Insurance Bill: National Treasury and FSB responses to submissions

Meeting report

Briefing by National Treasury on the responses to public comments received on the Insurance Bill, 2016
Mr Ismail Momoniat, DDG at National Treasury, stated that Treasury will be responding to the many comments received from the public hearings.

Ms Reshma Shoeraj, Director: Insurance, National Treasury, aid the insurance sector was very unique and required strong regulations. It was a business in which the insurer promised to protect the consumer against the small probability of a large loss in exchange for a regular ongoing payment. The insurance sector was characterised by a high level asymmetry of information between providers and consumers and required payment for the service long before the customer had an opportunity to experience its value. Furthermore, effective regulation and supervision are essential to build consumer confidence and trust and help ensure financial stability. This was underpinned by an effective strong regulation that was supported by licensing and solvency supervision which helped identify the risk that insurers will be unable to meet their promises to policyholders which is covered in the Bill.

Mr Momoniat said that most of the financial sector was essentially about promising to deliver something at a particular date. If you look at insurances, a life insurance package was like a retirement product where you get the payment at a later date. Although it could be pretty long, on the other hand there is short-term insurance. The issues were trust and prudential supervision which are quite critical.

Ms Sheoraj said National Treasury welcomed the opportunity to respond to submissions made in the public hearings, and the detailed responses are set out in the supporting matrix and revised Bill. Comments received from the public hearings focused broadly on transformation of the sector, financial inclusion, and cost of regulation, certain powers of the regulator, technical amendments and alignment with the Financial Sector Regulation (FSR) Bill.

Mr Momoniat said when dealing with the issue of transformation, the key question was how to take an appropriate approach on the Bill, as well as the instruments to effect it. The objectives and the instruments should not mix. The delivery on the objectives was very critical, and there should be dedicated regulators to each of those objectives, because market conduct should not dominate over prudential and vice versa. Black Economic Empowerment (BEE) should not be duplicated to an extent that the BEE legislation was ineffective. Instead, the Charter should be looked at, because it dealt with the issues of ownership. Most importantly, the issue was to what extent the Bill dealt with transformation.

The Chairperson stated that there will not be any debate right now, although highly contestable things have been said thus far. Transformation was not debatable, it was very critical. And referencing to the BEE Bill will have to be investigated further. The Bill was not going to be perused clause by clause, as long as there was consensus on the policy issues. He suggested that, if there are certain issues that National Treasury felt must be objected stemming from Parliament, they were more than welcome to do so. They must challenge Parliament and outline what Parliament suggested will adversely affect the sector, if the proposed amendments will actually affect the sector.

Ms P Kekana (ANC) said when the process started it was said that the challenges existing in the underwriting space and funeral parlours are taken for a ride in terms of short term insurance.

The Chairperson interjected, and suggested that Members should allow the delegation to first go through the presentation before making any submissions about comments and questions. Furthermore, the Committee was not going to through the Bill clause by clause, but it will look at specific highlighted issues and comment on the responses from the public hearing for now.

Ms T Tobias (ANC) suggested that the policy issues that are contentious must be lifted out because they are going to affect the clauses.

Ms Reshma said the Bill was built on the Twin Peaks model of financial regulation envisaged in the FSR Bill in respect of prudential supervision, and provided a consolidated legal framework for the prudential supervision of insurers are envisaged in the FSR Bill. The Bill will promote financial inclusion and transformation in the sector; it will enhance safety and soundness of insurers through introducing a new solvency assessment and management regime. The Bill will also help maintain financial stability through introducing a framework for insurance group supervision, and also facilitate some alignment with international standards in accordance with the G20 commitments.

The Bill entrenches the principle of proportionality, that regulatory requirements must be applied in a manner which was proportionate to the nature, scale and complexity of the risks inherent in the business of an insurer so that requirements imposed on emerging insurers are not onerous. This proportionality applied across all aspects of the Bill and requirements and exemptions may be granted to provide for progressive or incremental compliance with requirements. With regards to the framework legislation, the Bill was enabling and empowering - containing the framework for prudential regulation with detailed governance, financial soundness and reporting requirements.

Some of the keys issues addressed in the proposed revisions of the Bill include transformation in the sector and included in the amendments made was the term ‘’transformation of the insurance sector’’ defined in section 1 which has been defined with reference to the Broad-based Black Economic Empowerment (B-BBEE)  Act. The amendments also included the objective of the Act, the requirements for license in section 22; variation of licensing conditions in section 26 and exemptions in section 66 which has been amended to empower the Prudential Authority (PA) to exempt any insurer or a controlling company from, or in respect of, a provision of the Bill to achieve developmental, financial inclusion and transformation objectives. 

