Gap Cover – the Real Facts

The negative implications contained in the demarcation proposals on health cover products was clearly outlined in an article by Adri van Zyl in Die Burger on 6 August 2014 titled Versekeraars is op hol.

The response from the South African Insurance Association (SAIA) to the proposed demarcation legislation, contemplated by the National Treasury and the FSB, is possibly the clearest indication of just how out of touch the proposals are with reality.

Suzette Olivier, GM of legal affairs at the SAIA, pointed out that the average contribution to a medical scheme amounts to R2 693 per month, according to the Council for Medical Schemes (CMS) annual report. The current maximum commission percentage is 3% which, in this instance, would amount to R80.79. In reality, brokers will only be paid the capped maximum amount of R71.07.

The average Gap cover premium is R113, on which a broker can currently earn 20% commission, which equates to R22.60 per month.

The motivation given in the CMS discussion document is that the higher commission will encourage miss-selling.

Why a broker would rather earn the lesser amount is beyond my comprehension.

If the proposals were to be implemented, the broker will only earn R3.39 for selling gap cover.

Butsi Tladi, managing director of Alexander Forbes Health, says that this will not even cover the basic costs incurred by an accredited consultant. The group will lose 85% of its income from gap cover policies, which could lead to a 14% reduction in staff.

He called on the national treasury to leave the current commission of 20% unchanged.

SAIA also suggested that any decision to change commission be postponed until the FSB has completed its Retail Distribution Review (RDR).

This corresponds with a view that we expressed earlier that remuneration changes should be effected on an industry-wide basis, and not in a haphazard fashion. We are also of the opinion that it is for the national treasury and the FSB to determine commission rates on products under its jurisdiction – not the CMS.

SAIA also objected to the maximum of R50 000 per annum on gap cover contained in the proposals. Olivier says that, while this may cover the current average annual claim, there are substantially higher claims every year, specifically for procedures like joint replacements, where the highest claim last year came to R143 000.

Capping the annual maximum will not necessarily lead to reduced premiums, as the latter are based on individual rating of an applicant’s risk profile, says Olivier. The premiums are likely to remain the same, but the clients’ cover will reduce.

Olivier points out that people effect gap cover because of concerns over catastrophic medical costs. By implication, this means that the problem does not lie with gap cover products, but with the medical schemes.

SAIA drives a final nail in the coffin of the proposals by pointing out that the average age of people with gap cover is 46. This makes a bit of a farce of the proposition that gap cover lures younger people away from medical schemes.

In my view, it is the medical schemes that need urgent review, rather than the products which were developed in true entrepreneurial fashion from the need created by the schemes.

Let us pray that sanity will prevail.

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