THE FUTURE OF MICRO-INSURANCE REGULATION …

1 THE FUTURE OF MICRO-INSURANCE REGULATION IN south africa DISCUSSION PAPER 7 April 2008 The discussion paper on THE FUTURE OF MICRO-INSURANCE REGULATION IN south africa is hereby released for public comment. Comments on the discussion document should be furnished by Thursday, 31 July 2008 in the format indicated in appendix 11. Due to time constraints, it will not be possible to respond individually to comments received . However, receipt of comments submitted in the correct format before the due date will be acknowledged and fully considered by the National Treasury. Submit comments to Katherine Gibson by email: or fax: +27 (0)12 3155206 i TABLE OF CONTENTS TABLE OF CONTENTS i List of Figures v List of Tables v Executive Summary vi 1.

2 INTRODUCTION AND BACKGROUND 12 What is MICRO-INSURANCE and why is it important? 12 Why this discussion paper? 13 Scope of the discussion paper 13 Structure of the discussion paper 15 2. OBJECTIVES AND PRINCIPLES FOR MICRO-INSURANCE REGULATION 16 Policy objectives 16 Principles 18 Alignment with other government processes 19 3. FEATURES OF THE MICRO-INSURANCE LANDSCAPE IN south africa 22 Regulatory context 22 Market context 25 ii Providers 25 Distribution 27 Products 28 Take-up 29

3 4. DERIVING A MICRO-INSURANCE DEFINITION SUITABLE TO THE south AFRICAN CONTEXT 33 Product-based drivers of prudential risk 33 Proposed MICRO-INSURANCE definition 35 5. DEVELOPING THE OPTIONS FOR WRITING MICRO-INSURANCE 39 Framework of options for writing MICRO-INSURANCE 39 Burial societies as informal risk-pooling mechanisms 39 Spectrum of formal options for writing MICRO-INSURANCE 40 The option of a dedicated MICRO-INSURANCE license 46 Existing REGULATION may be unnecessarily onerous 46 Requirements for MICRO-INSURANCE provision 49 Legislative changes required for implementing the MICRO-INSURANCE license 58 Other challenges in writing MICRO-INSURANCE 61 iii

4 6. FACILITATING INTERMEDIATION AND CONSUMER PROTECTION 66 The risk of consumer abuse and misselling 66 Current regulatory framework 67 Impact of REGULATION on the market 70 Proposed regulatory framework for consumer protection 73 Proposed regulatory framework for enforcement 75 7. THE EMERGING MICRO-INSURANCE FRAMEWORK 80 8. EXPECTED IMPACT OF PROPOSED FRAMEWORK 85 Impact on the market 85 Regulatory and supervisory capacity implications 87 9. COMPARING THE PROPOSED FRAMEWORK TO INTERNATIONAL EXPERIENCE AND PRACTICES 90 10 WAY FORWARD 94 11.

5 APPENDICES 95 appendix 1: Comparison of requirements of insurance acts and regulations 95 appendix 2: International experience 96 appendix 3: The REGULATION of cell captives 106 appendix 4: Issues surrounding the Co-operatives Act of 2005 109 iv appendix 5: The proposed introduction of Financial Condition Reporting and likely impacts thereof 112 appendix 6: Corporate governance requirements for co-operative or mutual insurers 115 appendix 7: Profile of insurers holding minimum capital amounts 120 appendix 8: insurance capital requirements 121 appendix 9: micro -insurer capital requirement calculations 123 appendix 10: Detailed FAIS requirements 127 appendix 11: Format in which comments are to be submitted 128 12.

6 BIBLIOGRAPHY 129 Meeting list 134 v LIST OF FIGURES Figure 1. insurance uptake across LSM groups. 30 Figure 2. Breakdown of insurance usage among LSM1-5. 31 Figure 3. Map of prudential risk drivers 35 Figure 4. MICRO-INSURANCE within the low-income insurance market. 38 Figure 5. insurance provision: institutional graduation to becoming a full-fledged insurer. 45 Figure 6. Categories of intermediaries currently under FAIS 69 Figure 7: Short term insurers minimum asset holdings 120 Figure 8: Short term insurers minimum asset holdings 120 Figure 9: Capital requirements for Short Term Business 121 Figure 10: Capital requirements for Long Term Business 121 LIST OF TABLES Table 1.

7 Ranges of capital held by registered insurers. 49 Table 2: Key features of MICRO-INSURANCE regimes in India and the Philippines. 92 Table 3. Comparison between conventional corporate agent requirements and MICRO-INSURANCE agent requirements. 98 Table 4. Limits imposed on MICRO-INSURANCE products in India 99 Table 5: Capital requirements for various institutional forms of insurance providers 102 Table 6: Assumptions for capital requirements calculation 123 Table 7: Illustrative capital requirements for a microinsurer 124 Table 8: Illustrative additional capital requirements for microinsurers 125 Table 9. FAIS requirements and scope for relaxation thereof for MICRO-INSURANCE 127 vi EXECUTIVE SUMMARY This discussion paper proposes that a regulatory space for the provision of MICRO-INSURANCE products be carved out within the broader REGULATION of insurance provision in south africa .

8 MICRO-INSURANCE refers to insurance that is accessed by or accessible to the low-income population, provided by a variety of different providers and managed in accordance with generally accepted insurance practices. It does not operate in isolation, but forms part of the broader insurance market, distinguished by its particular market segment focus (which translates into distinct means of distribution and distinctly structured products). MICRO-INSURANCE as defined in this paper is intended to catalyse the market provision of risk management tools for poor households. However, given the inherent complexity of insurance and the vulnerability of the target market, there are also risks of potential abuse and misselling.

9 A balance therefore needs to be struck between market development and consumer protection. Accordingly, the goal of this discussion paper is to develop a coherent and clear regulatory framework that will encourage and facilitate the provision and distribution of good value, low-cost products that are appropriate to the needs of low-income consumers by a variety of market players who compete for the market, treat their policyholders fairly and are able to manage the risks of providing insurance . This is in line with the government s objective to increase access to financial services for the poor and provide a supportive regulatory environment for the implementation of the Financial Sector Charter.

10 Dedicated MICRO-INSURANCE license The discussion paper proposes the creation of - a dedicated MICRO-INSURANCE license, available to existing registered long-term insurers, short-term insurers, friendly societies as well as public companies and co-operatives which comply with the registration requirements, which will allow the license holder to write both long-term and short-term policies which comply with the product parameters set for MICRO-INSURANCE products (including a benefit cap of R50 000 and a maximum term of 12 months), to which simplified distribution requirements (under the Financial Advisory and Intermediary Services Act - FAIS) will apply; as well as a special prudential regime commensurate to the risks applicable to MICRO-INSURANCE policies.