Suzette Strydom, general manager of technical at the South African Insurance Association (SAIA), says the wave of legislative change set to hit the short-term insurance sector will support financial inclusion and financial stability, protect consumers, regulate market conduct, combat financial crime and support the integrity of the insurance market as a whole.
But analysts say legislation, focused on financial services in the insurance sector, could prove so complex and costly to comply with that smaller insurers could be forced out of the market. In its South African Insurance Industry Survey 2012, KPMG says that companies' differing abilities to keep up with regulatory changes could alter the local insurance landscape.
Partner and national head of insurance at KPMG Gerdus Dixon says: "The level of legislative and regulatory change facing both the short-term and life insurance industries would suggest that smaller players might struggle to keep pace with the ongoing and significant adjustments to the playing field. The implementation of solvency assessment and management is already fuelling speculation of merger and acquisition activity ahead of its expected implementation date in 2016. The additional staffing and improvement to IT systems come at a cost that may not be viable for some of these smaller operations."
Last year PwC stated in its list of strategic and emerging issues in South African insurance that the "unprecedented overhaul of the regulatory framework" in which the insurance industry operates would increase the cost of doing insurance business in South Africa. Strydom adds: "There are several costly changes needed, including system changes and additional staff capacity."
On the impact for consumers, she says: "The proposed legislation will impact policy holders positively and lead to more, and better, policy holder protection. But it may also impact the cost of insurance for policy holders."
Manana Madiba, compliance office at MiWay insurance, says: "Even though the impact of legislation on insurance can be arduous, MiWay strives to always achieve a healthy balance between safeguarding consumer protection and meeting business objectives when it comes to the implementation of new requirements.
"Bearing in mind that the failure to pay the necessary attention to legislative requirements may also lead to regulatory sanctions, we are focused on staying abreast with the ever-changing legislative landscape and remain committed to implementing any new legislation timeously."
The local insurance industry has welcomed the new legislation, though. Strydom says SAIA is following a collaborative approach in submitting comments on proposed legislative changes and amendments, and engaging with the relevant stakeholders.
It seeks to also render support services to its members in the short-term insurance industry in the form of guidance and proactive participation in government initiatives.
Key legislative changes
The numerous changes coming into effect follow the publication of the national treasury's red book "A safer financial sector to serve South Africa better" policy document in February 2011.
The treasury, in collaboration with the Financial Services Board (FSB), is developing a stronger regulatory framework, strengthening the effective supervision of the FSB, introducing crisis resolution, addressing systemic institutions, conducting international assessments and benchmarking South African principles and assessments against international norms. SAIA outlines the new and planned legislation.
The Financial Services Laws General Amendment Bill (Omnibus Bill)
This Bill is currently being considered by Parliament and will amend almost 15 financial sector Acts. These are include the Pension Funds Act, 1956; the South African Reserve Bank Act, 1989; the Financial Services Board Act, 1990; the Long-term Insurance Act, 1998;the Short-term Insurance Act, 1998; the Inspection of Financial Institutions Act, 1998; the Financial Institutions (Protection of Funds) Act, 2001; the Financial Advisory and Intermediary Services Act, 2002; the Collective Investment Schemes Control Act, 2002; the Co-operative Banks Act, 2007; the Medical Schemes Act, 1998; the National Payment Systems Act, 1998 and the Co-operatives Act, 2005 The Omnibus Bill was released on March 9 2012 for public comments by May 2 2012. The objectives of the Bill are to ensure an even transition to the "twin peaks" system and address urgent areas identified by the financial sector assessment program regarding South Africa's compliance with international standards of financial regulation.
What to expect from "twin peaks"
Following the release on February 1 2013 of treasury's "twin peaks" roadmap Implementing A twin peaks model of financial regulation in South Africa, the legislation is expected to be prepared and presented to Parliament by the end of 2013. The roadmap sets out a detailed plan to create a prudential regulator housed in the South African Reserve Bank, and transforming the FSB into a dedicated market conduct regulator.
Microinsurance legislation
A draft Bill is expected for public comment later this year. It will likrly extend access to a variety of formal insurance products to low-income households to support financial inclusion, facilitate formalised insurance provision by currently informal provider, lower barriers to entry, enhance consumer protection, facilitate effective supervision and enforcement and support the integrity of the insurance market as a whole.
Insurance Laws Amendment Bill
The FSB and insurance industry have embarked on a solvency assessment and management project to establish a risk-based supervisory regime for the prudential regulation of both long and short term insurers. The implementation deadline for this regime is January 2016. Certain transitional arrangements will be legislated through the Insurance Laws Amendment Bill.
Treating customers fairly (TCF)
The drafting of TCF-specific legislation will happen once the legislation that enables the "twin peaks" has been completed. The FSB's TCF department believes that the financial sector should already be including TCF principles in their day-to-day dealings with consumers and not wait for the implementation date of January 2014.
The development of subordinate legislation to implement TCF is in process. The use of policy holder protection rules and the Omnibus Bill will also serve as tools to enforce TCF principles.
Protection of Personal Information Bill (POPI)
POPI is set to become law shortly and will significantly affect the way in which insurers collect, store, process and disseminate personal information. It will place a significant compliance burden on insurers, because the industry possesses substantial personal data records.
Credit Rating Services Act
The Credit Ratings Services Act was signed into law by the president in January 2013. It provides for the registration of credit rating agencies, regulates certain activities of credit rating agencies, establishes conditions for the issuing of credit ratings, and rules on the organisation and conduct of credit rating agencies. On March 15 2013 the draft rules of the Credit Ratings Services Act was published for public comment.
The Financial Markets Act
The Financial Markets Act replaces the Securities Services Act No. 36 of 2004. It primarily focuses on the regulation of securities exchanges, central securities depositories, clearing houses and their respective members. It was signed by the president on February 5 2013. On March 6 2013, the FSB published the draft subordinate legislation for public comment.
Other sub-ordinate legislation and projects Demarcation regulations
The revised regulations that demarcate health insurance policies from medical schemes in the short-and long-term insurance landscape are awaiting publication.
Consumer credit insurance
It is expected that a discussion document on consumer credit insurance will be published for comment.
Third-party cell captive discussion document
A discussion document on third-party cell captive and similar arrangements is expected for release shortly.
Retail distribution review
A full cross-sector retail distribution review is expected for publication shortly is likely to include a review of remuneration models, the implications of the Financial Advisory and Intermediary Services Act will be included specifically, a review of the roles and responsibilities of product providers and the oversight of intermediaries in the light of treating customers fairly and the consideration of consistent definitions for intermediary services.
Reinsurance review
The Financial Services Board is currently reviewing the regulatory framework applied to reinsurance business in South Africa which is being run under the auspices of the boards's solvency assessment and management department. The scope of the review will include:
• Whether to allow foreign reinsurers to operate branches in South Africa;
• Whether to allow reinsurers to continue to operate a composite licence; and
• Whether to continue with the concept of "approved" and "non-approved" reinsurance or whether to adopt an alternative basis to protect local insurers from non-performance by reinsurers.
Binder regulations
The regulatory approach and further guidance on the application of the binder regulations remains ongoing.
Ombudsman for Short-term Insurance (OSTI)
The implementation of a special resolution, adopted by the OSTI scheme members at their annual general meeting on June 28 2011 and was approved by the Financial Services Ombud Schemes council on November 12 2012 to report on industry statistics, will be given effect to this year in the OSTI annual report that is due for publication later this month.
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