Insurance Laws Amendment Bill [B26-2008]: response to public submissions

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Finance Standing Committee

05 June 2008
Chairperson: Mr N Nene
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Meeting Summary

National Treasury and the Financial Services Board gave the Committee a report back on consultations held with industry stakeholders since their previous meeting. They had managed to reach agreement on many of the contentious issues. The main areas for concern had been:
▪ demarcation between the ‘business of a medical scheme’ and that of normal health insurers
▪ binder arrangements. The concerns centered on the type of remuneration a binder party could receive, as well as with whom the person with binder authority would be permitted to deal.
▪ technical amendments, which included the requirement that the auditor report all contraventions to the Registrar; the requirement’s regarding the reporting duties of the statutory actuary; the valuation of assets and the use of derivatives.

Members questioned the role of the statutory actuary, especially the duty to approve the use of derivatives for the purposes of hedging investment risk. There were also questions on binder arrangements and valuation of assets for statutory purposes.

Meeting report

National Treasury/ Financial Services Board response to public submissions
Mr Ismail Momoniat (Deputy Director General: National Treasury) said that the material issues emerging from the consultations had been around the issues of demarcation and binder arrangements. There had also been some proposed technical amendments.

Demarcation issues
Mr Momoniat referred to Slide 3 of the “Report Back on the Insurance Laws Amendment Bill” document. National Treasury had, since their meeting with the Portfolio Committee the previous week, held numerous meetings with industry stakeholders. These included SA Underwriting Managers Association (SAUMA), the SA Insurance Association (SAIA) and Financial Intermediaries Association (FIA); with whom meetings were held on 2 June 2008. They had met with the Department of Health (DOH) on the same day. There had also been continual interaction with the DOH, the Council for Medical Schemes and Financial Services Board (FSB).

There has been much agreement on issues discussed during those meetings. In fact Mr Momoniat was not aware of any major issues on which there was still disagreement. The consultation was shorter than what either National Treasury or Parliament desired, but one had to bear in mind the pressures surrounding the process.

The results emanating from inputs received by industry were consolidated into a document titled “Insurance Laws Amendment Bill: Government’s Response to Comments Received” (referred by presenters as ‘the Matrix’). The document also incorporated inputs received after the closing date. The detailed matrix also stated how Government had amended the provisions based on inputs received. National Treasury was planning a further meeting to interact with stakeholders to discuss any outstanding issues. This meeting would be held the on 10 June. If any material changes were proposed in that meeting, it would be brought back to the Committee.

Mr Momoniat referred to Slide 4 of the presentation document. National Treasury agreed that Medical Schemes should not only be used by the sick and elderly, while the young healthy persons were covered by normal insurance policies. National Treasury agreed that this situation made the Medical Schemes environment unsustainable. Government did not wish to undermine social security principles but merely wished to ensure more effective regulatory agencies. Part of the exercise included getting regulators to work together and to agree on the demarcation between the two Insurance Acts and the Medical Schemes Act (MSA). He read through the “Amendment of section 72 of Act 52 of 1998” in the document titled “Insurance Laws Amendment Bill: Health Demarcation” (the Health Demarcation document). He referred to the proposal by the Council for Medical Schemes that the “business of a medical scheme” should be defined in this Bill and said that Government had felt that this definition belonged in the MSA. They had reached consensus that the MSA would be amended to include this definition. National Treasury did not wish to amend another piece of legislation in this Bill.

Mr N Singh (DA) interrupted, asking if there was anyone from the DOH present.

Mr Momoniat replied that they had urged the DOH to attend, but that Department had felt that there was no need to do so, given the fact that they had reached consensus on most matters.

The Chair said that the Committee had also asked the Portfolio Committee on Health to send representatives. This had not happened. Perhaps they would urge the relevant role players more strongly to attend the final meeting on the Bill.

Ms Jo Ann Ferreira (Chief Director: Legislation: National Treasury) said that the Registrar for Medical Schemes had sent an email to National Treasury, confirming their agreement on matters discussed. National Treasury would be able to obtain a similar email from DOH.

