

Ms Motebele agreed with the Chair. This is currently the position with AVBOB.

The Chair asked whether this includes persons living on Anti-retrovirals?

Ms Motebele responded that this is not included as far as the Wits AIDS Law Project is aware, even for life cover. This has always been its argument.

The Chair stated that she is aware that the LOA and various people have been looking into these issues. The industry and government as a whole also has to begin looking at the implications of this for people living with AIDS, as well as their access to life cover and funeral cover. These are the people who such cover more desperately than the healthy people, but at the same time the industry is being asked to take on a huge risk. It has been proposed today that a State-sponsored funeral benefit programme be established. These issues, such as the waiting period, has to be discussed further. A better regime has to be brought in.

Mr Shone stated that the major complaint about the exclusion is that even though it may be excluded for two years, which is a separate debate, the problem is that even after this the policy can then be voided for non-disclosure. The answer and the approach to follow would probably be the American model, which uses an incontestibility provision. It provides that after a period of time, which is generally the exclusion period, the policy cannot be voided under any circumstances. It can thus be easily dealt with.

The Chair encouraged Mr Shone to engage with the various industry players on this. This is important because there are often several funerals in a family, thus creating huge poverty cycles that families are not recovering from. All role players have to look at creative ways to deal with these issues.

Draft Committee Programme
The Chair drew Members' attention to the Draft Programme (document attached). She impressed upon them that it is a provisional programme, and it is thus subject to changes.

The meeting was adjourned.

Appendix 1 : Black Sash Submission

Introduction
Black Sash is a human rights based non-governmental organisation that seeks to promote the realisation of the rights guaranteed by the constitution. We operate seven advice offices throughout the country to promote access to justice for those unable to afford the fees of lawyers. The contents of any advocacy work that we do throughout the organisation is directly informed by the work that comes in to our various advice offices.

As a result of the above, our main work seeks to promote socio-economic rights of people in South Africa, and to protect the vulnerable against abuses by dominant parties in the private sector.

The poor need to be able to provide for funeral payments. AIDS has increased the rate of deaths, particularly among the younger income earners. Grandparents are burying the youth. In the absence of provision for funeral benefits, many of the indigent are forced to take out micro loans at exorbitant interest rates that then force the debtor into a never ending debt trap.

For Black Sash, we question the principle of the offering of funeral schemes as a for-profit venture at the cost of the poor and indigent. In this submission we call for the investigation into the establishment of a state funded funeral cover scheme for social assistance beneficiaries by the state. Wheresoever financial products are offered, we believe that role players must subscribe to an active and effective regulation and enforcement to provide for consumer protection. We welcomed the promulgation of the Financial Advisory and Intermediary Services Act, and now look forward to the granting of jurisdiction to the Ombud in terms of this Act to provide an effective remedy against breaches by financial service providers their representatives and/or intermediaries. We argue that the financial service provider should assume a greater responsibility in terms of the Act for abuses by an intermediary or authorised representative, as they ultimately have most potential control over the actions of intermediaries and representatives.

In this submission we seek to illustrate abuses/ weaknesses in the current provision of funeral cover to the poor as witnessed in the cases seen in our advice offices in the year 2002. We then consider alternative approaches in the provision of funeral cover that could provide more effective protection for the poor and vulnerable.

A. SUMMARY OF PROBLEMS EXPERIENCED BY OUR CLIENTS
1. Lack of information to clients:
Lapsed policies: Many clients come in to query why their policies have lapsed and they are unable to claim benefits. On further investigation it often transpires that clients have stopped paying their premiums either because they did not realise it was an ongoing obligation, or because they can not, and could never, afford to pay the premium on an ongoing basis. In many of these situations, clients did not realise that a policy holder risks forfeiting the premiums paid in the event of non-payment. Many poorer people believe that the policies that they purchase are a type of savings club, and accordingly believe that their contributions are due to them at some given date.

