1 the insurance amendment bill, 2003 presentation to the portfolio committee on finance 27 january...

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THE INSURANCE THE INSURANCE AMENDMENT BILL, 2003AMENDMENT BILL, 2003

PRESENTATION TO THE PORTFOLIO COMMITTEE ON PRESENTATION TO THE PORTFOLIO COMMITTEE ON FINANCE FINANCE

27 JANUARY 200327 JANUARY 2003

SAMANTHA ANDERSONSAMANTHA ANDERSON

DIRECTOR OF FINANCIAL DIRECTOR OF FINANCIAL MARKETSMARKETS

NATIONAL TREASURYNATIONAL TREASURY

http://www.gov.za/_vti_bin/shtml.dll/symbols/coatofarms.htm/map

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THE INSURANCE THE INSURANCE AMENDMENT BILL, 2003AMENDMENT BILL, 2003

OVERVIEWOVERVIEW

1.1. HISTORY OF INSURANCEHISTORY OF INSURANCE

2.2. ECONOMIC CONTEXT OF THE LONG-TERM AND ECONOMIC CONTEXT OF THE LONG-TERM AND SHORT-TERM INSURANCE INDUSTRIESSHORT-TERM INSURANCE INDUSTRIES

3.3. PROFILE OF SHORT-TERM INDUSTRYPROFILE OF SHORT-TERM INDUSTRY

4.4. PROFILE OF LONG-TERM INDUSTRYPROFILE OF LONG-TERM INDUSTRY

5.5. INVESTOR PROTECTIONINVESTOR PROTECTION


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HISTORY OF INSURANCE HISTORY OF INSURANCE PUBLIC VERSUS PRIVATE INSURANCEPUBLIC VERSUS PRIVATE INSURANCE MARITIME INSURANCE IS THE OLDEST FORM OF MARITIME INSURANCE IS THE OLDEST FORM OF

PRIVATE INSURANCEPRIVATE INSURANCE

1200 1435 1762 19071200 1435 1762 1907First insurance First code First mutual Car First insurance First code First mutual Car insuranceinsuranceagainst robbery, of insurance life insurance first offered against robbery, of insurance life insurance first offered in in plunder (theft) & laws - company formed America plunder (theft) & laws - company formed America (Ford(Fordcapture for ransom Barcelona in London started in capture for ransom Barcelona in London started in 1903)1903)

Earliest record Great Fire Concept of Mutual Earliest record Great Fire Concept of Mutual liabilityliabilityof life insurance - of London in “preferred risk” insurance of life insurance - of London in “preferred risk” insurance first first was for the lives 1666 & 1st fire intro’ed allowing offered for was for the lives 1666 & 1st fire intro’ed allowing offered for damagedamageof pregnant wives insurance company lower rates to propertyof pregnant wives insurance company lower rates to property 1430 1680 1835 19211430 1680 1835 1921


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HISTORY OF INSURANCE HISTORY OF INSURANCE

The first insurance legislation in South Africa was introduced in 1891 in the Cape. Prior to The first insurance legislation in South Africa was introduced in 1891 in the Cape. Prior to 1910 (the Union of SA) the Colonies of Natal and the Cape and the Boer Republics of the Free 1910 (the Union of SA) the Colonies of Natal and the Cape and the Boer Republics of the Free State and the Transvaal all had their own legislation.State and the Transvaal all had their own legislation.

First national insurance legislation was passed by Parliament in 1923First national insurance legislation was passed by Parliament in 1923

This legislation was amended on an annual basis until in 1998 the two new insurance acts were This legislation was amended on an annual basis until in 1998 the two new insurance acts were passed by Parliament. passed by Parliament.


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ECONOMIC CONTEXT OF THE ECONOMIC CONTEXT OF THE INSURANCE INDUSRTY IN SOUTH INSURANCE INDUSRTY IN SOUTH

AFRICAAFRICA

2.32.6

2.3 2.4 2.22.6

2.9 2.8

0

1

2

3

4

5

1994 1995 1996 1997 1998 1999 2000 2001

Percentage of GDP

CONTRIBUTION TO SOUTH AFRICA’S GDP (LONG AND SHORT)CONTRIBUTION TO SOUTH AFRICA’S GDP (LONG AND SHORT)

