The South African Financial Sector Conduct Authority (FSCA) recently introduced an exemption for Microinsurers, providing them with more flexibility in managing their policies. Previously, Rule 2A.6.1 restricted the waiting period that Microinsurers could set for death, disability, or health benefits arising from natural causes. The Rule capped the period at a maximum of three months or one-quarter of the policy term, whichever was shorter in respect of a Microinsurance product or a funeral policy. In terms of Rule 2A.6.1. a Microinsurance policy may not have a contract term of more than 12 months, therefore the period could not exceed 3 months.
The Rule is aimed at protecting policyholders against unfair outcomes by ensuring that they are not prejudiced by unreasonable waiting periods. A number of Microinsurers have made individual applications for exemptions and these exemptions have been granted as these insurers have been placed at a disadvantage compared to traditional insurers offering similar products like funeral cover.
The new exemption allows Microinsurers to set a waiting period of up to six months for these benefits. This increased flexibility helps Microinsurers manage risk more effectively, particularly considering the higher prevalence of adverse selection they face. Adverse selection occurs when people who are more likely to need benefits are the ones more likely to purchase insurance. With a longer waiting period, Microinsurers can mitigate some of the financial risks associated with such situations.
However, the exemption comes with conditions. Microinsurers cannot impose additional waiting periods on existing policies, this is to ensure fairness for those who purchased coverage under the previous rules. Additionally, any new microinsurance policy offered under this exemption must have a 12-month term. Finally, the FSCA retains the authority to modify or withdraw the exemption entirely through a published notice on their website.
This change in regulations aims to strike a balance between protecting policyholders and fostering a more competitive microinsurance market in South Africa. By providing Microinsurers with greater flexibility in managing risk, the FSCA hopes to encourage the development of more affordable and accessible insurance products for vulnerable and low-income consumers.