1 ASSISTANCE BUSINESS IN THE RSA PRESENTATION to PCOF on 8 Augustus 2003 by A Swanepoel

2 ASSISTANCE BUSINESS IN THE RSA Background Who are the stakeholders? Characteristics of the market Problem areas and risks The way forward? Questions

3 ASSISTANCE BUSINESS IN THE RSA Background Cultural issue of importance Provide for funeral plus ancillary services Honesty, trust, caring and social responsibility important in burial societies Very often the first step into financial services Contributors are mostly from non-white sector

4 ASSISTANCE BUSINESS IN THE RSA Principles to take into consideration Is this a market that needs more than the normal protection? Market conduct rules and supervision the main issue There are prudential issues with small insurers Cost-benefit of supervision? Non-systemic

5 ASSISTANCE BUSINESS IN THE RSA Who are the stakeholders?

6 ASSISTANCE BUSINESS IN THE RSA Structure of market

7 ASSISTANCE BUSINESS IN THE RSA Distribution channels

8 ASSISTANCE BUSINESS IN THE RSA Long-term insurers 37 insurers registered for assistance business 32 limited to R limited to 5000/3000/2000/1000(2) Total premiums R690 million (plus extra?) That is 0,5% of total premium income of life insurers

9 ASSISTANCE BUSINESS IN THE RSA Total contributions R??? (my estimate R2,5 billion based on 55/15 relationship) plus the “extra” volume Friendly societies Total contributions R32 mil (for all types of benefits) Total benefits: funeral R14m, death R4m

10 ASSISTANCE BUSINESS IN THE RSA Burial societies Approx primary burial societies Covering 3 million members Between 10 to 200 members per society, mostly women Contributions estimated at R2 billion

11 ASSISTANCE BUSINESS IN THE RSA Characteristics of the market Buyers are unsophisticated in general Market is in the hands of the administrators and the intermediaries Very often a “long food chain” /fat in distribution channel No commission limitations on (assistance) insurance policies

12 ASSISTANCE BUSINESS IN THE RSA Mostly done via group schemes/typical no underwriting/only risk, no savings element Only two types of institutions who can legitimately underwrite namely insurers and friendly societies (burial societies) Demarcation between burial societies and friendly societies grey Death benefits normally paid within 48 hours Benefits often paid in kind but option to receive cash remains (sec 53) Not all cover sold under the banner of assistance business

13 ASSISTANCE BUSINESS IN THE RSA Problem areas and risks Lack of knowledge of products and financial disciplines Excessive commission paid Often no security that benefits will be paid Policies cancelled after long periods of contributions

14 ASSISTANCE BUSINESS IN THE RSA Policyholders not in contact with underwriter/long “food chain” On-off underwriting/difficult to trace schemes on cancellation Illegal operators (Fraud/disappear/no contractual rights/weak enforcement Policyholder misled regarding status of operator Cash flow underwriting until problems arise Only portion of premiums paid to underwriter VAT and other tax evasions Double underwriting

15 ASSISTANCE BUSINESS IN THE RSA Integrity of many intermediaries problematic Do not pay premiums to next level or administrator/underwriter Do not pay claims to beneficiaries or withhold portion Little knowledge of legalities involved Overselling, too may policies taken out Undertakers enforce contractual agreement that they only may conduct funeral Exploitation regarding costs of coffins and services

16 ASSISTANCE BUSINESS IN THE RSA Fraudulent and excessive claims Organisational, record keeping and accounting problems Difficult for small insurers to comply with Act Weak enforcement system in Courts/3xfines of R600 Lack of compliance with PPR and other sections of the Insurance Act

17 ASSISTANCE BUSINESS IN THE RSA Developments thus far LOA’s Assistance Business Standing Committee FSB’s Working Group on assistance business Study on Burial Societies (Thomson and Posel) National Cooperative Association of South Africa and the National Committee on Burial Societies FSB’s consumer education campaign (still much to do) FAIS Act There is a general agreement and a will to do something now

18 ASSISTANCE BUSINESS IN THE RSA The way forward AREAPOSSIBLE ACTIONS A.Formal market: insurers 1.FAIS Act will bring conduct of Administrators in line 2.Intermediaries/funeral parlours will be brought into the FAIS net 3.More controlled movement of schemes 4.Disciplinary actions/removal from industry 5.Better disclosure now obligatory 6.Stricter enforcement of Ins. Act

19 ASSISTANCE BUSINESS IN THE RSA The way forward AREAPOSSIBLE ACTIONS B.Semi-formal market : friendly and burial societies 1.Self-regulation (stokvel approach)for small mutuals 2.Revise FS Act and enforcement 3.Education on rights and responsibilities

20 ASSISTANCE BUSINESS IN THE RSA The way forward AREAPOSSIBLE ACTIONS C. Illegal operators1.Education, education, education 2.Name and shame 3.Quick and cost-effective enforcement with penalties 4.Rather bring them into the net than penalise them

21 ASSISTANCE BUSINESS IN THE RSA Further work More research necessary Making group schemes more permanent (cost vs security) Beef up enforcement and penalties FIC Amendment Bill/Enforcement Committee Consumer education Central funeral fund(s), underwritten by insurers, cut out high cost of distribution? Credit Life much the same problems Enhance effectiveness of dispute resolution mechanisms