Recently, Norton Rose Fulbright South Africa hosted yet another highly successful insurance management forum.

The forum was attended by some of South Africa’s most prominent insurance industry players and was led by Peter Todd, former CEO of Mutual & Federal who focused on the impact of current and incoming regulations on the short term insurance industry.

Todd kicked off the forum with a discussion on binder regulations.  Until recently, binder holders have enjoyed a fair amount of freedom.  This might change if the regulator proceeds with its draft directive which stipulates that insurers re-contract with all binder holders by December 2013 on a new basis for measuring what is a fee commensurate with the services provided.  In effect the directive seeks to bring back control to insurers and prevent fee bargaining abuse.

Says Todd: “Insurers will have to take greater ownership and better manage client relationships and problems.  Much of the administration will now revert back to insurers, the quality of data sharing will have to improve and the binder holder industry will in all likelihood consolidate.”

For the directive to work, Todd says that formal agreements need to be established for the outsourcing of all material, managerial and control functions and a framework for materiality needs to be approved by insurers.  The directive will also necessitate greater economies of scale and a more pro-active relationship between insurers and the Financial Services Board (FSB).    

“Admirable in its intent as the directive is, such regulations can sometimes lead to unintended consequences.  In this case, it could represent the first step towards a de-regulated commission structure which brings its own set of challenges,” adds Todd.

Todd proceeded to delve into the FSB’s Solvency Assessment and Management (SAM) project which seeks to establish a risk-based supervisory regime for the prudential regulation of both long and short term insurers.

Full implementation of SAM is due to come into effect at the beginning of 2016.  Interim measures have been implemented in a bid to ensure readiness but challenges have emerged.  For instance, SAM’s complexity has been cited as problematic. 

Some of the anticipated business impacts stemming from SAM include enhanced quality of reporting, stricter data governance requirements, a greater need for data and Annual Own Risk and Solvency Assessments.

“Given the costs and complexity involved with the rollout of SAM, smaller and mono-risk players might struggle to keep up which will probably trigger a number of mergers and acquisitions in the near future,” notes Todd.  “On the plus side, SAM should improve strategic decision - making given that such decisions will be based on quality risk information.”

Next on Todd’s agenda was the issue of Treating Customers Fairly (TCF) which will come into full effect from January 2014.  Todd reckons TCF and its spin-offs have been underestimated to some extent by the industry which could prove problematic.  

“The primary issue surrounding TCF is the question of interpretation.  Fairness can be interpreted in any number of ways.  As such, this is the first issue that needs to be clarified by an organisation.”
Interestingly, Todd reckons the best way to test whether or not a business strategy is fair is to put yourself in the shoes of the consumer and ask whether as a consumer you would consider the strategy being discussed as being fair to you.

Promoting consumer education and financial literacy, understanding client needs, the ability to evidence compliance, changes to certain business practices and policy wordings are but a few of the aspects which need to be tackled under this banner explains Todd.

According to Todd, the industry will also have to contend with micro-insurance legislation in the future.  Aimed at ensuring accessible insurance to non-traditional, low-income markets, the legislation will entitle the FSB to licence micro-insurers.

Of concern is that the legislation will set a lower regulatory standard in a market which needs firm regulations, thus opening the door to potential market abuse says Todd.  Drafting of this Bill has commenced but it has been delayed largely due to the focus on other industry legislation.

The Protection of Personal Information Bill (POPI) was next to come under the spotlight.  POPI is set to become law soon and will significantly affect the way in which insurers collect, store, process and disseminate personal information not just of policyholders but also of business partners and employees.  Todd says that POPI places a significant compliance burden on insurers.  The upshot is that akin to the binder regulations, accountability will ultimately lie with the primary insurer.

Todd rounded off the forum with a few thoughts on the controversial ‘Omnibus Bill’ and Twin Peaks programme.  The Bill is currently being considered by parliament and will amend approximately 15 financial sector Acts.

In a nutshell, the Bill and programme aim to create a prudential regulator housed in the South African Reserve Bank and to transform the FSB into a dedicated market conduct regulator.  Although positive in many respects, Todd believes that far greater transparency and consultation is needed regarding the Bill as it is currently far too broad in its scope.  However, it does support the central theme underlying all the regulatory changes and is a logical conclusion to the wave of regulatory changes.

During the Q&A session which followed, Rob Otty, MD of Norton Rose Fulbright SA and a number of the firm’s directors concurred with Todd in that greater transparency and clarity is needed going forward.  Patrick Bracher, a financial services lawyer with Norton Rose voiced his concern over the FSB’s ability to enforce all the new laws fairly and constructively; concerns regarding the sheer volume and cost of the legislation being introduced came to the fore; and the feasibility of structuring local models on international frameworks was questioned.  

Overall, Todd says that although much of the current and new legislation still has to be ironed out and may prove arduous to implement, there are a number of compelling reasons for the industry to collectively embrace the evolving regulatory framework.  These include the fact that the framework will support financial inclusion and financial stability; it will provide long term benefits from an image and reputation perspective; consumers will be better protected and the integrity of the insurance market as a whole will improve. 

“Positively approached, the main benefit will be that the control of insurance and policyholder service will revert firmly back to insurers.”

The forum was lauded by those who attended as providing valuable insights and guidance.  In closing, it was noted that given the firm’s recent merger, Norton Rose Fulbright is even better positioned than ever to provide solution - driven advice across the global insurance sector.