The National Treasury and the CEOs of South Africa’s top five life insurers have signed a statement of intent agreeing to set minimum standards of conduct, including an agreement to reimburse past policyholders going back to January 1, 2001, that will cost the industry a total of R2,6-billion.
Outlining the reimbursement settlement and statement of intent on Monday, Finance Minister Trevor Manuel said the agreement reflected a “broad-based” statement of intent about what changes the government and insurers themselves wanted to see take place in the savings industry. The changes would involve amendments to existing legislation and regulations to clarify the industry’s position, and would need the approval of the life insurers’ boards.
The minimum standards of business and reimbursements affect life insurance savings product including retirement annuities (RAs), endowments, whole life business products with a savings purpose and reversionary bonus business.
Old Mutual South Africa (OML) managing director Roddy Sparks said that the settlement was estimated to cost Old Mutual between 25% and 30% of the industry total, which works out to a maximum of 780 million rand.
Sanlam (SLM) CEO Johan van Zyl said that Sanlam’s cost would be approximately 500 million rand after tax, while Metropolitan (MET) CEO Peter Doyle told I-Net Bridge that its share of the cost would be between 150-165 million rand in terms of embedded value (EV).
The settlement and minimum business standards arise from the series of rulings made against life insurers by the Pension Funds Adjudicator (PFA) this year largely in favour of former policyholders who paid large surrender fees for RA’s or endowment policies on early termination. The PFA ruled in many cases that the fees had not been adequately explained or included in the rules of the fund, and ordered the affected insurers to reimburse the policyholders.
These rulings created uncertainty in the industry, pointing to the need for industry standards and for clarification on the applicable industry regulations and legislation.
In terms of the settlement, the minimum standards for all of the products will be implemented to apply retrospectively from January 1, 2001. All RAs made paid up in the past five years, as well as endowments made paid up, but still on the companies’ books, would be automatically credited with a minimum value of 65% of the investment account. This would be raised to 70% following further industry consultations and the finalisation of revised commission regulations.
“Arriving at the decision of both retrospective timelines and percentages has been exceeding difficult,” said Manuel in a statement. “We consider this to be a great step forward. We are of the view that it provides a measure of restorative justice, a bulwark against systemic risk, sufficient incentive to ensure people remain policyholders, and simultaneously will encourage savings in the future.
“We will need to take this matter forward to ensure higher levels of certainty. To this end, we will ask the representatives of the life offices to mobilise the support of their boards of directors. We will ask the Financial Services Board (FSB) to ensure higher standards of supervision and we will prepare for the legislative changes to provide the certainty.
“The benefits of this will accrue only if there is the widest possible communication which ensures that the long-term insurers will meet their obligations and that policyholders are more vigilant than they have been in the past.”
The CEOs of the five life insurers signing the agreement-Old Mutual, Sanlam, Metropolitan, Momentum and Liberty Life (LGL) – represent approximately 90% of South Africa’s long-term insurance industry. The other 30 long-term insurers operating in the country would also have to accept the minimum standards agreed upon on Monday, Manuel said. – I-Net Bridge