The adverse effects of the nationwide lockdown due to COVID-19 prompted many insurers to come out with their own responses regarding premium holidays or relief for consumers together with rules about the impact that has on benefits and rules about reinstating policies.
As far as commission goes, the normal rule in terms of commission regulations is that if premiums are stopped or are missed, then commission cannot be paid. So, for short-term insurance, commission would not be paid and in regard to long-term insurance, where there has been upfront commission paid, there should be an immediate clawback of commission. Insurers do not normally have a discretion about the clawback – they must apply the law.
The good news is that the FSCA recognises the impact of the current crisis on the ability of affected policyholders to pay premiums and that, under current regulations, the inability of policyholders to pay premiums or premium relief offered by insurers, will have a negative impact on the income of advisors, many of whom are small businesses. They have, therefore, published FSCA Communication 19 of 2020 together with FSCA Insurance Notice 6 of 2020 (relating to short-term insurance) and FSCA Insurance Notice 7 of 2020 (relating to long-term insurance) where they are exempting long-term and short-term insurers from some of the requirements of the Regulations and the payment and/or clawback of commission in relation to up to date policies. Shortly after the publication of FSCA Insurance Notice 6 of 2020 (relating to short-term insurance), the FSCA made a few amendments which resulted in the withdrawal of Notice 6 and a subsequent publication of its substitute FSCA Insurance Notice 8 of 2020. This article focuses on the latest developments as contained in Notices 7 and 8.
The exemption relates to benefits and impacts for policyholders (e.g. causal event charges) and for advisors, the FSCA is exempting insurers from aspects of commission regulations by allowing them to pay commission even if a premium is not paid and allowing them to delay any clawback – this will help the cashflow position of advisors.
The exemptions
What is premium relief?
Premium relief has been defined in the Notices and refers to a temporary release from the obligation to pay a premium (either whole or partially) for an existing policy. It is important to note that such release from the obligation to pay a premium should not have the effect to reduce or limit any policy benefits under the policy.
Short-term Insurance
The exemption relating to the Regulations under the Short-term Insurance Act is contained in FSCA Insurance Notice 8 of 2020. Short-term insurers (that provide premium relief due to the national state of disaster and COVID-19 outbreak) and advisors are exempt from Regulations 5.2 and 5.3(1). Regulation 5.2 deals with the time and payment of commission and basically states that commission shall only be paid once the premium is paid to the insurer. Regulation 5.3(1) deals with provisions relating to the maximum commission payable. The effect of this exemption is that advisors can still earn commission even where there is premium relief offered.
The exemption from these Regulations is subject to certain conditions which include:
- the premium relief must be in relation to an existing policy.
- the policyholder must be in good standing with the insurer (there should be no outstanding premiums).
- the commission paid must not exceed the maximum allowable commission as prescribed in Regulation 5.3(1). A reference to “premium” in this Regulation must be read as the premium that would have been payable had it not been for the premium relief.
- policy benefits, where premium relief is granted, must not be stopped, reduced or limited. Therefore, valid claims should be honoured where the claim event occurred during the premium relief period.
Long-term Insurance
The exemption relating to the Regulations under the Long-term Insurance Act is contained in FSCA Insurance Notice 7 of 2020.
Adjustment and Refund of Commission
Long-term insurers (that provide premium relief due to the national state of disaster and COVID-19 outbreak) are exempt from Regulations 3.5 and 3.17. These Regulations deal with the adjustment and refund of commission. The exemption from these Regulation are subject to certain conditions which include:
- the premium relief must be in relation to an existing policy.
- the policyholder must be in good standing with the insurer (there should be no outstanding premiums).
- if the premium relief remains unpaid for a period of 12 months, the adjustment of commission must be effected (recalculated by the insurer and refunded by the independent intermediary).
Limitations related to extended restriction period
Long-term insurers (that provide premium relief due to the national state of disaster and COVID-19 outbreak) are exempt from Regulation 4.2(1) insofar as it relates to premiums being repaid to the insurer to compensate for the premium relief granted, which premium repayments constitute excess premium and consequently triggers an extended restriction period. The exemption from this Regulation is subject to certain conditions which include:
- the premium relief must be in relation to an existing policy.
- the policyholder must be in good standing with the insurer (there should be no outstanding premiums).
- No additional causal event charges should be charged by the insurer flowing from the relief granted.
- The insurer must clearly disclose to the policyholder any adverse implications that would arise from accepting the premium relief, prior to granting such relief.
FSCA Communication 19 of 2020 states that the FSCA believes that these exemptions will assist insurers to provide premium relief options to affected policyholders while limiting the adverse consequences to intermediaries by still allowing insurers to pay commission to the intermediaries servicing these policies where they deem it necessary to do so. As this decision is left with insurers, FSPs are advised to keep a look out for communication from individual insurers in this regard.
ASISA has also recently published on premium relief. In a media release, ASISA urged policyholders to apply for premium relief as soon as possible, rather than allowing debit orders to bounce. Read ASISA’s Media Release.
Advisors should understand the consequences for their clients, if they accept premium relief, and ensure that clients are provided with sufficient information to make informed decisions. Advisors must also keep a record of any advice or discussions which they have with their clients in this regard – this will protect advisors down the line should they face a client complaint.