South African Insurance Laws Amendment Bill [B26-2008]: hearings; Financial Management of Parliament Bill [B74-2008]: briefing

Meeting report

Council for Medical Schemes (CMS) Submission
Mr Alex van den Heever (Special Advisor- CMS) said that the presentation was focused on the demarcation between medical schemes and ordinary insurance business.

CMS sought clarification around the issue of demarcation. They had significant concerns about the way legislative framework dealt with this issue in Bill. If this was not dealt with health policies could be undermined, e.g. National Health Insurance and exclusion of vulnerable risk groups. They submitted that there was no rational basis for excluding people on basis of health status

 He read through the presentation document which dealt with:

1) Background on Medical Schemes and their position in the strategic policy framework

2) Central issues requiring resolution in the three pieces of legislation (Medical Schemes Act, Long-Term Insurance Act and the Short-Term Insurance Act)

3) Concerns with the Legislation as Proposed

4) Recommended provisions to replace those presently in the Insurance Laws Amendment Bill

The CMS was the regulator for medical schemes since its establishment in terms of the Medical Schemes Act, 131 of 1998. They were responsible for administering the Act and for giving policy advice to the Minister of Health on issues relating to medical schemes. This Act introduced social security principles into a regulated private market. Previously legislation allowed unlimited discrimination against people with certain health conditions. Medical Schemes could exclude these people permanently if they had pre-existing conditions or could charge them a fee consistent with their claim. These principles therefore created a different environment from what had existed previously.

Provisions relating to demarcation are substantively related to heath policy. In essence, these provisions were 95% medical health policy issues and only 5% insurance issues. Since Medical schemes were also insurers for health care there was therefore conflict with normal insurers. To address this, it was therefore necessary to distinguish them from normal insurers.

Presently normal insurers did not have to comply with social security principles. This therefore added to the competition between the two groups. Normal insurers are able to cherry pick only younger healthy people, leaving sick to pay more until they were totally excluded from cover. A normal insurer can also overcharge if did not want a person to join their scheme. Medical schemes, on the other hand, were compelled to provide cover to all. This applied especially to essential care.

When medical schemes were deregulated they excluded everyone older than 55 and anyone with certain health conditions. Thus, previously medical schemes were like conventional insurance. This changed in 1999 when the Medical Schemes Act was introduced, which ensured that persons who formed part of the uninsurable group could claim. In reality these included the people who would definitely need to claim at some point. Where one combined the insurable and uninsurable groups there would need to be a process in place to bring them together without making the market unsustainable. Social security principles made medical schemes vulnerable to competition from normal insurance.

There was a need to improve risk pooling of medical schemes with the establishment of the Risk Equalisation Fund (REF). This would equalize age differences between medical schemes and would create an industry community rate. If demarcation was not handled the entire medical schemes environment would revert back to what existed in 1994. This was because it allowed for parallel insurers who could cherry-pick their environment.

Demarcation would be achieved through defining the business of a medical scheme. The Bill should however make provision for a carefully considered exemption process where it related to products which were not a problem for the medical schemes environment.

There needs to be clear distinction between medical schemes and the normal insurance market otherwise the scope of normal insurance market would be extended so much that entire medical scheme environment would be undermined.

Unlike normal insurance, Medical schemes are pre-approved. Rules are approved every year. Once you have an insurance license you can create your product which has to be in compliance with the law.

Mr William Pick (Chairperson of CMS) added that SA has in recent years experienced spectacular growth. The price to be paid for this growth has been increasing inequalities; as well as an increase in mortality and disease burdens. There has been a growing impatience on the ground for these matters to be addressed and CMS therefore urged the Committee to do the morally defensible thing by not allowing the erosion of the medical schemes environment by the amendments.

SA Underwriting Managers Association Submission
Mr Patrick Bracher (Senior Director: Commercial Department- Deneys Reitz Attorneys) said the SA Underwriting Managers Association (SAUMA) represented 71 companies of specialist underwriting managers.

