Proposed changes to short-term Policyholder Protection Rules

Proposed changes to short-term Policyholder Protection Rules

In its Statement supporting proposed amendments to the policyholder protection rules, the FSCA suggested changes to the PPRs in general, as well as ones relevant to the Long-term and Short-term industries, specifically. This article lists two proposals relevant to the latter.

Extending STIA PPRs to commercial lines business

It is proposed that the application of the STIA PPRs be widened to extend to commercial lines business. Historically, the 2004 short-term insurance PPRs only applied to personal lines business. With the replacement of the 2004 PPRs with the 2017 PPRs, it was initially proposed as part of the consultation process that the PPRs apply to both commercial and personal lines business. There was significant push back from the short-term insurance sector on this proposal. Reasons cited included that some of the requirements in the PPRs were not appropriate for commercial lines business, and that commercial policyholders have enough commercial knowledge to allow them to make informed decisions, such that the protections afforded by the PPRs are more appropriate to individuals/personal lines policyholders. It was argued that the compliance costs involved in meeting the requirements in the PPRs outweighed the benefit that these protections would offer commercial policyholders.

The national state of disaster brought about by the COVID-19 pandemic in 2020 created significant challenges in the insurance sector. In particular, it highlighted certain approaches and practices that illuminated the need for the protection afforded to individuals and very small SMME’s under the current PPRs, to be explicitly extended to commercial lines business. This would ensure the enforceability of the TCF principles in relation to commercial lines business as well, to ensure the level of protection in the PPRs regardless of whether the policyholder is a business or an individual.

This was particularly evident in relation to certain aspects of Business Interruption (BI) insurance cover, including examples where new exclusions or requirements were introduced during the period of national lock down during the COVID-19 pandemic crisis, and certain undesirable claims practices came to light that threatened fair outcomes to commercial lines policyholders. It was evident that commercial lines policyholders would also benefit from the protections afforded through the STIA PPRs.

An analysis was undertaken on the existing requirements in the STIA PPRs which showed that on the face of it, most of the rules in the PPRs can be made equally applicable to commercial lines business. Rule 2A, which sets out the Microinsurance product standards, is in any event only applicable to personal lines (as microinsurance business by its nature in terms of the definition in the Insurance Act is limited to personal lines business only). It is therefore proposed that, save for a specific qualification in Rule 13 on Data management, all the STIA PPRs rules be expanded to apply to commercial lines business. In term of the drafting necessary to bring about this change, it is proposed that the definition of “policy” is an amendment to align to that in the STIA, thereby automatically capturing both personal lines business and commercial lines business when referring to a policy in the STIA PPRs.

Determining premium and excesses

The amendments emanate from recommendations drawn from the thematic review on excess structures in the non-life insurance sector undertaken by the supervisory departments. Based on the findings of the thematic review the Authority proposed certain considerations to be taken into account by the insurer when determining excesses, and the disclosure of affordability to the policyholder in the event that the excess charges exceed certain amounts or percentages.

These requirements will be applicable to personal lines policies only, as findings show that the greatest risk lies with individuals that cannot afford excesses and do not know or understand the potential impact to these excess structures in the event of a claim. The requirement proposes that, when determining any excess where the aggregated excess amount exceeds either R10 000 or 5% of the value of the insured risk (whichever is lower), an insurer must take the following two steps:

  1. take into consideration the policyholder’s ability to financially bear any costs or risks associated with the excess by conducting an affordability test; and
  2. disclose to the policyholder in writing the result of such an affordability test before the policy is entered into.

It is acknowledged that such an affordability assessment may be considered onerous and intrusive, however the expected result is that insurers will move away from imposing exorbitant excesses and complicated excess structures to avoid conducting such an affordability test, thereby resulting in better outcomes for policyholders. An insurer can still elect to impose a higher excesses if it is considered appropriate given the particular risk, or where an insurer does so at the request or insistence of the policyholder. In such instances the affordability test must however be undertaken and the results disclosed to the policyholder. It is considered a less intrusive requirement than outright prohibiting such excesses, as has been done in the microinsurance space as per Rule 2A.8 of the STIA PPRs. Specific comments on this proposal are invited from the non-life insurance industry in respect of this proposed requirement.

Proposed amendments applicable to both Long- and Short-term Insurance Acts

It is envisaged that these amendments, as well as those not listed above, will ultimately ensure a stronger and less fragmented regulatory framework for the conduct of the business of insurers and lead to better outcomes for policyholders.

The Authority acknowledges that there may be instances in which the implementation of the amendments could have a cost implication for insurers, particularly in relation to system development.

We strongly suggest that those affected, take time to study these papers and provide input. The proposals relating to product design, for instance, can add a significant layer of costs and compliance requirements.

The full zip file on the proposed changes can be downloaded here.

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