The Bill seeks to promote financial inclusion through micro-insurance. There was a concern that the Bill seeks to distinguish between micro- and macro-insurance businesses which will exacerbate lack of transformation in the industry. With regards to the cost of regulation as a barrier to entry, there was a concern that PA may direct a capital add-on if the risk profile of insurer or governance framework deviated from underlying solvency capital requirement calculation which may result in small black-owned businesses being taken over by big businesses. To ensure that the financial soundness of the insurer so that promises to and claims of policyholders can be met, capital add-ons may be imposed. This power was limited in the Bill to where the PA reasonably believed that the risk profile of the insurer of the insurance group deviated significantly from the assumptions underlying the solvency capital requirement calculation or the group solvency capital requirement calculation, amongst others.

(See document for significant revisions per chapter and laws amended on slide 16)

Discussion

Mr B Topham (DA) referred to section 66 (Exemptions) on the Bill and said he was very impressed with the proposal to give the regulator the power to allow new entrants but he shared his concern about the requirements for a license in section 22. It may block new applicants and the section should not block new applicants because they do not meet the percentage of shareholding requirement. 

Ms Tobias said the issue of licensing needed to be deliberated; because it spoke to anybody who is knew in the industry that will look at this supervisory element as some sort of a barrier to entry. It cannot be de-linked to capital requirement, because capital requirements were another form of barrier to entry. Although it was necessary the sector cannot be made a free-for-all sector because that will hamper the regulations, but it needed to be addressed. Solvency requirements might need to be looked at differently on the basis of the economic conditions in the country at a particular conjuncture. It boiled down to protecting the companies that are facing difficulty and looking at the sustainability of the companies where they operate. She referred to the designation of holding groups and asked if it was only going to be on the holding company or the subsidiary. 

With regards to the group schemes, if the National treasury team lacked the township experience, there was going to be a variation or misunderstanding of how people in the township operate. Your salary was not only just your salary; you are expected to be a breadwinner. She advised that there should be a regime that allowed multiple people within families are put on funeral plans or insurance in the townships. National Treasury must go out to the townships and speak to the people on the ground and not the funeral parlours to understand challenges that are facing the ordinary South Africans and not make it more difficult for people who bear the responsibility of taking care of family members.

Mr A Lees (DA) said on transformation, it was integral and vital so there was no need to debate and that the debate should be around how it should be achieved. This kind of legislation’s objective was to regulate the industry to protect the consumer when purchasing an insurance product and have the certainty that he/she will get the return on their investment at the said maturity date.  He was inclined to think that the Charter was where the transformation direction should come from primarily, although some elements of it can be brought into the legislation. He cautioned aligning certain precepts which are important in order to fulfil the promises of the industry to be left out in some cases because then consumers will be put at risk without knowing that they are at risk.  Therefore, some service providers may argue that they are in a position to offer insurance without the R10 million capital requirement that was now required because the legislation allows them to, but then it makes it vitally important that that service provider disclosed that they did not have the R10 million. It puts the consumer at risk that he/she would not have had with another service provider or insurer who has the higher capital. It should be dealt with carefully and it was concerning how the PA authority would allow this to leeway without considering how all this may affect the customer or consumer.

Ms Kekana declared upfront her deficit in understanding the insurance industry, however there are a few things that are pressing. The biggest beneficiaries in the sector are asset managers and part of what they are dealing with is pension, insurance, etc. The middle-income group which are mostly black and African may not understand the things being brought forward in the legislation, but are affected adversely by it. Ordinary people, have responsibilities to take care of their families, hence the multiple insurance policies that ordinary people end up getting themselves into. National Treasury, once the process starts, must go out aggressively to ensure that people are informed because we do not want unintended consequences.

There may be a way that government can come in and intervene in the levies required for small players to enter the sector to assist in developing a blue print. It was now important that that process came in concurrently as the insurance sector was being transformed, specifically issues around transformation and rural areas that do not have access to insurance.

Currently if one looks at how the housing development was progressing in rural areas, most people in those areas cannot afford insurance, because they are deemed high risk areas. There needs to be some way to look at ensuring that people in rural areas benefit and also have access to insurance. She expressed her contentment regarding the legislation prescripts for funeral parlours. Lastly, on the first slide it was said that government can make a lot of money through tourism, but people who come to South Africa are insured through the Department of Tourism. National Treasury should speak to the Department of Tourism and establish how this can be achieved by the government to earn revenue through this, because government was paying a lot of money for road accidents for tourists but did not tap into making money through insurance via tourism.

