Finance Access for Low-Income Earners: Sector briefings

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Finance Standing Committee

25 August 2005
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Meeting report

FINANCE PORTFOLIO AND SELECT COMMITTEES: JOINT MEETING
26 August 2005
FINANCE ACCESS FOR LOW-INCOME EARNERS: SECTOR BRIEFINGS

Acting Chairperson

: Mr K Moloto (ANC)

Documents handed out:
 

Life Offices Association (LOA) briefing
South African Insurance Association (SAIA) briefing
Association of Collective Investments (ACI): Access proposal
Association of Collective Investments Fundisa Fund: briefing
Financial Sector Campaign Coalition briefing
Financial Sector Charter

SUMMARY
The Life Offices Association, the South African Insurance Association, the Association of Collective Investments and the Financial Sector Campaign Coalition briefed the Committee on proposals that had been submitted for approval to the Financial Sector Charter Council and which aimed to improve access to the financial sector for low-income earners. The briefings focused on offering low-cost insurance policies to consumers, proposals for a government subsidised premium-based education fund and consumer education measures for the aforementioned financial services.

The Committee asked how the increased access to financial services would impact on the debt situation of consumers; how sellers would protect themselves from overspending by consumers; what role informal community institutions had to play in offering financial services; the benefits of policies for stakeholders, and the implications of the removal of HIV clauses from insurance contracts.

MINUTES

Financial Sector Campaign Coalition (FSCC) briefing
Ms C Cain (FSCC Co-ordinator) briefed the Committee on the Financial Sector Summit agreements on access, the initiatives underway and the timeline for the launch of insurance access products in December 2005. The agreements stated that first order retail financial services had to be offered to low-income groups with an emphasis on savings products/services, community based savings schemes and insurance products/services. The initiatives underway are the Mzanzi account, the LOA project, the SAIA project and the ACI project.

Ms Cain offered an overview of the Charter Council study regarding Generic Access Standards. Phase 1 consisted of a literature review with an emphasis on developing countries and local research. This included the Financial Diaries and Finscope surveys. Phase 2 outlined guidelines for South Africa. Phase 3 consisted of an evaluation of proposed products and final recommendations. The final report would be delivered on 10 October 2005 for adoption at the November Charter Council meeting leading to the December launch of insurance access products. There was a commitment to ongoing monitoring of these products.

Life Offices Association briefing
Mr N Kohler (LOA Convenor: FSC Access Ad Hoc Committee and Executive Director: Hollard Life) briefed the Committee on the LOA’s intention to offer low-cost insurance. It would increase access by offering appropriate needs-based products, structuring affordable products, laying out understandable terms and conditions and increasing the awareness of products for consumers. The measure of success of the proposed low-cost insurance would be its level of penetration into the market place. Current penetration was 13% or 2.3 million policyholders of Living Standards Measure (LSM) 1-5. The maximum potential market was given as 40% of LSM 1-5. The LOA penetration target was given as 23% of LSM 1-5 or 4 million policyholders. The key dependencies for the success of the project included Charter Council approval, an agreement on an appropriate proxy for LSM 1-5, the allowance for debit orders for Mzanzi account holders, the capping of banks' debit order rejection fees at affordable levels, the facility for salary deductions from Persal [salary system for civil servants] remained available and an exemption might be required under Part C of Chapter 2 of the Competition Act.

Association of Collective Investments briefing
Ms D Turpin (CEO: ACI) briefed the Committee on the proposed Fundisa Education Fund. The Fund aims to attract monthly contributions for individuals over 18 years of age with the goal of financing education for members upon entering learning institutions. Disbursements would be made only at the time of study. Contributions would consist of an initial R100 lump sum with an additional monthly premium of R25. Interest derived from the Fund would be reinvested to boost the capital stock. ACI would manage the marketing content and the Fund could be branded as an individual entity. Ms Turpin proposed a grant matching system whereby government would match payments made by individuals by up to 25% of the contribution. This would further boost the capital stock. Ms Turpin suggested a grant-matching ceiling could be implemented to protect government.

