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Short-term

Short-Term Insurance Premium Collection – Now and in Future

From enquiries we receive, there appears to be some confusion regarding the collection of short-term insurance premiums. This is understandable, given the various amendments to the STIA, the implementation of the Financial Sector Regulation Act, the recent amendments to the Regulations and comments made regarding certain proposals in the Retail Distribution Review Updates.

Little has changed

The collection of premiums on short term insurance products is, despite all the new legislation and changes to existing legislation, still an intermediary service. The definition of “intermediary service” in the FAIS Act 2002 and “services as intermediary” in the Short-Term Insurance Act, 1998 and now in the amended Regulations, includes the collection and accounting for premiums payable under a short-term insurance policy.

In terms of s 45 of the Short-Term Insurance Act, 1998, an independent intermediary may not receive, hold or in any other manner deal with premiums payable under a short-term policy entered into or to be entered into with a short-term insurer unless authorised to do so in writing by the short-term insurer concerned, as prescribed by regulation and in accordance with the regulations.

S 45 of the Act has not been amended or repealed by the Financial Sector Regulation Act nor is there any change introduced in the Insurance Bill 2016, which is expected to be signed into law later this year.

The Draft Proposed Amendment of the Regulations, published in December 2016, contain important amendments to the existing Regulations. However, Part 4 (Authorisation of and requirements for collection of premiums by intermediaries (section 45)) has not been amended at all.

Part 4 of the Regulations provide that a short-term insurer may authorise an independent intermediary to receive, hold or in any other manner deal with premiums payable to it under short-term policies provided, inter alia, that the intermediary has the required security – usually an IGF policy. This remains the situation.

RDR impact

The confusion, it seems, may have arisen as a result of Proposal F contained in the Retail Distribution Review of 2014 and various comments that have been made in regard thereto in the subsequent status updates.

In terms of Proposal F, the collection of insurance premiums will not be permitted to be carried out by intermediaries in the case of any long-term insurance business or in the case of personal lines short-term insurance business, unless the intermediary complies with prescribed conduct standards for this service. These “conduct standards” will legislative instruments as defined and regulated by the Financial Sector Regulation Act. The FSB intends to proceed with Proposal F regarding standards for premium collection, and consultation with the industry reference groups for both long-term risk and short-term insurance will take place regarding who should be a “qualifying intermediary” and the standards for such intermediaries.

When the proposal results in standards being set, it is a certainty that intermediaries will be required to meet a very high-level benchmark. Look to the top collection agencies in the country for some indication of the governance, risk management and IT systems that will be required.

Perhaps adding to the confusion, the December 2015 RDR Status Review mentions that a number of commentators had proposed that premium collection should be excluded from the scope of “intermediary services” and instead be regarded as an outsourced service on behalf of the insurer for RDR purposes.

In the RDR Status Review of December 2016, the FSB noted its agreement with the suggestion that premium collection be removed from the definition of intermediary service and be treated as an outsourced function. The qualifying criteria for premium collection as an outsourced function will have a similar emphasis on governance, oversight, operational efficiency and fair customer outcomes as the broader outsourcing standards already have – together with specific operational requirements to safeguard the money collected.

Going forward

Once these qualifying criteria are set, necessary amendments to the current LTIA and STIA definitions of “service as intermediary” will be made to exclude premium collection from the ambit of the definition. At that stage, qualifying intermediaries will be permitted to earn a separate outsource fee for premium collection (possibly subject to a cap).

These changes will only occur once the future Conduct of Financial Institutions Act (COFI Act) is in place. The COFI Act is expected to repeal a number of existing financial sector laws and consolidate and strengthen the conduct of business related provisions they contain in a single, overarching conduct of business law.

National Treasury is, in consultation with the FSB and the South African Reserve Bank, in the early stages of planning the COFI framework. Public consultation on a draft Bill is scheduled to take place during 2017, with promulgation expected in the course of 2018. Although this estimate is provided by the FSB, the timing is regarded as somewhat optimistic.

In a nutshell

There have been no changes made to the Short-Term Insurance Act, 1998 or to the Regulations that in any manner affect the current procedures and requirements for the collection of short-term insurance premiums by intermediaries. In the near future, qualifying intermediaries will be required to meet enhanced conduct standards that currently do not apply. If premium collection is to become an outsourced function, this will be done in terms of the CoFI Act, once promulgated – and that is not expected to happen until the end of 2018 at the earliest.

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