SAUMA submitted that there was a need to distinguish between general underwriting managers, who are merely intermediaries doing additional administration functions; and specialist underwriting managers (members of SAUMA).

The field of specialist underwriting management started in the 1970s when it became apparent that there was a need for specialists in various fields to be covered for various contingencies.  In 1978 amendments were made to the legislation to differentiate this class of insurers from ordinary insurers.

The legislation sought to accomplish this distinction by saying that the specialist was a person dealing in “a particular kind of policy”. This phrase was so broad that it allowed ordinary brokers to become part of this category if they were, for example, selling their policies to only a particular soccer club, customers of a particular retail store; etcetera. This had not been the intention of the legislation. A specialist was someone who specialized in fidelity guarantee, aviation and marine insurance etcetera. It was different to an ordinary broker doing administrative functions.

Mr Bracher explained that in the past insurance companies had departments specializing in the areas of marine insurance, fidelity guarantee insurance and aviation insurance. With the consolidation of insurance companies in the 1980s, big insurance companies merged. Many of these departments of underwriting managers then established themselves outside the insurance companies. They also formed small companies outsourcing their specialized skills to the larger insurance companies. SAUMA members were part of this group.

SAUMA was proposing the distinction between this group and normal brokers. They wanted the clause to provide that the expert underwriting managers were persons who did the work of virtual insurers. They would therefore do everything done by an insurer but would be backed by a major insurer who would also take regulatory responsibility.

With regard to S48 (a) (3) (c), SAUMA believed that expert underwriting managers should be exempt from this prohibition on profit-sharing and the requirement regarding the disclosure of remuneration. Failure to effect this exemption would amount to discrimination in favour of large insurance companies with underwriting departments within their company; since these prohibitions would not apply to these companies.

SAUMA requested the Committee to consider the inclusion of the following provisions to emphasise the distinction between the expert underwriting manager and ordinary insurers:
(a)The expert underwriter should exercise all functions listed under S48 (1)
(b)The expert underwriter should only provide services to a registered short-term insurer or Lloyds underwriters for a particular type of insurance
(c)The expert underwriter should not enter into policies directly with policy holders. Unlike brokers the expert underwriter did not deal directly with the public but instead dealt through intermediaries or insurance companies only
(d)The expert underwriter should not perform services on behalf of policy holders, but should act solely “for the insurance company, as the insurance company”.
(e)The expert underwriter should provide services in relation to particular specialised types of insurance provided by particular types of insurance policy; that is differentiated by the type of insurance and not just by identity, group membership or geographical situation. This provision would do away with the situation where the person could claim to be a specialist underwriting manager because he/she only deals in policies for a particular soccer club, for example.
(f)The expert underwriter should have the expertise, competence and operational ability to provide such services.

If these provisions were to be included in the Bill, no further distinction would be needed. The rest was covered by the Financial Advisory and Intermediary Services (FAIS) Act.

South African Insurance Association (SAIA) Submission
Mr Barry Scott (CEO- SAIA) read through the presentation document. He referred the Committee to Clause 4 of the Memorandum of the Bill, which stated that “the proposed amendments were made available for public comment for a period of 30 days”. He pointed out that this was not the case, as the Bill had been received by industry just two weeks before submissions were due.

In addition the Memorandum stated that “consultations with affected industry participants prior to the submission of the Bill to Cabinet were also undertaken”. He denied that such consultation had in fact taken place with industry.

He said that the Bill was highly complex and would have a huge impact for short term insurance (STI). Although the objectives of the Bill were laudable, drafting issues may detract from what the Bill sought to achieve.

80% of the STI premiums were derived from brokers. It was therefore inconceivable that SAIA could reach an informed decision without having consulted the broker associations, who were their partners. Mr Scott requested that SAIA be granted an additional two months to consult with stakeholders in order for them to make an informed and in-depth decision.

SAIA noted that the amendments in the Bill could be divided into two categories; namely technical changes and policy changes. They indicated that they had no objections to the technical changes proposed. The policy changes could be categorized as follows:
-Financial Condition Reporting: SAIA had been part of the extensive consultation on this issue and had no objections to its provisions
-Medical Schemes Demarcation: SAIA had major concerns with this issue
-S48 (Binder issues); SAIA also expressed concern regarding this issue.