Mr Momoniat continued the presentation, by reading the “Amendment of section 70 of Act 53 of 1998” of the Health Demarcation document.

Binder Arrangements
Mr Jonathan Dixon (Deputy Executive Officer: Insurance, FSB) said that they had had numerous meetings with industry associations about binder arrangements. He read through slide 5 of the presentation document. Hearings and discussions had indicated the existence of various types of binder arrangements. The Act had to date, only dealt with underwriting managers. There were various forms of intermediaries and brokers with limited authority. It was necessary for provisions to cater for the different classes of binder arrangements.

Some discussions on binder arrangements related to broader policy issues. Among these was the question of intermediary relationships. Questions raised included whether intermediaries were acting as agents for clients where they were paid commission, or whether they were sales agents for the companies. There was agreement on the majority of provisions applying to all binder arrangements such as they had to be in writing, what they had to include and the fact that ultimate liability lay with the insurance company.

Concerns were expressed on the following issues:
▪ the type of remuneration a binder party could receive, particularly whether they could share in profits of the company; and
▪ who the person with binder authority would be permitted to deal with. Underwriting managers were prohibited from dealing with the public directly. They could only deal with the insurance company or the intermediary. The problem was that brokers with binding authority would by nature deal with the public.

Mr Dixon referred to the scope of the binder arrangement, explaining that it referred to the situation where a third party could create liability for the insurer or vary the liability of the insurer.

All parties to the discussions agreed that there were various hybrids of binder arrangements. No one had identified all the varieties that existed. Mr Dixon proposed that there be enabling provisions dealing with the different classes of binder arrangements in the regulations. Thus, when dealing with the question as to who would be able to deal directly with the public, there would be an agreed principle in the legislation, while the different permutations would be provided in the regulations. The regulation-making process would allow for a period of further consultation. There had to date not been a requirement for public consultation on regulations. However, there were suggestions that these regulations should be tabled in Parliament. He requested the Committee’s input on this.

Mr Dixon read page 44 of the Matrix document. This dealt with Clause 46 of the Bill.

Mr Dixon then referred to Slide 7 of the presentation document. The auditor and statutory actuary were the first line of defence when ensuring proper supervision within the company. The FSB/ Treasury decided to retain the requirement which made it compulsory for the auditor to report all contraventions to the Registrar (as opposed to reporting only material contraventions, as suggested).

The statutory actuary was required to report anything that threatened the financial security of the insurance company. There were suggestions from stakeholders that the Bill was extending the reporting duty of the statutory actuary to include areas that fell within the scope of the compliance officer. The FSB/Treasury were taking these concerns into account by limiting the reporting duty of the statutory actuary.

With regard to the valuation of assets, the Registrar could seek a ‘reasonable value’ on certain assets for statutory purposes. This replaced the provision that the Registrar could seek a ‘proper value’. One had to bear in mind that the value used for financial reporting differed to that used for statutory purposes.

With regard to the earlier provisions that the insurer may not invest in derivatives for speculative purposes, there were comments that it was sometimes necessary for the insurer to hold an open-position. This was when it formed part of the portfolio management and was done for hedging purposes. In addition, it had to be signed off by the statutory actuary.

Discussion
Mr B Mnguni (ANC) asked if there had been any consultation with non-governmental organizations (NGOs) and community-based organizations (CBOs).

Mr Momoniat said that CBOs and NGOs had been invited to the meeting which would be held the following week. They had already had input from these groups. Their concerns had been similar to those expressed by the Council for Medical Schemes.

Mr K Moloto (ANC) asked if the statutory actuary was a person within the company or an external party.

Mr Dixon replied that the statutory actuary could be either. Larger companies usually had an in-house person performing these functions. Smaller companies outsourced the functions.

Mr Moloto asked how often the companies would have to consult with the statutory actuary before the hedging process would be approved. If it occurred on a daily or weekly basis, he asked if this exercise was feasible.

