The Insurance Act, 2017 (“Insurance Act”) was enacted on 18 January 2017 and provides the prudential legislative framework for insurers. The commencement date of the Insurance Act is still to be determined by the Minister of Finance, but it is projected to be 1 July 2018.
The proposed amendments focus mainly on aligning the Regulations with the Insurance Act and on improving the premium collection framework. In this article we focus on the draft regulations regarding premium collection by intermediaries.
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.
The 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.
Collection of Short-term Insurance Premiums
The existing requirements under Regulation 4 of the STIA, stipulates that a person may not be authorised to collect premium unless the person has provided security by means of a guarantee policy (commonly referred to as IGF) or a contract and under which policy benefits are to be provided in the event of the failure of that person to meet those obligations. The requirement for security in the form of a guarantee policy is primarily aimed at mitigating the insurer’s prudential risk relating to authorising an intermediary to collect premium on its 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 it authorises to collect premiums on its behalf have the necessary governance and resources to do so and to mitigate risk associated with allowing an intermediary to collect premium on its behalf.
Due to the proposed amendment that the security requirement be repealed, several risks regarding premium collection have been identified. The draft regulations propose to improve the premium collection legislative framework by implementing the following, and mitigating the risks identified:
- A prohibition on an independent intermediary delegating the authority to collect premiums provided to it by a short-term insurer;
Only one intermediary can be authorised to deal with a premium in relation to the same policy if it is a policy forming part of personal lines business.
- Requiring that certain matters must be addressed in the written authorisation provided by the insurer to the independent intermediary;
The authorisation to collect premiums, must provide detail of the duration of the authorisation, the functions performed by the intermediary, the commission payable for the service, and the manner and means by which the insurer will monitor performance and compliance with the authorisation.
- Imposing governance and oversight requirements applicable to a short-term insurer when allowing an independent intermediary to collect premiums;
The insurer must be satisfied that the independent intermediary has the operational ability to perform the functions, before granting the authorisation. Insurers must monitor independent intermediaries ‘on an ongoing basis’ to ensure that the fair treatment and continuous satisfactory service to policyholders will not be compromised.
- Requiring that the independent intermediary collecting premiums must maintain a separate bank account for the premiums collected;
The intermediary receiving premiums must maintain a separate bank account and ensure that premiums are received by electronic means or in cash. If in cash, a proper detailed receipt must be given as specified in Regulation 4.2(4).
- Prohibiting the independent intermediary from using the premiums collected for any business or commercial purposes.
Collection of Long-term Insurance Premiums
Currently there are no existing requirements in the LTIA Regulations governing premium collection. Thus, the proposed amendments will have a significant impact on the Long-term insurance industry. The proposed amendments to the LTIA Regulations are very closely aligned with those proposed for the Short-term insurance industry.
What will this mean for Intermediaries
Existing premium collection arrangements between insurers and independent intermediaries may not be consistent with these proposed amendments and such arrangements will have to be restructured. The current premium collection arrangements will also need to be amended to provide for appropriate oversight over the functions performed by independent intermediaries.
The National Treasury proposed that the amendments take effect on 2 July 2018 which means the agreements and systems that are currently in place will need to be amended as a matter of urgency. Consideration will, however, be given to appropriate transitional arrangements necessary for some of the proposed amendments to mitigate the possible impact thereof.
The National Treasury welcomes comments on the draft Regulations. Comments to be submitted by the 23 April 2018.
Click on the links below to read the documents.
- Media Statement – Publication for comment of the draft amendments to the regulations to be made in terms of the Long-term Insurance Act of 1998 and Short-term Insurance Act of 1998
- Annexure A_Short-term Insurance Act, 1998: Proposed Amendments to the regulations made under Section 70
- Annexure C_Regulations under the Short-term Insurance Act, 1998_with tracked changes
- Annexure D_Regulations under the Long-term Insurance Act, 1998_with tracked changes
- Annexure E_Statement on the proposed amendments to the proposed amendment of the regulations made under the Long-term Insurance Act, 1998 and Short-term Insurance Act, 1998