Ms Refilwe Moletsane (Deputy Executive- SAIA) referred to Accident and Health Policy in the Bill. She explained that STI’s (including SAIA) had until recently operated under a cloud of uncertainty on matters surrounding this policy. The Bill sought to remove uncertainty on whether products were governed by STI Act on the one hand or the Medical Schemes Act (MSA) on the other.

SAIA proposed an upfront definition of Accident and Health Policy, since this was currently subject to the MSA definition. In addition there needed to be certainty regarding the products provided by STIs. Also, while S70 (1) (A) was laudable, the consultation was limited to the Ministers of Finance and Health.

Ms Moletsane outlined SAIA’s concerns with S48 of the STI Act. The following issues were unclear:
-whether an Independent Intermediary could bind an insurer
-whether this section dealt with the underwriting manager or an entity with Binding Authority
-whether services specified in this section were the same as “services as intermediary” as defined in the Act.
-the effects of Financial Services Board Interpretive Note- December 1998

Ms Moletsane read through SAIA concerns regarding the following sub-sections of S48:
S48 A (1) (a-e); S48 (2) (a-e); S48 (3) (a-c); S48 (4) (a-c); S48 (5) (a-c)

SAIA suggested that the following distinctions be specified in S48:
-regarding underwriting managers
-intermediaries with Binding Authority and the type of business they can bind
-Brokers without binders

Discussion
Mr N Singh (IFP) noted that the main concern of the CMS centered on the issue of demarcation between health insurance and medical schemes.

Mr Singh asked CMS if their concerns would be addressed if the words “after consultation with the Minister of Health” were to be replaced with “in consultation with the Minister of Health”.

Mr Van den Heever said that these words would not address the issue. They had proposed the words “with concurrence”. This was not a finance policy but a health policy. Exemptions would have to be decided upon in the proper manner. Merely creating a regulatory framework was insufficient. The actual products should be approved by the Regulators acting together. Only once the product was approved in a way that was consistent with regulations, should it be allowed into the market. This process was very important because of its impact on medical schemes. This was also the process used internationally.

Mr Singh asked SAUMA who would determine if a person was an expert underwriting manager.

Mr Bracher explained that underwriting managers would still be registered under the FAIS Act. Therefore there was still the need to be registered as a “Key Person” which meant that all the requirements for registration as such had to be met. The insurance company would still need the key personnel registered with the necessary expertise to do this specialized type of business. Also, he referred to (e) of the provisions he had submitted for inclusion in the Bill (for the purpose of further distinguishing underwriting managers from ordinary brokers). In accordance with this provision, one would have to bear in mind that the insurance company still had to decide who would be the front face of the company for that type of expertise. Also, there was an objective test which was mentioned in (f) of the same paragraph. This ensured that the specialist would have to possess the skills and knowledge which s/he claims to possess. This person would therefore be judged as an expert and this would ensure that people did not claim to possess expertise which they did not in fact have.

Mr Singh said that he did not think that giving SAIA an additional two months would add to the process, given the fact that they had submitted the most detailed and in-depth presentation.

Mr Scott answered that the industry saw the Bill on 9 May for the first time. This was just two weeks prior to the deadline for submissions. One had to bear in mind that the industry was very complex. The brokers were their partners, without whom the industry would die. There had not been sufficient time to hold discussions with this important group and it was very important that SAIA obtained a detailed input from broker associations. There were 5 00 000 to 1million persons who owned Accident cover. These policies were under threat if the Bill went through in this form. There was a need for more time to engage around these issues. SAIA had not had the opportunity to consider the full implications of the Bill. They had hoped that the industry could obtain consensus around the issues raised in the Bill.

Dr D George (DA) referred to the assertion by the CMS that the insurance industry was guilty of cherry-picking clients. He asked if CMS was not perhaps guilty of the same thing.