Ms Hantie van Heerden (Head: Actuarial Insurance: FSB) said that the statutory actuary would not sign off every single transaction. The statutory actuary would write the framework within which investment managers must work. The agreement would set out the limits and circumstances in which these transactions would be allowed.

Dr D George (DA) asked how the company knew that the statutory actuary was making the right decision when deciding on the hedging process.

Mr Dixon responded that one should bear in mind that the Bill was not proposing anything new regarding the use of derivatives. Insurance companies could currently use derivatives for the purposes of hedging investment risks. The Bill was merely proposing the additional requirement, which was that the statutory actuary had to give approval. The statutory actuary had to be prudent as this function related to the management of the solvency of the company. There were processes being undertaken where the role of the statutory actuary was being looked at. This included deciding if there were sufficient controls in place to ensure that they were doing their jobs properly. The Bill could not do much more. Other processes would ensure proper checks and balances.

Ms Van Heerden added that the statutory actuaries were appointed in their personal capacities and were therefore held liable as such. There were also standards of professional conduct imposed by the Actuarial Society of South Africa. If these were breached, the actuary would be subject to disciplinary processes.

Dr George said that the Bill attempted to regulate the agreement between the underwriter and the agent. He asked how the customer could feel comfortable with this agreement, when he was not directly exposed to it.

Mr Dixon answered that the insurance company was responsible for underwriting risk. The Bill ensured that the insurance company could not try to contract out of liability. The intermediary had to disclose his/her role as an agent of the insurer. The policy document had to be clear about the identity of both the insurer and the intermediary.

Mr S Marais (DA) asked if the term “reasonable value for actuarial purposes” should not rather be defined in the Bill. Failure to do so could leave the term open to interpretation and conflict.

Mr Dixon said that this was tricky as one was creating a circular reference. The Bill proposed that the reasonable value be at the discretion of the Registrar subject to guidelines provided by the Registrar or independent expert.

The Chair referred to Mr Dixon’s request for guidance from the Committee about whether the regulations should be tabled in Parliament. He said that there was a standard agreement that this should always be done when dealing with legislation before the Portfolio Committee on Finance.

Government’s Response to Comments Received
Mr Dixon read through the document titled “Insurance Laws Amendment Bill: Government’s Response to Comments Received” (referred by presenters as ‘the Matrix’). It outlined:
▪ the number of commentators who commented on a particular issue
▪ the issues raised by stakeholders
▪ National Treasury/FSB’s response to the respective issues
▪ the amendments for consideration.

There were however pages missing at the end of the document. Due to time constraints, he promised that these would be made available to the Committee during the course of the day.

The Chair said that that the National Treasury and FSB had done well in conducting extensive consultation. When further consultation took place the following week, it should be remembered that one should not aim for 100% consensus. Stakeholders could be satisfied that their concerns had been raised and dealt with by Government.

Mr Singh referred to the fact that the meeting by National Treasury and the FSB would be held on 10 June. He asked if this gave everyone sufficient time to process the information before the following Portfolio Committee meeting.

The Chair said that external consultations had already been taking place since the previous week. There were already many areas of agreement.

Mr Marais asked if it was possible to ask industry players present at the meeting if they felt that they were being given enough time.

The Chair did not wish to change the programme of the meeting. Also, he did not want to give stakeholders who were present, the unfair advantage over those who were not able to attend the meeting. The Committee meeting scheduled for 13 June would commence as scheduled. If Members then felt that there had been insufficient time to deal with the further inputs, a further decision could be taken at that meeting. Ms Ferreira had indicated that the Council for Medical Schemes and DOH had given their written agreement with the areas of the Bill they had discussed with National Treasury and FSB.

Mr Momoniat promised that the National Treasury and FSB would email the documents provided at the present meeting, to all the stakeholders. In addition these documents would also be placed on their websites. They would email the Committee if any material issues arose from consultations.

The Chair adjourned the meeting.

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