Representatives

1. Insurance in South AfricaOverview, Policy and Regulatory FrameworkPresentation to SCOF1 September 2015 |

2. Representatives • Ms Reshma Sheoraj – Director: Insurance (NT) • Jo-Ann Ferreira – Head: Insurance Regulatory Framework (FSB) • Mr Jonathan Dixon – Deputy Executive Officer: Insurance (FSB) • Mr Olano Makhubela – Chief Director: Financial Investments and Savings (NT)

3. Outline of Presentation • Insurance & insurance policy framework • Overview of the insurance market • IMF FSAP of insurance regulation and supervision • Twin Peaks regime & insurance regulation and supervision • Key Projects • Insurance Bill, 2015 • Financial inclusion reforms • Prudential reforms • Market conduct / Conduct of Business reforms • Retails Distribution Review • Key Information Documents • Consumer Credit Insurance • Demarcation between health insurance and medical schemes • Legacy Life Insurance Products • Market development

4. Insurance • Insurance entails the pooling of funds and risk from insured persons to pay for losses incurred by others • Loss in the form of death - long-term insurance • Loss to property (theft, fire, etc.) - short-term insurance • Insurance pools funds to also pay for expensive health related costs • Medical insurance schemes, health-insurance products, disability cover • Insurance also facilitates saving for retirement (eg underwritten funds) and enables regular income in retirement (eg annuities) • Insurance, both long and short-term, is a prudential concern since it guarantees to pay a certain (contracted) amount when risk or commitment materialises • Reinsurance is simply insuring the insurers (usually against large scale losses) • Microinsurance is insurance which provides limited cover at affordable rates • Consumer Credit Insurance is insurance linked to purchasing items on credit, to cover inability to repay

5. Insurance policy framework • Current legislative framework • Long-term Insurance Act, 1998 & Short-term Insurance Act, 1998 • Board Notices, Regulations & Policyholder Protection Rules • Addresses both prudential and market conduct frameworks • Review of legislative framework necessitated by international standards and local market conditions • Other directly relevant legislation • FICA, SASRIA, Inspections Act • Other legislation falling under other departments, but with implications for insurance • Medical Schemes Act • National Credit Act

6. Overview of the insurance market

7. Overview of the insurance market

8. Overview of the insurance market…cont • Big insurance groups • Sanlam, Old Mutual, Liberty, MMI, Discovery • Do we have Domestically Systematically Important Financial Institutions (SIFIs) or GSIFIs? • Old Mutual is primary listed in London – lead regulated in London – but significant revenue from South Africa – So host (SA) regulator important

9. Overview of long-term insurance market

10. Overview of short-term insurance market

11. Characteristics of the insurance market • Long-term insurers (mostly life) hold most of the insurance assets, equal to 64 percent of GDP, with only a small share for short-term insurers (non-life) • The financial sector has a high degree of concentration and interconnectedness: • the top five insurers account for 74 percent of the long-term insurance market • all major banks are affiliated with insurers through holding companies or direct ownership. Bank-affiliated insurers underwrite a substantial proportion of private pension assets • In addition to cross-ownership and equity investments • insurers are a major source of funding for banks

12. Risks posed by Insurers: Concentration The South African financial sector has a high degree of concentration and interconnectedness. • The top five insurers account for 74% of the long-term insurance market, • The seven largest fund managers control 60% of unit trust assets • The top five banks hold 90.5% of banking assets This concentrated structure gives major financial institutions significant pricing power and enables them to achieve returns on equity and assets higher than in more competitive economies. Market share of SA financial institutions (%)

13. The Twin Peaks regime & insurance regulation and supervision

14. The Twin Peaks regime & insurance regulation and supervision MARKET CONDUCT PRUDENTIAL FINANCIAL STABILITY Conduct of Business Banking Financial Stability Oversight Committee Market Integrity Insurance Financial Market Infrastructure Resolution Authority Consumer Education Financial Conglomerates FSCA PA SARB Slide14

15. The Twin Peaks regime & insurance regulation and supervision • Currently, both prudential and market conduct supervision of insurance done by the FSB • Change – prudential supervision to Prudential Authority at SARB and conduct supervision under MCA • Implications for FSB staff

