1 ASSISTANCE BUSINESS IN THE RSA PRESENTATION to PCOF on 8 Augustus 2003 by A Swanepoel

1

ASSISTANCE BUSINESS IN THE RSA

PRESENTATION

to

PCOF

on

8 Augustus 2003

by

A Swanepoel

2

ASSISTANCE BUSINESS IN THE RSA

Background

Who are the stakeholders?

Characteristics of the market

Problem areas and risks

The way forward?

Questions

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ASSISTANCE BUSINESS IN THE RSA

Background

Cultural issue of importance

Provide for funeral plus ancillary services

Honesty, trust, caring and social responsibility important in burial societies

Very often the first step into financial services

Contributors are mostly from non-white sector

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ASSISTANCE BUSINESS IN THE RSA

Principles to take into consideration

Is this a market that needs more than the normal protection?

Market conduct rules and supervision the main issue

There are prudential issues with small insurers

Cost-benefit of supervision?

Non-systemic

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ASSISTANCE BUSINESS IN THE RSA

Who are the stakeholders?

Group administrators

STAKEHOLDERS

InsurerFuneral parlours

Brokers

Friendly societies

Burial societies

Individual policyholders

Illegal operators

Acts of Parliament

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ASSISTANCE BUSINESS IN THE RSA

Structure of market

FormalUnionsRetail clientsEmployer basedFriendly societiesCompulsory and insured

Semi-formalLarge burial societiesChurch groupsFuneral parloursVoluntary and often insured

InformalBurial societiesOccasionally insured

Illegal operators

ASSISTANCE BUSINESS MARKET

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ASSISTANCE BUSINESS IN THE RSA

Distribution channels

INSURER

5 6 8 7/4 3 1 2

Broker Broker Adm Adm

BrokerP/holder P/holder

FunctionsAdministrationSalesPremium collectionData capturingClaims

Differently catered for in different models.

V/group V/group V/group C/group V/group

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ASSISTANCE BUSINESS IN THE RSA

Long-term insurers

37 insurers registered for assistance business

32 limited to R10 000

5 limited to 5000/3000/2000/1000(2)

Total premiums R690 million (plus extra?)

That is 0,5% of total premium income of life insurers

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ASSISTANCE BUSINESS IN THE RSA

Total contributions R??? (my estimate R2,5 billion based on 55/15 relationship) plus the “extra” volume

Friendly societies

Total contributions R32 mil (for all types of benefits)

Total benefits: funeral R14m, death R4m

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ASSISTANCE BUSINESS IN THE RSA

Burial societies

Approx. 100 000 primary burial societies

Covering 3 million members

Between 10 to 200 members per society, mostly women

Contributions estimated at R2 billion

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ASSISTANCE BUSINESS IN THE RSA

Characteristics of the marketBuyers are unsophisticated in generalMarket is in the hands of the administrators and the intermediariesVery often a “long food chain” /fat in distribution channelNo commission limitations on (assistance) insurance policies

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ASSISTANCE BUSINESS IN THE RSA

Mostly done via group schemes/typical no underwriting/only risk, no savings elementOnly two types of institutions who can legitimately underwrite namely insurers and friendly societies (burial societies)Demarcation between burial societies and friendly societies greyDeath benefits normally paid within 48 hoursBenefits often paid in kind but option to receive cash remains (sec 53)Not all cover sold under the banner of assistance business

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ASSISTANCE BUSINESS IN THE RSA

Problem areas and risks Lack of knowledge of products and financial disciplinesExcessive commission paidOften no security that benefits will be paidPolicies cancelled after long periods of contributions

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ASSISTANCE BUSINESS IN THE RSA

Policyholders not in contact with underwriter/long “food chain”On-off underwriting/difficult to trace schemes on cancellationIllegal operators

(Fraud/disappear/no contractual rights/weak enforcementPolicyholder misled regarding status of operatorCash flow underwriting until problems ariseOnly portion of premiums paid to underwriterVAT and other tax evasionsDouble underwriting

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ASSISTANCE BUSINESS IN THE RSA

Integrity of many intermediaries problematicDo not pay premiums to next level or administrator/underwriterDo not pay claims to beneficiaries or withhold portionLittle knowledge of legalities involved

Overselling, too may policies taken outUndertakers enforce contractual agreement that they only may conduct funeralExploitation regarding costs of coffins and services

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ASSISTANCE BUSINESS IN THE RSA

Fraudulent and excessive claims

Organisational, record keeping and accounting problems

Difficult for small insurers to comply with Act

Weak enforcement system in Courts/3xfines of R600

Lack of compliance with PPR and other sections of the Insurance Act

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ASSISTANCE BUSINESS IN THE RSA

Developments thus far

LOA’s Assistance Business Standing Committee

FSB’s Working Group on assistance business

Study on Burial Societies (Thomson and Posel)

National Cooperative Association of South Africa and the National Committee on Burial Societies

FSB’s consumer education campaign (still much to do)

FAIS Act

There is a general agreement and a will to do something now

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ASSISTANCE BUSINESS IN THE RSA

The way forward

AREA POSSIBLE ACTIONSA.Formal market: insurers

1.FAIS Act will bring conduct of Administrators in line

2.Intermediaries/funeral parlours will be brought into the FAIS net

3.More controlled movement of schemes

4.Disciplinary actions/removal from industry

5.Better disclosure now obligatory

6.Stricter enforcement of Ins. Act

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ASSISTANCE BUSINESS IN THE RSA

The way forward

AREA POSSIBLE ACTIONSB.Semi-formal market : friendly and burial societies

1.Self-regulation (stokvel approach)for small mutuals

2.Revise FS Act and enforcement

3.Education on rights and responsibilities

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ASSISTANCE BUSINESS IN THE RSA

The way forward

AREA POSSIBLE ACTIONSC. Illegal operators 1.Education, education,

education

2.Name and shame

3.Quick and cost-effective enforcement with penalties

4.Rather bring them into the net than penalise them

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ASSISTANCE BUSINESS IN THE RSA

Further work

More research necessary

Making group schemes more permanent (cost vs security)

Beef up enforcement and penalties

FIC Amendment Bill/Enforcement Committee

Consumer education

Central funeral fund(s), underwritten by insurers, cut out high cost of distribution?

Credit Life much the same problems

Enhance effectiveness of dispute resolution mechanisms