Mr F Shivambu (EFF) proposed regarding section 22 and the requirements for licenses that there must not be tiptoeing on the transformation issues. It has to be contained in legislation because the only thing that was reflected there was that the insurer should have a clear, whilst the entire sector was predominantly controlled by white capitalists and businesses. The proposals are as follows, ‘the applicant entering the market must have a minimum of 30% black ownership’; secondly, ‘a minimum of 50% of the company must be controlled by black executives’; and lastly, ‘a minimum of 50% of the boards of the entrants into the market must be women.’ This commitment needed to be made clearly, and at any given time a minimum of 40% of licenses issued must be given to wholly black companies. The approach of the BEE codes has failed and the control of the country’s economy after 23 years of democracy still reflected a pre-apartheid regime There was no way that these proposals can be unconstitutional. Most businesses in the sector are wholly white owned. This will also be the case for asset managers, banks and so forth in due time.

The Chairperson said essentially there must be a right balance in allowing new entrants and ensuring that customers do not lose out in the end, because the proportional effect of losing money will be borne by the middleclass and the working class. The State needs to come in, but how can the State come in with such a low growth rate (0.3%). National Treasury needs to advise on how the State can intervene. He disagreed that transformation must be left to the BEE legislation and the Charter. What the EFF has said needs to be considered and there can be a solid plan but who is going to implement it. There needs to be provisions to ensure that these things are done, and monitored so that if there was no adherence then licenses can be rescinded. 

Another pressing issue was the fine print in the insurance contracts (asymmetry of information) and the National Treasury must inform the Committee what was being done on this issue. For years people have been complaining about the fine print when they submit the claims. There must be clear evidence that the customer was clearly informed and made aware of what is in the fine print. The weight has always been on the policyholder and now it must be on the policy provider. 

The issue of ‘black tax’ remained a universal and it affected many other ethnic groups. To what extent can the law take that into account?

Mr Momoniat responded and said that that transformation may be interpreted differently, hence the notion that there has not been enough transformation in the financial sector. The insurance industry has the biggest challenge to transform its services and offers in the industry. A lot of the offerings in the market are pathetic to say the least, and some practises are plain fraudulent and to have the market regulator effective one would expect it to deal with such things. The credit insurance abuse that has been seen is disgraceful.  A revolution needs to take place on what type of products can be sold to the public. For instance, car insurance companies stated that one in three motor cars on the road are not insured and asked Treasury to ask government to make it compulsory. National Treasury argued that the insurance industry needed to evaluate its services and practises and ask why people refuse to insure their cars. It was because the products are expensive which translated to market conduct. We talk about transformation, but how many people even here in the Committee room can say that they do not bank with one of the big four/five banks? It was the same with insurance companies. People tend to have a bias towards small players because they look at reputation, so how does one get smaller player to come and yet operate on a fair plain field, it is not an easy one.

On ownership and transformation, he said in many instances 40% - 60% ownership was foreign and this was needed for economic growth. South Africa needed that investment and rules and regulations should not drive foreign investment away. The truth was that some of these companies (26%) are not even locally owned. Some of that ownership could be geared anywhere and if Mr Shivambu’s proposals were legislated, it would definitely have serious implications from a growth perspective. The Financial Sector Charter was a better approach and there was monitoring under the Charter. Current targets in the Charter are irrelevant and needed to be improved. Mr Shivambu’s approach will not achieve what it seeks to achieve by simply putting in those provisions. Treasury also believed that the top management in these insurance companies was not representative of the country’s demographics, but if there was proper representation then people on the ground will get the right policies, because management will understand what the consumer wants. The FSR Bill was likely to deal with prudentials. The regulators needed to be held to account and monitored.

Mr Jonathan Dixon, Financial Services Board, said the Bill deals with the prudential aspects (half of the story), which are important aspects because they protect customers to ensure that insurers pay claims when they are due. The other half of the story is about the conduct aspects that might be brought before the Committee to talk about the changes that are being made regarding the Policyholder Protection Rules which introduced a lot of changes to conduct requirements and those were gazetted and released for comments. The plan is that the final version will come to the Committee to be considered, particularly the conduct of the market which will cover a lot of the comments that were made.

Mr Shivambu said National Treasury cannot outright state that things cannot be legislated because of potential foreign behaviour. These were historical issues where black people could not participate actively in the economy. If this generation failed to deal with the injustice of black people being economically excluded, then with reservations, there will not be another generation to look into rectifying this problem. People coming into the system now will automatically think that things are just the way they are and if you look at investor behaviour historically, foreign investors always find a way to operate within the regulations and laws that have been set locally.

The Chairperson advised that the ANC needed a bit of time to consider the concrete legislative targets. The Committee understood the statements made by the National Treasury, but would like more evidence that the consequences will be as disastrous as suggested. Treasury needed to come up with how those targets can be achieved without it being prescribed in the Bill. In the meanwhile the ANC study group will meet soon and discuss this issue and the EFF can submit its tentative initial proposals by Monday morning for the ANC study group to look into.

Ms Tobias suggested that perhaps Mr Shivambu can be given an opportunity to make a presentation to the Committee on the proposals he made today.

The Chairperson said that can be considered.

The meeting was adjourned.