This suggests the following:
- Intermediaries (brokers) do not fully explain the theory of insurance and the implications of non-payment of premiums.
- Brokers are not explaining the need for ongoing monthly payments for the duration of the policy.
- Brokers sign up people who are not able to afford the premiums charged. This amounts to reckless selling of policies for commission.

Recommendation: Given the fundamental contracting imbalance between the broker and the potential insured there is wide scale possibility for abuse. There accordingly need to be very high sanctions to ensure that intermediaries do not sell policies that people cannot afford, merely for the sake of immediate commissions. In instances of reckless selling of policies, authorised financial service providers should be held liable for the full repayment of the premiums to date, or delivery of their obligations, at the instance of the insured. This should be contained in an amendment to the Financial Advisory and Intermediary Services Act.

1.2. Repudiation on the grounds of non-disclosure
Not surprisingly, few indigent people are schooled in the concept of "uberrimae fides". The need for disclosure, and the implications of non-disclosure need to be thoroughly explained by brokers to potential policy holders, and the relevant questions need to be asked to ascertain if there is the need to disclose any relevant information. In many cases clients claim that no such information was given at any stage to them in the application or approval process of their claims. Few informed people would fail to disclose relevant information if aware of the need to do so and the result of non-disclosure.

In addition, the issue of exemptions and waiting periods are often not disclosed by the broker which results in clients purchasing policies that are completely unsuitable to their needs.

Recommendation: the obligations on brokers should be rigorously enforced. There should be extremely high penalties for breach of the relevant codes of conduct and other consumer protection provisions. Given that the insured is usually deceased at the time of repudiation of the claim it is extremely difficult for his or her family to prove that the broker failed to advise the deceased of the necessary disclosures and exemptions. Should the policy provider wish to repudiate a claim for non-disclosure or on any exemption ground, the onus should be on the financial services provider to prove that the necessary information was provided to, or elicited from, the insured.

1.3 Failure to provide client with copy of contract:
Again, few clients ever see a formal contract, or have them read and/or explained to them. Many of our clients are old, illiterate and non-English speaking. Where contracts have been shown to our clients, they are invariably written in English in very small print. Few clients have ever seen a completed copy of their contract. Contracts are often signed in blank, and requests of our clients to access copies of their signed contracts or even standard terms and conditions are invariably met with silence.

Recommendation: all intermediaries and/ or representatives must ensure that a signed copy of the contract is handed to the insured. In addition, contracts should be available in at least the four most widely spread languages in the country.

There should be wide spread education about the right not to complete a contract in blank, and the potential dangers of doing so.

2. Incorrectly repudiated claims:
We have had clients whose claims have been repudiated by funeral cover providers, only to have our paralegals discover that there was no valid reason for the repudiation. We see only a small fraction of people in need in our advice offices. Thousands of people have no affordable recourse in the event that they believe their rights have been violated and so never receive the benefit of their contributions.

Recommendation: the services of a freely accessible ombud must be widely advertised across the country. In order to provide a legitimate and valid service, such services must be able to address the concerns of illiterate, non-English speaking, rural dwellers.

3. Delayed payments:
Many clients give up trying to wring payment out of companies given the attendant costs of having to do so.

Recommendation: free and accessible services of an ombud as set out above.

4. Failure to give effect to the cancellation of policies and the continued deduction of unaffordable premiums.

Recommendation: free and accessible services of an ombud as set out above.

5. Fraudulent policies:
Of great concern is the number of fraudulent policies that are written up allegedly on behalf of indigent clients. We have numerous cases of this in Kwa-Zulu Natal. This type of practice affects the reputation of the whole industry and harms relations between authorised financial services providers and the general public as well as the affected clients. This practice must be actively stamped out by all role players.

Recommendation: high profile prosecutions of intermediaries/ representatives as well as the authorised financial service provider. The provider is the only body that can call the intermediary to account, and so should bear the risk.

6. Fraudulent practices by intermediaries:
In some instances, intermediaries fail to pay over the collected premiums to the insurance principles and usually abscond with the payments, leaving the client with no claim against the insurer, and little practical hope of locating the absconded broker.

