A document from the Registrar of Long-term Insurance was published in June and calls for comments by 31 July 2013.
The request for input on the Directive follows in the wake of determinations by the Pension Fund Adjudicator which concerned transgressions of the intentions of the Statement of Intent. This agreement between the industry and National Treasury was drawn up to curb excessive penalties being charged on “causal events.” It now appears that there is no consistency in how the terms of the agreement are applied, despite subsequent legislation which aimed to provide direction.
The purpose of the Directive is very clear:
- To clarify the maximum causal event charges that may be deducted and, very importantly, to do so in a manner consistent with the purpose of Part 5A or 5B of the Regulations issued under the Long-term Insurance Act.
- The directive reflects the manner in which the Registrar will apply Parts 5A and 5B of the Regulations made under section 72 of the Act (“the Regulations”) for regulatory purposes.
Part 5A of the Regulations provides for maximum causal event charges in respect of policies (other than policies to which Part 5B applies) where a causal event has occurred on or after 1 January 2001. A causal event can be a reduction in premiums, cessation of premiums, transferring benefits to another fund or surrendering a policy. Part 5B of the Regulations provides for maximum causal event charges in respect of investment policies entered into after 1 January 2009.
A number of rulings issued by the Pension Funds Adjudicator have highlighted the “…unfair and unreasonable practice…” by certain insurers, where multiple causal events occur in respect of the same policy, to deduct the maximum regulatory causal event charge for each causal event. This, in the view of the Registrar, “…is inconsistent with the spirit, intent and purpose of the Statement of Intent and the Regulations, as well as fair outcomes for customers in terms of Treating Customers Fairly (TCF) principles as it results in –
- the “worst case scenarios” envisaged in the Regulations, namely that policyholders could lose up to 40%, 35%, 30% or 15% (as applicable) of their expected policy values as a result of causal events, potentially being exceeded in the case of multiple causal events; and
- Policyholders who initially reduce and then cease premiums to policies (or where other combinations of causal events occur) being in a poorer position than those policyholders who immediately cease contributions, in effect penalising those policyholders who make an effort to keep their policies in force.”
One of the principles applicable to future penalties stipulates that:
“…the insurer must ensure that the cumulative effect of multiple causal event charges during the life of a policy does not result in the policy’s investment value at any time being reduced by a greater proportion than would have been the case if, at the time of the first causal event, the maximum causal event charge was deducted.”
The following comment in the draft directive did raise a smile:
“The Regulations determine the maximum charges that may be charged on the occurrence of causal events. Insurers are reminded that they are not obliged to charge the maximum charges…”
The Directive further proposes to address past anomalies by requiring “Insurers that have previously applied Part 5 of the Regulations in a manner inconsistent with the Regulations and this directive” to adjust the investment value of the policy in accordance with these principles. It then lists specific events where this has to happen.
The Directive also calls for improved monitoring and oversight controls to be implemented immediately to ensure, pending the rectification of operating systems (where necessary), that the insurer adheres to the Regulations and this directive.
There is no doubt that the Regulator is very serious about this matter. There is only one month for affected parties to respond.
The retroactive ruling could, if implemented, be very painful for those insurers who charged the maximum penalty on each causal event.
Please click here to download a copy of the Draft Directive.