SA Insurance Association briefing

Ms L Moonda (SAIA Managing Director) briefed the Committee on the proposed low-cost insurance schemes aimed at LSM 1-5. The briefing identified two major goals in terms of access. They were to broaden access to products of the short term insurance sector and to educate consumers in the LSM 1-5 category regarding financial service products. Ms Moonda said that the SAIA Access Group had approved the final proposal and that the process was currently in the product design phase. A launch date was planned for 2005. The effectiveness of the product would be measured by the number of policies sold. The generic product would be branded in line with the Mzanzi bank account initiative. The policy would include cover for the home, household goods and personal effects against fire, lightning, explosions, storms, floods, impacts and thefts. Ms Moonda stated that the project would have to cater for irregular premium payments and that Mzanzi had a role to play in addressing this challenge.

Ms V Pearson (SAIA Consumer Education Division) then briefed the Committee on progress in terms of the Consumer Education Initiative. She recommended that there be a joint effort whereby individual insurance firms would pool 0.2% of their profits to fund the education initiative. This would amount to R7.4 million in 2005. Rural literacy workshops throughout South Africa were planned with a target of 10 000 to be running in the pilot year. The workshops would utilise ComutaNet as a way to reach the target market. This was deemed appropriate as 1.2 million South Africans could be reached through Rank TV at various taxi ranks.

Discussion

 

Ms B Hogan (ANC) asked to what extent the new financial products would affect consumers’ debt situations and how sellers intended to manage the potential debt increases. Mr Kohler replied that mechanisms were in place to ensure debt situations did not become unmanageable. Rather than increase the possibility for increased debt, the new financial products would help to reduce debt in the long term as consumers became more aware of the benefits.

Ms Hogan said that the debt administration industry had its problems that needed to be addressed. She asked how firms intended to protect themselves from overspending. Ms L Mametse replied there were affordability checks in place and that firms would ensure that individuals complied with a minimum take-home pay. She said that the National Credit Bill would help the situation.

Ms Hogan (ANC) said that collective insurance institutions that communities had set up themselves were very successful. She asked if any assistance would be given to these institutions. Mr G Joubert (LOA Executive Director) replied that only legitimate collective institutions should be given help as fraudsters were active in the market. Mr Kohler said that the collective institutions represented an opportunity as they could help to reach project targets. He said that individual offices had leeway to engage with the institutions.

Mr N Van Dyk (DA) asked if the products were merely gimmicks to satisfy politicians or if the benefits would actually make the projects worthwhile. Mr Kohler replied that the products represented genuine improvements for LSM 1-5 individuals.

Mr K Moloto (ANC) asked why LOA had wanted FAIS (Financial Advisory and Intermediary Services Act) exemption clauses in their policies. He also asked if credit insurance affected household equipment acquisition. Mr Kohler explained that the issue of FAIS exemption clauses had been dropped. Subsequent research had shown that FAIS legislation requirements were not onerous and allowed access to category A products. He said that maximum price ceilings were needed because of unscrupulous behaviour by some consumers. These ceilings would form part of the minimum standards to address credit problems.

Mr Bhamjee asked if the removal of HIV status clauses were affecting the mandate of insurance firms in practice. He also asked what the implications would be for the industry with the removal of the HIV clauses and how the situation was monitored. Mr Joubert replied that if an individual policyholder was not HIV-positive at the inception of the policy and they contracted HIV after acquiring a policy, the policy would still be paid out. He said that this was not the case in the past. Mr Kohler explained that the removal of the HIV status clauses were supposed to eliminate the differential that existed between HIV and other diseases. He also said that LOA branches should confirm at the end of each year that they have complied with the new agreements on HIV clauses. Ms Cain added that the monitoring of the situation needed improvement.

The meeting was adjourned.

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