16. IMFFinancial Sector Assessment Program (FSAP) of Insurance Regulation and Supervision

17. Assessment of International Association of Insurance Supervisors (IAIS) Insurance Core Principles (ICPs) • Number of ICPs 26 • Observed 6 • Largely observed 11 • Partly observed 9 • Not observed 0 • Main areas of concern: • Governance structures of the Financial Services Board • Corporate governance requirements for insurers • Risk management and internal controls requirements for insurers • Countering fraud in insurance • Public disclosure requirements for insurers • Formal framework for group-wide supervision of insurance groups • Creditor protection for policyholders in winding-up of insurers

18. Assessment of IAIS ICPs (cont) Measures taken / underway to address concerns: • Solvency Assessment and Management (SAM) framework • New risk-based solvency framework for insurers, aligned with international standards, in development with industry stakeholders since 2010 • Includes enhanced requirements for: (i) financial soundness requirements (Pillar I); (ii) governance, risk management & internal controls (Pillar II); and (iii) public disclosure (Pillar III) • Interim measures: Board Notice on Governance & Risk Management Framework for Insurers, effective 1 April 2015 • Final measures: Insurance Bill, 2015 • Envisaged implementation date: mid-2016 • Financial Sector Regulation Bill, 2015 • Gives effect to Twin Peaks and strengthens supervision • Other initiatives • Resolution framework; to deal with entities under stress

19. Insurance Bill, 2015

20. Insurance Bill, 2015 • Timing: Bill to be tabled in Parliament in November 2015 • Overview: • Bill facilitates: • Financial inclusion through a microinsurance regulatory framework • Enhanced prudential supervision through new solvency regime for insurers • “conduct of business” provisions will be facilitated through the FSR Bill • Consolidates long-term (life) and short-term (non-life) prudential regulation • Framework legislation - technical requirements in subordinate legislation • Largely technical in nature and developed in consultation with industry • Gives effect to Twin Peaks: Provides framework within which PA can perform forward-looking risk-based insurance supervision

21. Financial inclusion reforms

22. Microinsurance and inclusive financial markets • Insurance Bill will give effect to the National Treasury’s Microinsurance policy document • Bill supports the development of an inclusive insurance sector and introduces proportionate regulation and supervision of microinsurance through a dedicated microinsurance licence • FSB in the process of drafting a paper giving an update on the regulation and supervision of an “inclusive insurance market” which will also focus on regulatory options for funeral parlours • Will outline detailed proposals for prudential and conduct regulation of microinsurers • Informal insurance practices must be encouraged to formalise, to better protect consumers • Research underway into options for a proportionate regulatory framework for funeral parlours

23. Prudential Reforms: New Solvency Framework

24. New solvency framework: Solvency Assessment and Management (SAM) • Solvency Assessment and Management (SAM): • New risk-based solvency regime for insurers aligned to international standards • Based on Solvency II in Europe, but adapted for local circumstances • Consists of 3 Pillars: • Pillar 1: quantitative financial soundness requirements • Pillar 2: qualitative governance and risk management requirements • Pillar 3: regulatory reporting and public disclosure requirements • Aims of SAM: • To align capital requirements with underlying risks of insurers • To develop a proportionate, risk-based approach to supervision of insurers • To provide incentives to insurers to adopt more sophisticated risk monitoring and risk management tools • To help maintain financial stability

25. New solvency framework: SAM (cont.) • SAM consultation process: • Has been developed in continuous consultation with industry • Since 2010 more than 117 discussion documents and position papers have been published on the various components of the framework • 3 Quantitative Impact Studies (QISs) to test Pillar 1 proposals • A Pillar 2 readiness review plus a follow-up study • A SAM Economic Impact Study • A Reinsurance Regulatory Review • Comprehensive Parallel Run since January 2015 • Bill approved by Cabinet on 15 April 2015 & published for comment on 17 April 2015 • Various workshops on Bill

26. New solvency framework: Insurance Bill • Prudential reforms: • Enhancing financial soundness of insurers, financial stability and the protection of policyholders through – • introducing the SAM regime • requirements for significant owners and key persons • enhancedlicensing framework • governance framework requirements • financial soundness requirements • reporting and public disclosure requirements • introducing a framework for insurance group supervision • enhancing the reinsurance regulatory framework • Aligning with international standards & G20 commitments