Mr Van den Heever responded that medical schemes could also risk rate and there had in fact been enormous pressure from the open medical schemes to do so. The legislative framework was however working against this pressure. New legislative reforms were supposed to eliminate gaps to address the situation where medical schemes were discriminating. Once this happens the cross subsidization over the life cycle of an individual would become natural. It was however difficult for medical schemes to operate in an environment where there was a parallel structure subject to different rules working in the same environment.

Dr George referred to SAIA’s claim that there was insufficient consultation on this Bill. He asked if the industry did not hold regular discussions with regulators and consult on important issues on a regular basis.

Mr Marais referred to SAIA’s assertion that they had made a submission to National Treasury (NT) which had not been taken into consideration sufficiently.

Mr K Moloto (ANC) asked if the CMS was proposing that the issues falling within the business of the medical scheme should be regulated by the CMS, while those involving health matters in the area of normal insurance should be regulated by the Financial Services Board (FSB).

Mr Van den Heever responded that business of medical schemes should be regulated by the Medical Schemes Act. This is because this Act contained the social security framework ensuring protection for members of that environment. Thus upon market entry it would be necessary to check if the product was unproblematic, after which the FSB would regulate these exempted products. This could only happen if a proper exemption process was found.

Mr S Marais (DA) asked SAIA for more information on when and how they had received notification for consultation.

Mr Moloto asked if SAIA had been consulted in the drafting of the Bill. This was usually the procedure followed in the drafting process.

Mr Scott said that SAIA had not been consulted in the drafting process. They had seen the Bill on 9 May for the first time.

Financial Intermediaries Association (FIA) Submission
Mr Jay Ramsunder (Past President- FIA) said that FIA understood the rationale behind the amendments to the Long Term Insurance (LTI) and STI Acts. It had been necessary to introduce legislation which was more relevant to the current environment.

He informed the Committee that FIA too had had insufficient time to consult and prepare their submission adequately. They had not been informed of the hearings officially. They had been informed of its release for comment by SAIA on 10 May 2008. They had contacted other stakeholders, who also indicated that they had not been informed of the invitation to submit comment on the Bill. They therefore supported the call made by other organizations for more time.

Mr Arnold van der Linde (President – FIA) referred to the current delivery method by industry whereby administrators and intermediaries work closely together is the way in which the products are delivered to consumers. Most big and many small brokers partake in this delivery channel where there is an administrator or binder-holder into he same group. The definition of “binder-holder” was problematic. It was difficult to deal with this issue without adequate consultation. In addition, insurers cannot take over this function overnight. Insurers do not always provide the niche product where this delivery method exists.

FIA was not clear about what this all meant and what the implications were and therefore could not advise their constituencies on these matters.

Mr Chris Busschau (Director-FIA) said that much of what was being raised had already been raised discussions on the General Laws Amendment Bill. There was an overarching relationship between the pieces of legislation. There could be overlap, conflicts or gaps between these pieces of legislation. One of these areas was S14 (7) of the Pension Funds Act. This was discussed again in the deliberations on the Long Term Insurance Act because the products involved were of a LTI nature.

There were issues which could have a negative impact on consumers. He referred to the remuneration of intermediaries in cases where a consumer has funds in a non-performing or poorly performing instrument where the consumer was not aware of this fact. The only way consumers would often know about this was if their intermediary approached them to advise them. Expecting the intermediary to provide this assistance for free was unrealistic and therefore failure to allow remuneration for intermediaries in these cases could have serious consequences for consumers.

With regard to the debate regarding upfront commission or fees, FIA supported the practice of negotiations between the consumer and the intermediary regarding the charging of fees where the collection could be done with the consent of the client. Trail fees would be levied on an agreed basis. They recommended that the Committee should take this into account in future discussions.

