On January 17, 2018, the South African government adopted a law governing the insurance business in the Republic of South Africa. The new provision, “Insurance Act 2017”, has been designed to ensure financial stability of insurance companies and protect the interests of the insured. It also ensures the conformity of the market with international standards and to facilitate the entry of new players. South Africa’s insurance industry is a fast growing one with many industry players involve.
The Insurance Act, was tabled in the National Assembly in January 2016 and completed its journey through the parliamentary process in December 2017 and has how been converted from a Bill to an Act. However, this Act will come into operation on a date yet to be announced by the Minister of Finance which is widely expected to be on July 1, 2018, at least in regard to the main provisions. According to section 73(2), different dates may be set for different provisions of the Act to come into operation.
The main objectives of this new Act seek to provide a legal framework for the prudential regulation and supervision of insurance business in the Republic that is consistent with the Constitution of the Republic of South Africa, 1996, and promotes the maintenance of a fair, safe and stable insurance market; to introduce a legal framework for microinsurance to promote financial inclusion; to replace certain parts of the Long-term Insurance Act, 1998, and the Short-term Insurance Act, 1998; and to provide for matters connected therewith.
While the former two Acts regulate insurers and insurance products, the latter Act regulates intermediaries and advisors for financial products, of which insurance is an important part.
What Can Ghana Learn
The Gross Domestic Product of the Republic of South Africa is $295,678 million. In South Africa, there are two systems of insurance. They are the Short-term Insurance and Long-term Insurance.
Short-term insurance is insurance that can be purchased for a short period of time as opposed the typical annual policy. It is meant to meet the temporary insurance needs of those who purchase it. The main difference between short-term and long-term insurance is simply how long a contract will last.
Oversight by Parliament
Insurance Act 2017 is going to help the South African Parliament to conduct its oversight over the insurance sector to ensure that it is aligned with international standards. The Bill aims to bring about a fair, safe and stable insurance market by strengthening oversight through higher prudential standards, making the industry more accessible for new entrants such as micro-insurers.
The Insurance Act will introduce microinsurance as a separate class of insurance business. Microinsurers will be able to underwrite both life and non-life policies and will benefit from less onerous solvency and regulatory compliance requirements within the constraints of specific monetary caps on the premiums charged and policy benefits provided by these insurers.
Microinsurance will enable the over 20% of South Africans who currently do not have access to formal financial services protection against financial risk, loss of income and the loss of assets.
This means they will be safeguarded against financial risks, loss of income, illness, inability to work or the loss or destruction of assets.”
According to the South African Insurance Association, local insurance fraud is in line with international trends and statistics. The estimated fraudulent claims in South African insurance could amount to as much as 32% of all claims submitted in any year. The unsustainably high level of fraudulent claims in particular is beginning to lead to intelligent product innovations in South Africa. Peer-to-peer insurance in which policyholders select their own insurance activities and risk pool often from among people they know and block chain technology solutions are being developed specifically to reduce the number of fraudulent claims.
The area where technology probably will have the most impact is on motor insurance. Using a GPS to show the way home is now a general feature on a cell phone. Nowadays, GPS devices are installed in the vehicle itself relaying a lot of data back to the insurer.
Technology will play a huge part in the future of insurance and will change insurance as it is known today. There is the need for insurance companies to embrace the change and keep up to date with the latest technologies and innovations in the insurance industry to ensure that their customers get the best services at the lowest rate.
The requirement for security in the form of a guarantee policy is primarily aimed at mitigating the insurers’ prudential risk relating to authorising an intermediary to collect premiums on their behalf.
The proposed amendments have removed the requirement for security in the form of a guarantee policy from the regulations. It is the responsibility of insurers to ensure that those intermediaries they authorise to collect premiums on their behalf have the necessary governance and resources to do so and to mitigate risk associated with allowing an intermediary to collect premiums.
The premium collection framework insofar as it relates to the Short-term Insurance Act (STIA), previously required intermediaries that collected premiums on behalf of clients to abide by certain requirements. However, the legislative framework governing premium collection under the Long-term Insurance Act (LTIA) was limited, and insurers regularly evaded the legislation by arguing that it was not applicable to them. Nevertheless, the new draft regulations aim to provide more adequate protection to policyholders and to align the legislative framework governing premium collection across the LTIA and the STIA.
Protection of Policyholders
A new prudential framework for the insurance sector called the Solvency Assessment and Management (SAM) framework has been developed to improve policyholder protection and contribute to financial stability through aligning insurers’ regulatory capital requirements with the underlying risks.
This law seeks to ensure that the poor are protected from the outcomes arising from market failures. This will be achieved by ensuring that insurers are able to meet their long- and short-term promises to consumers and must remain financially stable, in order to be in a position to continue to pay claims.
One notable function of the Act is that it will seek to provide stricter regulation of foreign-based insurers which are underwriting risks in South Africa. This is to control the solicitation of insurance and reinsurance business by foreign insurers and reinsurers from within South Africa.
The Act will prohibit these foreign companies from soliciting business in South Africa on a cross-border basis. Unless, of course, the reinsurance company conducts reinsurance business through a branch established in South Africa. No direct insurance will be licensed, however.
There is the need to monitor foreign insurers and reinsurers in order to ensure the safety and soundness of insurers in general.
In 2016 the Parliament of Ghana enacted a law that required banks to recapitalise in order to be stable and firm in their financial operations. However, it is important that Parliament also consider the insurance sector and do what the Republic of South Africa has done. Through this legislation, “Act 2017”, more providers of insurance services will be brought into the regulatory net to ensure financial stability of insurance companies and protect the interests of the insured.
Work with: Tri-Star Insurance Services (Gh) Ltd.