South Africa: Publication of proposed amendments to the Policyholder Protection Rules

The Financial Sector Conduct Authority has published for comment draft amendments to the Policyholder Protection Rules. The below article highlights the most notable amendments.

On 30 July 2021, the Financial Sector Conduct Authority (“FSCA”), published for comment draft amendments to the Policyholder Protection Rules (“Draft Amendments”) prescribed under Section 62 of the Long-term Insurance Act, 1998 (“LTIA PPRs”) and Section 55 of the Short-term Insurance Act, 1998 (“STIA PPRs”).

The Draft Amendments are a culmination of a number of regulatory and supervisory projects undertaken by the FSCA since the promulgation of the Policyholder Protection Rules (“PPR”) in 2017. According to the FSCA, some of the factors that necessitated the Draft Amendments are (amongst others):

• To expand on existing requirements to further mitigate conduct risks, including in particular risks identified in relation to lack of governance of product design, premium review practices and the design and disclosure of loyalty benefits;
• to address gaps in the PPR that allow for regulatory arbitrage specifically in relation to life insurance policies underwritten under the funeral and risk classes of life insurance business;
• to create alignment between the STIA PPRs and the LTIA PPRs
• to correct minor drafting errors and clarify areas of interpretational inconsistency; and
• to incorporate proposals emanating from policy developments.

Of import, the Draft Amendments propose (amongst others) the following notable amendments to the STIA PPRs:

• an amendment to the definition of ‘policy’ such that the STIA PPRs will apply to both personal lines and commercial lines policies, regardless of the turnover of such business with the result that the STIA PPR will apply to all commercial lines policies;
• aligning the STIA PPRs with the LTIA PPRs by including section 51 (voidness of certain provisions of agreements relating to short-term policies), section 53 (misrepresentation and failure to disclose material information) and section 54 (validity of contracts) of the STIA into the STIA PPRs; and
• amending Rule 6.2 of the PPR which deals with Determining Premiums and Excesses to clarify in the wording that no administration fees are allowed – before or after the inception of a policy.

The noteworthy changes contained in the Draft Amendments which apply to both the STIA PPRs and the LTIA PPRs include (amongst other things) the following proposals:

• amendments to Rule 1.4 of the PPR, which requires insurers to have policies and procedures to achieve the fair treatment of policyholders. In terms of the Draft Amendments, insurers will be required to have, in addition to the said policies, the necessary systems which play an integral part in all steps of the product lifecycle.
• amendments to the principles related to product design. The Draft Amendments require that the board of directors of an insurer be responsible for ensuring the appropriateness of all products that are introduced in the market and will require an insurer to establish a board-approved product design framework, which framework must contain the elements provided for in the proposed amendments to Rule 2, including an appropriate level of involvement of the compliance function and the testing of products during the design stage.
• deletion of the 12-month contractual term limitation applicable to microinsurance policies.
• additions to the disclosure requirements applicable before a policy is entered into, in relation to bundled products.
• amendments expanding on the requirements for a claims management framework to provide for (amongst others) processes and procedures to ensure a reasonable time is allowed for policyholders to institute claims, and appropriate and prominent disclosure of any time limitation for the institution of a claim.
• inclusion of a new Rule 19.5 (STIA PPRs) and Rule 20.5 (LTIA PPRs) in respect of the termination of policies that include loyalty benefits. The Draft Amendments propose that where there is a loyalty benefit attached to a policy, and the policy terminates due to the death of the policyholder before the due date when the accrued value of the loyalty benefit is to pay out to that policyholder, any accumulated value must be paid to the estate of the policyholder or a nominated beneficiary.

It is envisaged that the Draft Amendments may require certain structural variations to products, processes, and systems of insurers and a transitional period is being proposed to allow insurers sufficient time to plan and implement the changes in their businesses in order to ensure compliance with the enhanced requirements. The FSCA has requested specific comments from industry stakeholders on the proposed transitional period.

Interested parties are invited to submit comments on the proposed amendments using the comments template available on the FSCA website, on or before 10 September 2021 to FSCA.RFDStandards@fsca.co.za.

Please click here for a copy of:

1. FSCA Communication 14 Of 2021 (INS);
2. Statement Supporting the Proposed Amendments to The Policyholder Protection Rules made under the Long-Term Insurance Act, 1998 and the Short-Term Insurance Act, 1998;
3. Notice Regarding the Publication of Draft Amendments to the Policyholder Protection Rules prescribed under section 55 of the Short-Term Insurance Act, 1998;
4. Notice Regarding the Publication of Draft Amendments to the Policyholder Protection Rules prescribed under section 62 of the Long-term Insurance Act, 1998; and
5. The comment template.