The issue of inducements to effect insurance, which we discussed in Monday’s newsletter, is fast becoming a very hot topic, and it does not only relate to short-term products.
One of our regular correspondents shared his correspondence with the FSB on the subject. He enquired about the legality of giveaways by Platinum Life as part of their marketing processes. When I read the following opening sentence on the website, I understood why:
At Platinum Life we sell our policies telephonically. In this way, we eliminate the high commission fees that brokers charge for selling policies.
In response to Steve’s first enquiry, the FSB responded as follows:
After careful and extensive analysis that took into consideration the guidelines laid down in Momentum Group Ltd vs. registrar of Long- term Insurance 2009 (5) SA 336 9 (T) judgement, which we have concluded there was no contravention of section 45 of the Long term Insurance Act 1998.
The complaint is finalised and we shall proceed to close our file.
So would your ruling then endorse the giving of prizes in order to market long term assurance? These prizes include kitchenware and the like.
In return, the FSB wrote:
The ruling does not endorse all rewards programmes, however, what was considered, was the fact that the interpretation of the section in isolation would potentially have the effect of rendering even genuine insurance marketing practices as contravening Inducement provisions in the Insurance Acts.
The following criteria was applied to determine the manner in which section 45 is to be interpreted in terms of the Momentum declaratory judgement:
- Is the offering assessed as part of the risk and benefits offered to the policyholder?
- Does the offering form part of the policy definition?
- Can the insurer and the regulators supervise the risk by the assets and investments that underlie the various policy schemes?
- Is the participation of retailers in the scheme assessed by the actuary or the auditor as is consequently within the regulator’s supervision?
- Is a major portion of the discount paid into assets forming part of the foundations of the particular policy?
There is currently a proposal for a project that focuses on identifying acceptable and unacceptable practises that constitute inducements and those that do not. This project (if approved) will inform the amendments to the inducement provisions of the Insurance Acts promoted under the Financial Services Laws General Amendment Bill, which amendments will allow the Registrar to prescribe what constitutes an inducement and what does not.
Steve was still not satisfied:
Thank you for the explanation, but I am at a loss to understand the ruling. How do house items like knives and pots and pans relate to being part of the risk and benefits offered to the policyholder? How is it part of the policy definition? How do the actuaries assess these gifts as part of a policy costing? It seems clear to me that these gifts have nothing to do with assurance products but rather are inducements to do business unrelated to the viability of the product being sold. If these are not inducements, what would be? How about the requirements to treat clients fairly and without conflicts of interest? Your answer does not shed light on this matter.
There certainly is a lot of confusion about the matter of inducements to take out insurance. It appears to be mainly direct insurers who are involved in this matter.
We received an enquiry from a compliance client about Dial Direct offering a Tom Tom GPS device. A number of readers also queried Outsurance’s offer of cash, if their quote was not the cheapest.
Our legal department shared the concern of these readers. Section 44 of the Short-term and Section 45 of the Long-term Insurance Acts prohibit both a product provider AND a registered FSP from offering inducements to take out insurance.
In our view, there should be no differentiation between direct insurers and the rest. What is sauce for the goose, is sauce for the gander.
We will take this matter up with the FSB and report back.