Source : FSBSource : FSB


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AFRICAAFRICA

CONTRIBUTION TO EMPLOYMENT (LONG AND SHORT)CONTRIBUTION TO EMPLOYMENT (LONG AND SHORT)

7143376111

64373 6178058476

788338038781051

40000

50000

60000

70000

80000

90000

1994 1995 1996 1997 1998 1999 2000 2001

31 December



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AFRICAAFRICAMARKET CAPITALISATION ON THE JSE (LONG AND SHORT)MARKET CAPITALISATION ON THE JSE (LONG AND SHORT)

R'billion

77.66

148.6127.99

99.91

136.06

100.8076.80

48.60

020406080

100120140160

1995 1996 1997 1998 1999 2000 2001 2002

30 JuneSource : FSBSource : FSB


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AFRICAAFRICAAVERAGE PERFORMANCE OF INSURANCE SECTOR AVERAGE PERFORMANCE OF INSURANCE SECTOR

JSE Insurance and All Share Indices

4000

5000

6000

7000

8000

9000

10000

11000

12000

J SE All Share Index

J SE Insurance Index

Source : BloombergsSource : Bloombergs


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PROFILE OF SHORT-TERM INSURANCE PROFILE OF SHORT-TERM INSURANCE INDUSTRYINDUSTRY

WHO IS WHO IN THE INDUSTRY?WHO IS WHO IN THE INDUSTRY?

In 2003 there are 88 registered S/T Insurers in South Africa and 7 In 2003 there are 88 registered S/T Insurers in South Africa and 7 reinsurers. Of those 88, 52 are members of SAIA. reinsurers. Of those 88, 52 are members of SAIA.

The number of S/T insurers is down from 107 in 1996. Since May The number of S/T insurers is down from 107 in 1996. Since May 1996, 19 companies have either closed or are in run-off. This is 1996, 19 companies have either closed or are in run-off. This is due to a substantial amount of consolidation in the industry over due to a substantial amount of consolidation in the industry over the past 6-7 years. the past 6-7 years.

PARTICIPATION BY FORIEGN INSURERS IN THE PARTICIPATION BY FORIEGN INSURERS IN THE LOCAL MARKETLOCAL MARKET

Out of the 88 S/T insurers in SA, 16 are either wholly or partly Out of the 88 S/T insurers in SA, 16 are either wholly or partly foreign owned.foreign owned. Largest foreign ownership is German closely Largest foreign ownership is German closely followed by UK ownershipfollowed by UK ownership. .


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1999* 2000* 2001%

Change%

ChangePrimary insurers R'm R'm R'm '99 to '00 '00 to '01Gross premiums 21 250 24 670 26 538 16.1 7.6IncomeNet premiums 16 205 16 345 17 313 0.9 5.9Investment income 4 631 4 859 3 692 4.9 -24.0Total 20 836 21 204 21 005 1.8 -0.9ExpenditureClaims paid 10 889 11 812 11 593 8.5 -1.9Management expenses 2 314 3 002 3 683 29.7 22.7Commission 1 798 1 636 1 641 -9.0 0.3Total 15 001 16 450 16 917 9.7 2.8Underwriting profits -4 -337 22 -8 325.0 106.5Underwriting profitsplus investment income 4 627 4 522 3 714 -2.3 -17.9Assets 39 122 37 729 34 538 -3.6 -8.5Liabilities 19 778 17 935 18 340 -9.3 2.3

*Actual figures for 1999 exclude the figures for Compass and Guardrisk and, for 2000,exclude the figures for Guardian Insurance, due to a change in the financial year-ends.

FINANCIAL SUMMARYFINANCIAL SUMMARY


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Total R26 310m

Property

29%

Transportation

3%

Engineering

3%

Liability

6%

Miscellaneous

15%

Motor

34%

Accident & health

5%

Guarantee

5%

ANALYSIS OF GROSS PREMIUMS PER POLICY TYPE

Source : FSB (2001)Source : FSB (2001)


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MOTOR VEHICLE COVERMOTOR VEHICLE COVER

34 % of gross premiums for the industry (largest source next 34 % of gross premiums for the industry (largest source next to property that accounts for 28%). to property that accounts for 28%).