27. Conduct of Business Reforms

28. Market Conduct Policy Framework for the Financial Services Sector • Published in December 2014 • Will inform the proposed Conduct of Financial Institutions Act - will support a risk-based and proactive approach to supervision • Provides an overview of the proposed approach to market conduct regulation in South Africa, and the policy framework within which the FSCA will operate • Includes insurance sector • Priority areas in the short to medium term dealing with poor industry practices relating to insurance: • Opaque, high and sometimes inappropriate investment charges (like rebates), especially in multi-layered products (e.g. a retirement fund backed by an insurance policy invested through a Linked Investment Service Provider into a collective investment scheme) • Product design features may weaken returns (e.g. asset based fees or causal event charges), and competition (e.g. through restricted portability on account of causal event charges, esp. in legacy products) • Poor disclosure of product terms, weak understanding by customers of technical policy language

29. Market Conduct Policy Framework for the Financial Services Sector • Priority areas in the short to medium term dealing with poor industry practices relating to insurance (cont.): • Weak governance in outsourcing arrangements • Conflicted commission-based remuneration structures of intermediaries or service providers (esp. upfront commission on life risk, and remuneration for outsourcing asset risk) • Claims handling practices, esp. repudiations and non-transparency of exclusions, unreasonable excesses on asset cover, “underwriting at claim stage” • Too much focus on premium price rather than value (where costs to the consumer are displaced to higher excesses), esp. on asset (short-term insurance) cover • High incidence of illegal operators in the funeral insurance market

30. Market Conduct Policy Framework for the Financial Services Sector • Way Forward: • Regular NT/FSB engagement with industry associations (ASISA and SAIA) to discuss identified market conduct concerns, priority reforms and possible solutions • Most concerns being addressed through current regulatory initiatives: • Retail Distribution Review • Key Information Documents (KID’s) • Consumer Credit Insurance • Demarcation between health insurance and medical schemes • Dealing with legacy life insurance products

31. Retail Distribution Review • Published in November 2014 • Overview: • The RDR has been undertaken in the context of the Twin Peaks market conduct mandate and the Treating Customers Fairly (TCF) framework • It is a prominent example of a more interventionist approach to market conduct regulation • A mainly retail focus – wholesale market reforms are being addressed through complementary processes • A cross-cutting, cross-sectoral approach • Outlines significant concerns and risks inherent in the current distribution landscape (poor customer outcomes, mis-selling of financial products)

32. Retail Distribution Review • Objectives: • To ensure that financial products are distributed in ways that support delivery of TCF outcomes and enable – • Delivery of suitable products and fair access to suitable advice • Customers to understand and compare the nature, value and cost of advice and other services • Enhanced intermediary professionalism to build consumer confidence and trust • Customers and distributors to benefit from fair competition for quality advice and services, at prices more closely aligned with the service provided • Sustainable business models for financial advice

33. Retail Distribution Review • Key structural changes: • Placing greater responsibility on product provider • limitations on the types of remuneration that intermediaries can earn and from whom, to address conflicts of interest • enabling customers to understand and compare the nature, value and cost of advice and other services that intermediaries provide • Way forward: • FSB Project teams • Consultation with industry project teams • 2015 focus: draft phase 1 interventions and a roadmap for phase 2 reforms (following FSR Bill) and phase 3 reforms (following proposed Conduct of Financial Institutions Bill)

34. Key Information Documents (KIDs) Overview: KIDs are pre-point of sale documentsthat are being specifically designed to give financial consumers important information that is: • In language they can easily understand (as far as possible, free from jargon and technical language) • Succinct enough to be readable (the aim is for 5 pages or less) • In a standardised format that aids comparability • Given at a time that is relevant to the consumer’s decision • Highlights important information about the product (incl. benefits; risks; charges and commitments; and information on the product supplier) KIDs will be compulsory across the entire range of retail financial products, and extensive work has already gone into developing the KIDs for a number of products including long term insurance products, short term insurance products, CIS’s, and pension funds, with transactional banking and securities products to follow.

