INSURANCE LAWS AMENDMENT BILL (2008)

1. INSURANCE LAWS AMENDMENT BILL (2008) BRIEFING TO THE PORTFOLIO COMMITTEE ON FINANCE 28 MAY 2008

2. STRUCTURE OF PRESENTATION • Background • Process • Overview of main proposed amendments Approach in the presentation will be as follows: 1. Issue for review 2. Brief summary of law governing the issue 3. Problems encountered / motivation for amendment 4. Outline of proposed amendment

3. BACKGROUND • Bill proposes amendments to Long-term Insurance Act No. 52 (LTIA) and Short-term Insurance Act No. 53 (STIA), both of 1998 • Proposed amendments are required to update legislation, to close regulatory gaps identified in existing statutes and to effect improvements to certain provisions • Primary objective of Bill is to strengthen the legislative framework for a sound and well-regulated insurance industry and to promote financial stability in the interests of industry players and consumers

4. PROCESS • Bill submitted to Cabinet and approved in April 2008 • Bill reviewed and certified by State Law Advisors in May 2008 • Bill published for public comment on 09 May 2008 • Bill introduced into Parliament in May 2008

5. OVERVIEW OF PROPOSED AMENDMENTS

6. SIGNIFICANT PROPOSED AMENDMENTS Amendments common to LTIA and STIA • Demarcation between health insurance and medical schemes business • Auditor: expanded functions and alignment with other legislation • Statutory actuary: expanded reporting duties; new provisions for short-term insurers • Audit committee: alignment with other legislation • Maintenance of a financially sound condition, holding of assets and arrangements regarding liabilities • Independent review: report on a matter in statutory return by a person nominated by Registrar • Binder agreements Amendments specific to LTIA • With-profit business: process for award of a bonus or similar benefit • Assistance policy benefits Amendments specific to STIA • Enabling provisions for planned future introduction of Financial Condition Reporting (FCR): Method of calculating of value of assets and liabilities in Schedule 2; calculation of Lloyd's security in Schedule 3

7. DEMARCATION BETWEEN HEALTH INSURANCE AND MEDICAL SCHEMES Brief summary of law governing the issue • Definitions of “health policy” in LTIA and “accident and health policy” in STIA – exclude contracts where policy benefits amount to doing the business of a medical scheme • “business of a medical scheme” defined in Medical Schemes Act, but not cross-referenced in LTIA and STIA Problems encountered / motivation for amendment • Confusion as to interpretation of definitions of “health policy”, “accident and health policy” and “business of a medical scheme” • Has resulted in legal disputes re. certain product offerings of insurers Outline of proposed amendment • Provisions to enable a policy process between MoF and MoH • Regulations to demarcate types of policies excluded from definition of “business of a medical scheme” • Provision for a dispute resolution process (LTI: clauses 1, 3, 23. STI: clauses 27, 29, 52)

8. AUDITOR Brief summary of law governing the issue • LTIA and STIA already regulate the appointment of auditors Problems encountered / motivation for amendment • Auditing Profession Act, 2005 (Act No. 26 of 2005) repealed the Public Accountants’ and Auditors’ Act, 1991 (Act No. 80 of 1991) • Appointment of auditor should be aligned to requirements in Companies Act and also apply to insurers who are not incorporated Outline of proposed amendment • Updated reference to Auditing Profession Act • In addition to name of the firm, the name of the individual who undertakes the audit must be provided to the Registrar • Limit on term of same individual serving as the auditor • Appointment of auditor aligned to Companies Act • Required reporting extended: auditor must inform the Registrar of any matter which he/she became aware of in the performance of his/her functions as auditor and which, in the opinion of the auditor, may prejudice the insurer’s ability to comply with any section of the Act (LTI: clause 6. STI: clause 32)

9. STATUTORY ACTUARY Brief summary of law governing the issue • LTIA requires statutory actuary to report to the board any matter that may prejudice an insurer’s financial soundness – but not entitled or required to attend meetings of the board • STIA does not prescribe that a statutory actuary must be appointed Problems encountered / motivation for amendment • Statutory actuary can play an important role in informing Registrar of problems at an insurer before it becomes financially unsound • Must be adequately enabled to ensure that concerns are dealt with at board level • Proposed introduction of FCR for short-term insurers will require actuarial skills in some circumstances Outline of proposed amendment • Extending matters which the actuary must report on to the Registrar • Requirements for the statutory actuary to attend and speak at board meetings • Appointment (and removal) of statutory actuary by a short-term insurer under circumstances determined by the Registrar, either generally or in a particular case, for purposes of FCR (corresponding to existing requirements in the LTIA) (LTI: clause 7. STI: clauses 33, 34, 35, 47, 48)

10. AUDIT COMMITTEE Brief summary of law governing the issue • LTIA and STIA currently provide for the composition and duties of the audit committee Problems encountered / motivation for amendment • Provisions need to be updated in line with the Companies Act as amended by the Corporate Laws Amendment Act • Insurers that are not incorporated under the Companies Act should meet the same governance requirements Outline of proposed amendment • Audit committee requirements in LTIA and STIA amended to align with provisions of the Companies Act applicable to widely held companies (LTI: clause 8. STI: clause 36)

11. MAINTENANCE OF A FINANCIALLY SOUND CONDITION,HOLDING OF ASSETS AND ARRANGEMENTS REGARDING LIABILITIES Brief summary of law governing the issue • Section 29 of LTIA and section 28 of STIA regulate the maintenance of a financially sound condition. Problems encountered / motivation for amendment • Insurers should value their assets on the basis of fair value determined in financial reporting standards, as introduced in the Companies Act. • Requirement in STIA for a contingency reserve will not be applicable under FCR. Outline of proposed amendment • Clarification of certain provisions with respect to valuation of assets, liabilities and capital adequacy requirement • Require valuation in terms of fair value. If Registrar is satisfied that the value of an asset thus calculated does not reflect a proper value, the Registrar may require an independent valuation (consistent with existing powers) • Removal of obligation on short-term insurers to hold a contingency reserve with the introduction of FCR (LTI: clauses 11, 12, 13. STI: clauses 39, 40, 41, 42)