Referring to S49 of the LTI Act, FIA said that there was a link between this section and S16 of the FAIS Act dealing with reward for intermediaries. For two years NT explored how fees had to be charged in the LTI area. Draft regulations had been distributed in March this year. Intermediaries had contributed to this debate. The general intention of the NT had been to level the playing field. Consumers had to have a clear understanding regarding the charging of fees and the way in which intermediaries would be remunerated. Product suppliers would then be in a position to offset the reduction in costs which would flow from this, into providing better values for the consumer.

Mr Ramsunder requested that the Committee postpone the implementation of the proposed amendments pending further consultation with their stakeholders and members. FIA had noticed interpretational problems and would need more time to obtain legal and professional opinions.

Interaction with National Treasury on the Consultations held with Industry
The Chair requested NT to provide clarity on the consultation process regarding the Bill. Members of industry were complaining that they had not been given sufficient opportunity to give input into the Bill.

Mr Jonathan Dixon (Director-NT) said that NT interacted with the Short-Term Advisory Committee on a continual basis. That Committee provided continual feedback to its members. The Bill had been made available to that Committee a year ago.

Quarterly meetings had been held with the various industry regulators to discuss industry issues. None of the issues in the Bill should be a complete surprise to industry. Although they had seen the specific proposals on 9 May, none of the background issues were new to them.

Life Officers Association (LOA) Submission
Ms Anna Rosenberg (Deputy Executive-LOA) said that LOA had had insufficient time to consult and prepare comprehensive comments. In addition, they believed that further consultation was needed on various aspects of the Bill.

LOA had a problem with the fact the definition of “health policy” was anything that was not the “business of a medical scheme” as defined in the Medical Schemes Act. This rendered the LTIA subservient to the Medical Schemes Act.

In addition they felt that the role being imposed on the statutory actuary was too wide and exceeded the actuary’s intended role and expertise.

Ms Leanne Dewey (Convener of the LOA Distribution Committee) said that LOA did not have a problem with the entire S49A. They however felt that proposals regarding the prohibition on profit sharing and legal relationships between entities may have unintended consequences on legitimate and beneficial arrangements. Aspects of S49A went further than the harm sought to be addressed. Further consultation would be needed to identify appropriate regulatory tools to address certain issues. There was also much uncertainty around what were regarded a binder agreements.

LOA felt that S49A should not be adopted in its current form. They offered their support in seeking effective solutions to any identified market conduct abuses.

Discussion

Mr Moloto wanted clarity on the reason LOA believed that the Bill would duplicate the roles of the Statutory Actuary and the Compliance Officer.

Ms Dewey responded that Clause 7 of the Bill showed how a potential breach of the Act had to be dealt with. To expect the statutory actuary to become involved in future breaches which had nothing to do with financial soundness, was extending the role too far. It also amounted to an overlap with the role of the Public Officer.

Dr George asked for clarity on the issue of trailer fees where the investor was unhappy with the performance of a fund and wished to transfer to another product or portfolio.

Mr Busschou replied that this was dealt with in terms of the Pension Funds Act. If an investor in a Retirement Annuity Fund was unhappy with the performance of that fund s/he could now by law transfer that capital, under the advice of an intermediary, to another structure. The argument had been that the intermediary would be receiving commission twice for the same transaction. FIA however felt that at the time of the transaction, the consumer may not even have been aware of the facility which has now come into being. This would then only be brought to the attention of the consumer by the intermediary, who should be fairly remunerated for this. This would be done in agreement with the consumer, who would not be paying this amount out of his/her pocket. One should bear in mind that the consumer could have been left in ignorance to suffer the loss.

Mr B Mnguni (ANC) asked for clarity on what FIA meant by “suffocate critical means of making products accessible to all consumers”.

Mr Van der Linde said that this referred to the provisions of S48. This dealt with the delivery of niche products by teaming up with an intermediary, who was able to effect this in a seamless way. This would happen “there and then”. If this were to be done by those with product delivery licenses, it could not be done in this fashion without the assistance of an intermediary. S48 would therefore suffocate that delivery mechanism.

Mr Moloto said that it was important to ascertain whether industry had actually seen the draft prior to its submission to Cabinet. It was not good enough to say that NT had consulted with them on an ongoing basis.