35. Consumer Credit Insurance • NT/FSB Technical Report published in July 2014 • Prepared against the backdrop of increasing concerns about poor market practices and unfair consumer outcomes in the CCI market, especially for consumers in the lower-income market • Key findings: There is a role for CCI, but also that there is a need to strengthen the current regulatory framework for such products in order to stamp out widespread abuses • Lack of transparency in the total cost of credit: Full cost of credit, including the cost of CCI, is not fully disclosed. The fact that CCI is bundled together with the credit offering and the inclusion of add-on products such as warranties and “club” membership fees make price comparisons difficult. In addition, disclosure of commission and fees is opaque • High premiums and different pricing: Premiums tend to be higher when a risk is insured under a CCI policy than for freestanding cover

36. Consumer Credit Insurance • Key findings (cont): • Product differentiation limits comparison: Variance between CCI product features limits product comparability and substitutability, with questionable competition benefits. Examples include different forms of cover for employment related events • CCI cover does not meet the needs of the target market: Some business models offer policy benefits that many in the target market might not actually be eligible for and by implication can never claim against. An example is retrenchment cover benefits offered to customers who are self-employed • Enhance coordination between the regulators on overlapping projects and concerns

37. Consumer Credit Insurance • Way forward: • Number of workshops and bilateral discussions to engage industry on the policy proposals, and discussions with the NCR and the dti have been ongoing • Further technical work undertaken • A road map will be released which sets out how the proposals will be implemented • Engaging with dti and NCR on potential premium caps in the interim

38. Demarcation of health insurance policies and medical schemes • Medical Schemes Act (MSA) amended in 2013 to remove ambiguity in definition of a medical scheme • 2nd draft published 29 April 2014 for comment by 31 July 2014 & FAQ released early July 2014 • Significant policy considerations inherent in draft regulations • Objectives: Regulations aim to clearly define and separately regulate health insurance policies from the business of medical schemes • seek to ensure that the sale of health insurance policies complement medical schemes and do not undermine the social solidarity principles, while at the same time serving the needs of those who require additional protection against health-related risks • in addition, there are health insurance policies which are being misleadingly marketed as alternatives to medical scheme cover, while the protection they offer against health events is not equivalent to that of medical schemes

39. Demarcation of health insurance policies and medical schemes • A clear demarcation between health insurance policies and medical schemes is necessary to support and enhance the objectives and purpose of the MSA, which entrenches the principles of community rating, open enrolment and cross-subsidisation within medical schemes • Way forward: • Engagement with DoH, CMS, industry associations • Concurrence of MoH • Final Regulations to be published in September to align to the CMS Low Cost Benefit Option Framework

40. Legacy life insurance products • Certain historic or so-called “legacy” features of long-term insurance products or business models may lead to poor customer outcomes • Areas of concern: • Early termination penalties on life insurance savings & investment policies • Retrospective redress for worst past outcomes through 2005 SoI • Caps on early termination penalties have been lowered in stages through regulations, but penalties can still be high on legacy products • Variable premium increases (i.e. voluntary ad hoc increases to recurring premiums) on legacy products (entered into pre-March 2009) still attract full up-front commission • introduces a potential conflict of interest - bias towards advising to increasing premiums rather than investing in a newer type of product • “Section 14 transfers” between retirement annuity (RA) funds • may be motivated by differences in remuneration for different types of RA funds rather than the best interests of the customer

41. Legacy life insurance products • Proposals: • RDR changes will support minimal early termination penalties for new policies • High early termination penalties on legacy contractual savings policies must be phased-out – fair treatment of customers must apply not only to new policyholders, but also existing policyholders of legacy life policies • Same commission basis to apply to variable premium increases on “legacy” investment products as is currently applied to new investment policies • Specific requirements to mitigate the risk of poor customer outcomes on the transfer of accumulated benefits from one RA fund to another, including - • strengthened disclosure requirements • enhanced oversight requirements to help ensure that the transfer is in the fund member’s interests – particularly in instances of transfers from underwritten RA’s that involve an early termination penalty

42. Market Development • How can the ST insurance industry grow faster • In South Africa? In the rest of Africa and beyond like BRICS? • How can more and better ST insurance products be provided to the consumers? • How can we get better coverage for ordinary consumers on their houses and household contents? • How can we get better coverage on motor car insurance to cover every vehicle on our roads? Compulsory Third Party Insurance? • How can we get better products for small businesses? • How can costs be reduced, without compromising value? • How can the LT insurance industry serve South Africa better? • More affordable and appropriate savings products? • How can we get better funeral cover insurance? • What is the industry doing to meet financial inclusion and empowerment objectives, e.g. procurement practices for panel beaters?

43. Thank You!