Recommendation: if an intermediary issues a receipt for payment of any amount on an authorised receipt which could be provided by the authorised financial service provider, this should bind the authorised financial service provider for the same reason as in 5 above.

7. Linking of schemes to funeral parlours
Many clients are prejudiced in situations where funeral cover schemes are only paid out to families if the family uses the services of a specific undertaker. One client who lived in Knysna but had to bury her partner in the Transkei could not recover money from the scheme because there was no branch of the relevant funeral parlour in the Transkei environs.

Recommendation: this is an undesirable business practice and should be declared so in terms of section 34 of the Financial Advisory and Intermediary Services Act.

8. General:
Our Knysna advice office observes that from their extensive work with microlending, it is clear that the unregistered and unregulated provision of financial services is the cause of most of the aggravating of problems for the indigent and vulnerable. Funeral cover should be regulated in the same way as microlending is by the MFRC.

B. DEVELOPMENT OF TAILORED ALTERNATIVE FUNERAL COVER
1. Provision of state regulated funeral cover for social assistance beneficiaries and their dependants:
We have already stated our concern that where financial services are provided for a profit to the poor, the rights of the poor usually seem to come second in the priorities of the policy provider.

In 2001, Black Sash was integral to an initiative of the Minister of Social Development to investigate abuses of the automatic deduction function of policy premiums from social grants which our advice offices in Kwa-Zulu Natal were witnessing. This was perhaps one of the worst instances of abuse of the vulnerable - many funeral cover policies and micro loans were written up completely fraudulently; premiums were deducted automatically from a pensioner's state pension, and there was no point of assistance at which the pensioner could query the deduction.

There was a question of legal interpretation concerning whether the Social Assistance Act 59 of 1992 allowed for such deductions. Various provinces allowed diverse practices.

To try to develop a uniform solution to the problem the Minister convened a couple of meetings attended by insurers, micro-lenders and civil society organisations that worked with affected pensioners. Various options to prevent abuse of pensioners were discussed, including the setting up of an accreditation body of diverse stakeholders to approve companies requesting to have access to pensions for collection of premiums. The process seemed to have ground to a halt in the last twelve months.

Then, in the first draft of the draft Social Assistance Bill circulated at the beginning of the year for comment, provision was made the deduction of premiums for burial and savings schemes "established or approved by the Minister for the benefit of social assistance beneficiaries".

(This provision does not appear in the second draft where reference is made only to the need for the Minister to regulate deductions.)

The Black Sash strongly believes that it is in the state's interest to ensure that the monies paid as social assistance are not used to bolster the profits of private financial service providers, in many cases to the detriment of the beneficiary as seen from our cases illustrated above. Currently we oppose deductions of any kind from state social assistance given the abuse that currently takes place.

Recommendation: the Departments of Finance and Social Development set up an investigation into the feasibility of the establishment of a not-for-profit burial scheme for the benefit of social assistance beneficiaries by, or under the control/ direction of the state.

2. Role Of Co-Operatives
Burial clubs and societies have a long history among black South Africans in particular. In the recent Growth and Development Summit of 7 June 2003, all sectors agreed to investigate the expanded use of co-operatives. Co-operatives are often able to provide more appropriate services for the particular community in which they are based. The social cohesion of the community ensures a high degree of compliance and consumer protection. Keeping the proceeds of the moneys within communities adds to the sustainability of the community.

An investigation into current burial co-operatives would expose both the strengths and the weaknesses/ abuses that occur within such a structure. These findings could then be used to draft a code of conduct for registered co-operatives particularly for the provision of funeral cover.

Recommendation: The departments of Finance and Trade and Industry initiate an investigation into ways of extending support for the growth and development of burial co-operatives.

C. REGULATION
There is a plethora of legislation and regulations that purport to govern this industry. However it is clear that the effects of this regulation is not affecting the most indigent on the ground.

As indicated by our Knysna advice office, the greatest threat for abuse is posed by unregistered providers.

Recommendation: the ombud and Financial Services Board embark on an active rights education campaign to ensure that people are aware of their rights and how to enforce them in a free and accessible manner. The dangers inherent with unregistered providers must be widely popularised.