Mr Marais agreed that whatever was discussed between the NT and industry would not be enough for industry to obtain mandates from their constituencies. Industry could not assume what would be in the final draft based on discussions. They needed to have seen the draft.

Mr Singh agreed, but added that there had to be a timeframe for this consultation.

Ms Jo-Ann Ferreira (Chief Director: Legislation-NT) said that the extent to which this consultation had to occur, had not been clear to NT. In addition, NT had to put forward a Bill which was in the best interest of the public and not necessarily of the insurance industry.

Mr Moloto asked what the normal process was and if it had been followed.

Ms Ferreira said that the process which had been followed with this Bill was not unusual, especially given the fact that this was not a new Bill but an amendment.

Advocate Frank Jenkins (Parliamentary Legal Advisor) said that the Constitutional Court had ruled that the Executive had to ensure meaningful consultation in these processes. The Committee should decide if “meaningful consultation” had taken place.

The Chair ruled that despite the fact that continual engagement had taken place, he would allow industry participants a week for further engagement. The Committee would then assess if further engagement was needed.

Mr Moloto pointed out that consultation did not necessarily mean that industry players had to obtain agreement among all their members and stakeholders.

National Treasury Briefing on the Financial Management of Parliament Bill

Mr Andrew Donaldson (Director-NT) read through the presentation document, which highlighted the following areas:

-Background
-General Comments
-Underlying Principles
-Concerns
-Practical Difficulties
-Alternative Approach
-Specific Concerns
-Conclusion

The Bill sought to provide for independent financial management for Parliament, which currently falls under the Public Finance Management Act (PFMA). NT, however, believed that this issue could be fully provided for in the PFMA

NT expressed concern that the Constitution required a single national Revenue fund and an integrated Treasury, which meant that this Bill could be constitutionally challenged. It also seemed to amount to an unnecessary duplication of the PFMA. Financial Management of Parliament could be dealt with in the PFMA. This could be done in a separate Chapter specific to Parliament; given that Parliament was a very different structure to a Government Department. There could be difficulties which could arise regarding alignment with the PFMA. Separate legislation could exclude Parliament from the wider provisions of the PFMA; such as borrowing, Public Private Partnerships, guarantees and public entity oversight.

Discussion

Dr George asked if rules of accountability could fall by the wayside by having separate legislation.

Mr Donaldson said that norms and standards could develop over time. However the development of a body of practice which is peculiar to Parliament could be a problem.

Mr Marais asked if there was similar precedent in South Africa or if this would be the first.

Mr Donaldson said that the homeland system had resulted in fragmented financial systems which had to be integrated. It is because of these precedents that NT was being so cautious. The general thrust of financial management had since then, been toward the establishment of a common financial system. NT was concerned that this Bill represented a move in the opposite direction.

Mr Marais asked who would bail Parliament out if they should run into debt.

Mr Singh asked for clarity on the budgeting process. He asked who would supervise and control the funds and wanted clarity on whether the role of NT was simply to allocate the funds.

Mr Donaldson said this provision addressed the risks in the situation where project commitments created future financial obligations. In planning for these projects in advance there would be the need for assurance that the money would be made available. It might therefore be necessary for agreements with the Minister of Finance to approach banks and suppliers, providing assurance that the money would be made available. It would be more difficult for Parliament to provide these assurances to banks in the absence of such agreement with the Minister.

Mr Marais asked if there would be any problem with including a separate chapter in he PFMA to deal with Parliament’s Financial Management.

Adv Jenkins said that there was nothing preventing this. The aim had always been for this to be part of a single act but a political decision had been taken to deal with it in a separate Act. Perhaps this decision should be revisited. It was not clear what Parliament’s norms and standards would be.

The Chair said that there was a need for Members to set aside a day to respond to this briefing. It was important to take into account that the Bill could be subject to Constitutional challenge. He recommended that the Committee should seek independent legal counsel on this matter. He agreed that the inclusion of a chapter in the PFMA would have been neater.

The Chair adjourned the meeting.