Insurance Laws Amendment Act 2008 (ILAA)

Binder agreements

Section 48A of the Insurance Laws Amendment Act 2008 deals with binder agreements that allow insurers, in terms of a written agreement with third parties, inter alia, “to enter into, vary or renew a short-term policy”. These third parties are generally independent intermediaries and their associated structures, such as administrators.

Intermediary structures are so fundamental to our operating environment that a proper consultative process was essential to any changes or amendment to the law. In particular, it was necessary to identify the various structures in our industry. Although the initial draft of the Bill did not draw a distinction between the various classes of binder agreements, SAIA made a proposal to the Regulator as well as Treasury.

As a result of this consultative process, provision was made in the Insurance Laws Amendment Act (ILAA) for the drafting of regulations. These regulations will ensure the recognition of the various classes of binder agreements and the manner in which the binder intermediaries will be regulated.

SAIA is participating in an ILAA Binder Workgroup set up by the Financial Services Board. It is anticipated that the workgroup will be instrumental in drafting the terms of reference for the binder regulations, developing regulatory policy proposals and drafting the regulations.

At the fourth Binder Workgroup meeting held on 17 June 2009, the SAIA Cell Captive Workgroup was afforded an opportunity to present to the Financial Services Board (FSB) Binder Workgroup the use and the structures of Cell Captives. It was noted, following the discussion on cell captives, that a discussion paper on cell captive arrangements will be issued by the FSB.

At the Binder Workgroup meeting held on 27 July 2009 the SAIA, South African Underwriting Managers Association (SAUMA) and Financial Intermediaries Association (FIA) representatives presented the short-term industry insurance intermediaries’ matrix. The input provided by the short-term insurance industry on the Financial Services Board (FSB) Universal Matrix was acknowledged but a view held is that it is too high level for the short-term industry.

The SAIA/SAUMA/FIA matrix depicts the short-term insurance structures and to this end the following structures were presented and discussed:

• the call centre/on-line broker/full-time representative/tied agent
• the administrator with no discretion, which can be broker linked, performing outsourced administration for the broker/the insurer
• independent intermediary with binding authority
• the administrator performing outsourced functions with discretion
• the underwriting manager

The independence of an intermediary remains an area of concern for the Regulator where the intermediary performs a binder function on behalf of an insurer. It is hoped that the agency status will be determined during the process of engagement on binder regulations. The SAIA is now in the process of incorporating the SAIA/SAUMA/FIA intermediaries’ document, presented at the last FSB Binder Workgroup meeting into the FSB Universal Matrix. It is anticipated that the process of the drafting and review of regulations by all relevant stakeholders will be completed during this last quarter of 2009.

An integral component of binder agreements, which is specifically referenced in Section 48A, relates to ownership of “any information and documentation relating to the policies contemplated in the agreement”. It is a provision of the ILAA that as the owner of such information, the short-term insurer is entitled to access the said information, which must “upon termination of the agreement be returned to the short-term insurer”.

The industry is in the process of investigating the viability of a connectivity initiative programme that will allow all parties to the insurance transaction to have access to the necessary data, without one’s access to the exclusion of another. Ideally, this would require an electronic data interchange system that connects insurer administration platforms to the binder holder administration platforms. In addition, the issue surrounding which party (the insurer or intermediary) is in reality the legal owner of the information will need to be addressed.

Short-term Insurance Act, 1998 - Section 48 intermediaries:
Status in terms of the Financial Intermediaries Services (FAIS) Act

In response to the initial view that a Section 48 intermediary, in particular underwriting managers, should be registered as a representative of the insurer in terms of the Financial Intermediaries Services (FAIS) Act, SAIA engaged in discussions with the Regulator. The definition and nature of certain intermediaries with binding authority was discussed. Following this, agreement was reached in terms of which such an intermediary can be classified as a financial services provider (FSP) in its own right and not as a representative of a short-term insurer. It was also agreed that this discussion would be taken further during the consultation process in drafting the regulations under the Insurance Laws Amendment Act (ILAA).

National Treasury short-term insurance sector review

During 2008, SAIA submitted a briefing document outlining industry structures and practices to the National Treasury on how the short-term insurance industry operates. It is probable that further discussions could be subsumed under the Insurance Laws Amendment Act (ILAA) Binder Workgroup.

Demarcation between health policies and medical schemes products

The Insurance Laws Amendment Act (ILAA) seeks to shed clarity on the demarcation between “medical scheme products” and “health policies”.

Initial proposed provisions were inadequate in that the definition of “accident and health policies” did not provide certainty for the continued existence of health policies. In addition, these provisions allowed the Minister of Finance to identify, by way of regulation, categories of products that would be deemed to be “accident and health policies”. In so doing, this presented the further challenge that the Minister, when exercising this discretion in consultation with the Minister of Health, had to consider the following issues:

• Community rating
• Open enrolment
• Cross subsidisation

Furthermore, the ILAA did not provide definitions of the above principles.

Subsequently, SAIA provided input into the definition of “accident and health policies”, which resulted in amendments to the Bill. In addition, the Act allows for implementation of regulation to govern this element.

This part of the Act also impinges on policy issues surrounding the provision of medical insurance and the proposed national health scheme. In order to implement the regulations, the National Treasury has created a Demarcation Workgroup with the objective of setting out a clear and detailed policy framework for regulation, taking into account the policy objectives of Government. This will be followed by the drafting of the regulations.

Progress in the workgroup is underway and three broad categories of products have been identified that are to be reviewed. After completion, the criteria against which these products are to be evaluated will be formulated. These in turn will form the basis of the drafting of the regulations.

At the fifth Demarcation Workgroup meeting held on 26 June 2009 it was noted that, certain industry data had to be reviewed against each product typology to further enhance comprehensive deliberations on the demarcation discussions.

The SAIA has requested members to provide the data requested in line with all the typologies which have been identified to be “doing the business of a medical scheme” with an exception to medical cost benefits provided within the Motor Comprehensive and Household Contents Insurance environments.

SAIA wishes to thank those who participated in making a meaningful contribution to the ILAA input.

The SAIA submitted the data for the various Health Insurance product typologies to the National Treasury on 14 August 2009. The data was aggregated where possible, but in several typologies the data submitted was for individual member companies only. Due to the use of third party administrators, several member companies were unable to meet the data request. A survey questionnaire by product typologies was also undertaken with several member companies and a report has also been submitted to Treasury.

At the next Workgroup meeting, the Associations’ (the SAIA and the Life Offices’ Association) and the Council for Medical Schemes’ submissions will be reviewed by the Workgroup.