industry
30 March 2006
The National Treasury today released a discussion paper outlining far
reaching proposals designed to improve the cost and fairness of contractual
savings products offered by the South African life insurance industry such as
retirement annuity funds and endowment policies.
Although there is currently broader processes of retirement reform underway,
certain issues that are particular to the retirement savings products offered
by the insurance sector require urgent attention.
The discussion paper follows the signing of a statement of intent between
the Minister of Finance and the long term insurance industry in December 2005
and is the outcome of extensive consultation with representatives from the
insurance and intermediary industries. Though the statement of intent primarily
addresses issues of poor benefits in the event of early termination of
contributions, the agreement also included a commitment to examine other issues
impacting on costs including commission structures, disclosure standards and
consumer education.
The key recommendations of the National Treasury and Financial Services
Board task team include:
Efforts to lower costs and improve effective competition, such as:
* reducing barriers to effective competition, to be informed by a joint
National Treasury, Financial Services Board and Competition Commission
investigation of the insurance sector and other service providers in the
long-term contractual savings market; and
* improving disclosure requirements, consumer education and product
standards.
Regulatory changes to improve governance of retirement annuity funds, such
as:
* aligning disclosure requirements under the Pension Funds Act and the
Long-Term Insurance Act;
* issuing a code of governance for trustees to clarify the fiduciary duties of
the trustees of retirement annuity funds; and
* issuing regulations and model rules on matters which must be included and
addressed in all retirement annuity fund rules.
Measures to better align the incentive structure of intermediaries such as
insurance brokers and financial advisors with the interests of the client,
including:
* requiring that intermediaries must declare themselves to prospective
policyholders as either an insurer agent or an independent financial advisor,
the distinction being that insurer agents must be remunerated by the insurer
only and independent financial advisors must be remunerated by the customer
only; and
* requiring that only independent financial advisors may describe themselves as
âadvisorsâ or âproviding adviceâ; and
* improving the quality of investment advice through higher standards of
intermediary education and implementing a system of accreditation.
Regulating the level and structure of sales commission subject to certain
conditions, namely:
* allowing only a limited proportion of the commission to be paid upfront
with the balance payable over the term of the policy, to provide an incentive
to the sales agent to ensure that the policy is appropriate to the needs of the
customer and to service the policyholder throughout the term of the
policy;
* making the payment of ongoing commission conditional on the provision of
ongoing support to the policyholder;
* giving the policyholder the right to re-direct ongoing commission to an
alternative agent or discontinue it completely;
* paying commission on contractual contribution increases only as and when the
increases occur, conditional on ongoing support to the policyholder;
* making allowance for transitional financing arrangements for small and
emerging intermediaries so as to continue to support access to savings products
by low income investors; and
* applying the principles of commission regulations in a consistent manner to
both risk products and savings products and determining a consistent approach
for single premium products.
Measures to ensure an improved âsafety netâ for investors in cases where the
investor reduces or discontinues contributions to a contractual savings
product, including:
* regulations to give effect to the agreement contained in the statement of
intent on minimum early termination values applicable to existing policies and
policies terminated after 1 January 2001; and
* regulations covering enhanced minimum early termination values to be applied
to new policies from a date of implementation to be specified in such
regulations that provide for a graduated set of minimum values and an
appropriate sharing of the risk of early termination between the policyholder,
insurer and intermediary, aligning as far as possible the interests of all
parties.
It is anticipated that these measures will result in a significant
improvement in consumer perceptions of the value offered by the savings
products of the long term insurance industry particularly with respect to the
burden of cost in the event of early termination.
The discussion paper contains recommendations on principles of reform and
high level proposals with a view to eliciting comments that will assist in
crafting detailed proposals and revised regulations. The process going forward
will entail further consultation with all stakeholders.
The closing date for comment is 15 May 2006.
Enquires contact:
Thoraya Pandy
Cell: 082 416 8416
Issued by: National Treasury
30 March 2006