Such messages could be spread amongst communities in partnership with advice offices and civic structures. Advice offices already act as the first port of call for many who suspect their rights have been violated. This could develop into a more formal role of monitoring compliance with the legislation by the insurers and brokers on behalf of the state and statutory consumer protection bodies.

D. WAY FORWARD/ RECOMMENDATIONS
This submission has included not only a criticisms of current funeral policy schemes that we have observed through our case work in our advice offices, but has also considered compelling alternatives of funeral cover provision for the poor and indigent, both of which suggestions contain an active role for the state.

In conclusion, our recommendations are:

- Given the fundamental contracting imbalance between the broker and the potential insured there is wide scale possibility for abuse. There accordingly need to be very high sanctions to ensure that brokers do not sell policies that people cannot afford, merely for the sake of immediate commissions. In instances of reckless selling of policies, insurers should be held liable for the full repayment of the premiums to date, or delivery of their obligations, at the instance of the insured.

- The obligations on brokers (intermediaries) should be rigorously enforced. There should be extremely high penalties for breach of the relevant codes of conduct and other consumer protection provisions. Given that the insured is usually deceased at the time of repudiation of the claim it is extremely difficult for his or her family to prove that the broker failed to advise the deceased of the necessary disclosures and exemptions. Should the policy provider wish to repudiate a claim for non-disclosure or on any exemption ground, the onus should be on the provider to prove that the necessary information was provided to, or elicited from, the insured.

- All brokers must ensure that a signed copy of the contract is handed to the insured. In addition, contracts should be available in at least the four most widely spread languages in the country.

- There should be wide spread education about the right not to complete a contract in blank, and the potential dangers of doing so.

- The services of a freely accessed ombud must be widely advertised across the country. In order to provide a legitimate and valid service, such services must be able to address the concerns of illiterate, non-English speaking, rural dwellers.

- High profile prosecutions of brokers and insurers that breach the legislation and regulations/ codes of conduct.

- The Departments of Finance and Social Development set up an investigation into the feasibility of the establishment of a not-for-profit burial scheme for the benefit of social assistance beneficiaries by, or under the control/ direction of the state.

- The Departments of Finance and Trade and Industry initiate an investigation into ways of extending support for the growth and development of burial co-operatives.

- The ombud and Financial Services Board embark on an active rights education campaign to ensure that people are aware of their rights and how to enforce them in a free and accessible manner. The dangers inherent with unregistered providers must be widely popularised.

Such messages could be spread amongst communities in partnership with advice offices and civic structures. Advice offices already act as the first port of call for many who suspect their rights have been violated. This could develop into a more formal role of monitoring compliance with the legislation by the insurers and brokers.

Appendix 2 : LOA Submission

LIFE OFFICES' ASSOCIATION OF SA
PRESENTATION TO PCOF, 8 AUGUST 2003, RE FUNERAL INSURANCE

The aim of this presentation is to provide a brief overview of the topic under discussion, the problem areas, developments and suggestions for the future.

Assistance Business: Basics

Life insurance written under a restricted license
Basic sum assured limited to R10 000
Periodically (often monthly) renewable term cover
Cover typically for members, or nuclear family, and optionally parents
Formerly called funeral / home service business
No commission caps
Generally no AIDS exclusions
Waiting periods - 3 months to 12 months
Also written under ordinary life license by offices such as OMGS, Metropolitan, African Life, etc.

Characteristics of Assistance Business
Characteristic product type is the group scheme
Policy issued to a group which ranges from employer, to union, to church, to open "Voluntary Group Schemes"
Cover may be compulsory e.g. employer, or voluntary
The term "group" is only referred to in the commission regulations in the Insurance Act, (Part 3) and the Policyholder Protection Rules (S 1 (vi)
Voluntary group schemes in particular are characterised by the interposition of an administrator between the insurer and insured
As well as group schemes, there are informal burial societies

Issue: Clarification of the Basis of Group Business
Assistance funeral business is a very low cost business catering for affinity group schemes
The voluntary group concept - whose members' only affinity is membership of the scheme - allows cover to be provided economically to the lowest economic strata
Because the business is sold on price, price competition makes it more economic to outsource the administration of the scheme to an administrator.