12. INDEPENDENT REVIEW Brief summary of law governing the issue • New provisions Problems encountered / motivation for amendment • Statutory returns sometimes point to a matter that requires a closer look. The matter may be specialised and may need to be dealt with speedily • A report by an expert would assist the Registrar in assessing the risk and to take further action if necessary • The work of a statutory actuary may also require a peer review Outline of proposed amendment • To empower Registrar to direct the insurer to furnish him/her with a report compiled by an expert nominated by the Registrar at the cost of the insurer on a matter forming part of the statutory returns (LTI: clause 15, STI: clause 44)

13. BINDER AGREEMENTS Brief summary of law governing the issue • LTIA does not contain provisions regarding binder agreements • STIA provides for binder agreements - generally enabling a third party to make an agreement with a policyholder legally binding on the insurer, or until the completion of a formal contract by an insurer takes place Problems encountered / motivation for amendment • The wording of provisions presents interpretation difficulties • Agreements between insurers and the third party are not always concluded in writing • The functions that the third party may perform and the powers of the person to do so are not sufficiently clear • The third party may further delegate certain functions without the knowledge and permission of the insurer • Certain of the services rendered as an intermediary and those rendered in terms of a binder agreement may be the same – resulting in arbitrage of commission regulation • Possible conflicts of interest when services as an independent intermediary and services in terms of a binder agreement are rendered by the same person • Risk that the insurer may not accept liability for the actions of the third party in terms of the binder agreement

14. BINDER AGREEMENTS (continued) Outline of proposed amendment • A written agreement is required, setting-out the functions and the powers of the third party. The functions can be any one or more of the following- • to enter into, vary or renew, a policy on behalf of the insurer; • to determine the wording of a policy; • to charge premiums; • to determine the value of policy benefits; • to settle or pay claims. • The person must disclose the name of the insurer to policyholders, keep and maintain proper books of account and other records and to give the insurer access thereto • The person may not delegate, assign or sub-contract any of the functions • Limitations on the form of remuneration for services to avoid conflicts and maintain transparency • Person rendering services in terms of a binder agreement may not also be an independent intermediary for the particular type of policy contemplated in the agreement • Clear accountability and responsibilities, such that the insurer remains liable for compliance with the Act (LTI: clause 18, STI: clause 46)

15. PROPOSED AMENDMENTS SPECIFIC TO THE LONG-TERM INSURANCE ACT

16. AWARD OF A BONUS OR SIMILAR BENEFIT Brief summary of law governing the issue • The LTIA provides that an insurer may not award a bonus or similar benefit to a policyholder unless the statutory actuary is satisfied that it is actuarially sound and that a surplus is available for that purpose Problems encountered / motivation for amendment • Bonuses are awarded at the insurers discretion and do not vest immediately – the insurer may reduce the bonus at its discretion until such time that it vests • The decision to award bonuses or to remove all or part of non-vested bonuses must be done in a proper and transparent manner Outline of proposed amendment • To further regulate the award of a bonus or similar benefit to ensure fair and equitable treatment of policyholders • Require the insurer to have in place principles and practices of financial management for purposes of awarding a bonus or similar benefit to a policyholder (Clause 16)

17. ASSISTANCE POLICY BENEFITS Brief summary of law governing the issue • Currently either party to an assistance policy may request that a non-monetary benefit (a funeral) be instead provided as a sum of money equal in value to the cost that would have been incurred by the insurance provider had the funeral been provided Problems encountered / motivation for amendment • Many policyholders who request a monetary benefit are provided with a sum of money far lower than the expected funeral cost Outline of proposed amendment • Assistance policies must state upfront what the monetary equivalent of the non-monetary benefit will be (not exceeding the maximum amount in the definition of “assistance policy”) (Clause 19)

18. PROPOSED AMENDMENTS SPECIFIC TO THE SHORT-TERM INSURANCE ACT

19. FCR: CHANGES TO METHOD OF CALCULATING VALUE OF ASSETS AND LIABILITIES Brief summary of law governing the issue • Schedule 2 of STIA regulates the method of calculation of the value of assets and liabilities. Liabilities consist of various reserves to cover possible future risks. Problems encountered / motivation for amendment • The current measure of solvency based on a fixed percentage of net written premium, does not take into account either the size of the insurer, or the inherent risks underlying the types of business that it writes Outline of proposed amendment • Enabling provisions for the planned future introduction of FCR • FCR introduces a risk-based approach to solvency calculations. FCR is being developed in consultation with industry based on international developments but adjusted for SA circumstances. • Both the value of the liabilities and the capital adequacy requirement can be calculated using either a prescribed rules-based method or by developing a partial or full internal model – along the lines adopted by Basel II for banks • Consequential changes are necessary to Schedule 3 to enable the possible future introduction of FCR measures covering Lloyd’s underwriters. (Clause 54)

20. END OF PRESENTATION CONTACT DETAILS: National Treasury: Jo-Ann Ferreira Chief Director: Legislation Jo-Ann.Ferreira@treasury.gov.za (012) 315 5263 Katherine Gibson Director: Financial Regulation Katherine.Gibson@treasury.gov.za (012) 315 5061 Financial Services Board: Jonathan Dixon Deputy Executive Officer: Insurance Jonathand@fsb.co.za (012) 428 8051