FSCA Communication 19 of 2020 (INS) recognises that the inability to pay premiums as a result of the COVID-19 pandemic may be to the detriment of the policyholder and will have a negative impact on the income of intermediaries, many of whom are small businesses, and may be unable to sustain significant income reduction.
The FSCA points out that possible consequential effects could stem from provisions that determine that commission may only be paid on receipt of premium and provisions that provide for commission adjustment or so called “claw back” when the actual premium received is less than anticipated.
“To minimise the potential unintended consequences for policyholders who choose to make use of the premium relief as well as the impact of premium relief on commission income of intermediaries, the FSCA is exempting insurers that will be granting premium relief to policyholders from the aforementioned requirements contained in the Regulations under the Acts, subject to certain conditions,” the FSCA stated.
In response, the FSCA published two general exemptions to provide context to the intention behind the exemptions.
Short-Term Insurance commission
The exemption notice is aimed at facilitating, at the discretion of the insurer, the delivery of premium relief to policyholders without impacting the expected income of intermediaries which they receive through commission.
It includes distinct conditions with which an insurer, intending to rely on the exemption, must comply. These conditions include a requirement that policy benefits, where premium relief is granted, must not be stopped, reduced or limited. This means that valid claims should be honoured where the claim event occurred during the premium relief period.
Furthermore, where commission is paid in respect of a policy that is subject to premium relief, such commission may still be paid at the discretion of the insurer to assist small businesses and not exceed the maximum allowable commission prescribed in Regulation 5.3(1).
The FSCA also included a condition limiting the exemption to policies where the policyholder is in good standing with the insurer (e.g. no outstanding premium). This prevents the insurer or broker from attracting new business by offering premium relief and attempts to avoid the potential abuse of premium relief by policyholders that have tendencies to default on premiums, and who are more likely to use the COVID19 pandemic as an excuse not to pay premiums.
Long-term Insurance commission
The exemption notice is aimed at facilitating the delivery of premium relief to policyholders by providing for the exemption from immediate adjustment of commission due to a reduction in premium received by the insurer. This exemption notice also aims to prevent the policyholder from being placed in an extended restriction period and/or the policy attracting causal event charges due to the premium relief being accepted.
Please note that, if the premium, in terms of which the premium relief is granted, remains unpaid for a period of 12 months, the exemption automatically expires and, as a result of the unpaid premium, any commission that was paid in respect of such a policy must be adjusted (recalculated) by the relevant long-term insurer and refunded by the relevant independent intermediary to the relevant long-term insurer.
In terms of the restriction period, the conditions include a requirement to clearly disclose any adverse implications from accepting the premium relief and that no additional causal event charges should be charged flowing from the relief granted. As with the exemption notice related to short-term insurance, the FSCA included a condition limiting the exemption to up to date policies. The FSCA believes that these exemptions will assist insurers to provide premium relief options to affected policyholders while limiting the adverse consequences to the intermediaries by still allowing insurers to pay commission to the intermediaries servicing these policies where they deem it necessary to do so.