Administrators
Typically handle:

Membership records
Premium collection
Claims processing
May also be the broker and the scheme principal
Typically move schemes - own and ones for which they are the broker - from insurer to insurer based on price and how accommodating their claims underwriting is
Commission to brokers is typically 7,5% to 10% of premiums received, and up to 15% or higher where the broker is also the administrator.
The typical insurer's premium basis is:

70% for claims
10% for commission
10% for administration
10% for profit

Administrators will typically add on a per capita administration charge
Administrators may represent many offices

Abuses
This regime potentially - and actually in a large number of cases - provides affordable funeral insurance to virtually all the population and particularly poorer groups on an efficient cost effective basis where individual full insurer administered contracts - which are universally available - would be uneconomic

However

5.1 Many schemes are uninsured or rather the administrator is an unlicensed insurer. Scheme members are unprotected financially and subject to a wide range of abuses including underpayment / over charging / payment in kind. Unregistered schemes are common among small undertakers since they often know their clients, can assess the risk and manage the claim payment

5.2 The Insurer - Customer Link May Be Weak
The insurer is dependent on the administrator for operating information and member communication
There is a clear temptation for the administrator to anti-select and self insure profitable risks

5.3 The End Price May Be Excessive
While administrators may control the underwriting placement of schemes, the scheme itself - the church or undertaker - will require a further margin and the scheme may well also be paying sales people to actually enrol members.

R14 for R5 000 cover charged by the insurer may well translate into anything from R20 to R60 to the customer.

NB. The price ceiling is the cost of insured individual cover marketed direct by the insurer.

6. Developments
The FSB has taken the initiative in encouraging assistance insurers and administrators to form representative bodies.
The Assistance Business Standing Committee ('ABSC') is the insurer body set up as an LOA committee but open to all assistance insurers, and has been operating for four years
The administrator body - GAF - Group Administrators Forum - has recently crystallised
The FSB have in hand an initiative - the Assistance Business Working Group - to consider the legal status of group business including informal societies and stokvels
PPR
FAIS

7. LOA Assistance Business Standing Committee
Initial focus was on:
Perceived non enforcement of law against unlicensed regulators
Code of Conduct for ABSC members
Enforcement is a difficult problem - the FSB have genuine problems in identifying and dealing with offenders

LOA Code of Conduct on Assistance Business was adopted in February 2001 and sets standards inter alia for

Membership records - insurer to keep or have access

Premium setting and accounting
Insurers to determine final 'retail' price
Insurer to account for final price
Premium collection

Claims settlement
Payment to beneficiary or designated service provider
Insurer to hold bank account

LOA has introduced entry level membership category to bring in offices (almost 30 players in industry)

The committee feels that with the emergence of GAF, the possibility exists of establishing a regulatory "micro regime" for voluntary group business along the lines of the Micro Finance Regulatory Council including:

Control of licensed administrators
Enforcement of LOA Code type rules as standard administration contract by all offices, perhaps through FSB directive
Clear definition of group business
Relaxation of Long Term Insurance Act non payment advice requirements
Control jobbing of schemes via FAIS replacement requirement / LOA replacement agreement: formal notification and transfer requirements
Registration of sales people as FSP representatives - cut out excessive sub-agenting

Clear demarcation between formal and informal schemes to prevent arbitrage

Support FSB consumer education initiative - discussions in progress between LOA and FSB

Conclusion
The triad:

Standard regulatory requirements for assistance insurers
Standard code for administrators
Consumer education re the need to deal only with licensed (FSP) bodies

… will tidy up the "honest" side of the business

The LOA believes it will reduce to a minimum the illegal environment
The illegal environment will be undermined by increased customer awareness
More effective regulation of unlicensed operators would help
Regulation of undertakers could usefully be reviewed