The total number of cars licensed to drive on SA roads is 6 The total number of cars licensed to drive on SA roads is 6 million, of which only 2 million (33%) have some form of million, of which only 2 million (33%) have some form of insurance cover. In most developing countries 3rd Party insurance cover. In most developing countries 3rd Party cover is mandatory and where it is not, cover is usually as cover is mandatory and where it is not, cover is usually as high as 90% of motor vehicles on the roads. high as 90% of motor vehicles on the roads.

High accident rates and theft of motor vehicles in South High accident rates and theft of motor vehicles in South Africa have been a source of losses for S/T insurers. Africa have been a source of losses for S/T insurers. Hijacking is one of the main areas of concern for S/T insurers Hijacking is one of the main areas of concern for S/T insurers and SAIA is working with the SAPS and Department of Safety and SAIA is working with the SAPS and Department of Safety and Security in an effort to reduce car hijacking. and Security in an effort to reduce car hijacking.


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PROPERTY COVERPROPERTY COVER

28 % of gross premiums for the industry 28 % of gross premiums for the industry

Residential and CommercialResidential and Commercial

All houses and other forms of property in South Africa that are All houses and other forms of property in South Africa that are financed i.e. mortgage bond holders have mandatory cover. It financed i.e. mortgage bond holders have mandatory cover. It is not known what percentage of all houses or commercial is not known what percentage of all houses or commercial properties in South Africa have some form of cover.properties in South Africa have some form of cover.

In 2001, SAIA in conjunction with the Vehicle Security In 2001, SAIA in conjunction with the Vehicle Security Association (VESA), launched a project to establish standards Association (VESA), launched a project to establish standards for burglar bars and security gates. Testing of gates and bars for burglar bars and security gates. Testing of gates and bars has already commenced. In addition, SAIA is also involved in a has already commenced. In addition, SAIA is also involved in a similar initiative to establish minimum criteria for the similar initiative to establish minimum criteria for the installation of security systems (burglar alarms)installation of security systems (burglar alarms)


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EVENT YEAR LOSSSeptember 11th 2002 US$ 90 BnHurricane Andrew 1992 US$20 BnLos Angeles Earthquake 1994 US$16,2 BnCyclone Mirelle (Japan) 1991 US$ 7,15 BnStorm Daria (Europe) 1990 US$ 6 BnStorms Lothar and Martin(Europe)

1989 US$ 6 Bn

Hurricane Hugo 1989 US$ 5,8 BnAutumn Storms (Europe) 1987 US$ 4.5 Bn

TERRORISMTERRORISM


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TERRORISMTERRORISM

• Apart from the cover provided by SASRIA, Apart from the cover provided by SASRIA, there is there is very little cover for terrorist activity very little cover for terrorist activity offered in offered in South Africa.South Africa.

• The S/T industry is concerned about theirThe S/T industry is concerned about their inability to reinsure terrorist cover due to a inability to reinsure terrorist cover due to a

worldwide retraction of private worldwide retraction of private reinsurance for reinsurance for this. Governments this. Governments have had to guarantee have had to guarantee reinsurers in reinsurers in order for this cover to continue to order for this cover to continue to exist. exist. This may pose problems for South Africa in This may pose problems for South Africa in the future as foreign investors may be deterred the future as foreign investors may be deterred from investing in a jurisdiction that cannot offer from investing in a jurisdiction that cannot offer any terrorist cover. any terrorist cover.


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OTHER LARGE RISKSOTHER LARGE RISKS

• The local insurance market is not large The local insurance market is not large enough to enough to absorb risks such as SAA, Koeberg absorb risks such as SAA, Koeberg and other large and other large corporations such as mining corporations such as mining houses etc. houses etc.

FRAUDFRAUD

• The S/T insurance industry worldwide has The S/T insurance industry worldwide has seen seen an increase in fraudulent claims in the past an increase in fraudulent claims in the past 5 5 years. The industry has recently years. The industry has recently launched a fraud launched a fraud hotline to try and reduce the hotline to try and reduce the incidence of fraud. incidence of fraud.

The number of the fraudline is 0800 25 The number of the fraudline is 0800 25 26 27 26 27

or go to or go to www.tip-offs.comwww.tip-offs.com to give an to give an anonymous tipanonymous tip


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PROFILE OF THE LONG-TERM PROFILE OF THE LONG-TERM INSURANCE INDUSTRYINSURANCE INDUSTRY

WHO IS WHO IN THE INDUSTRY?WHO IS WHO IN THE INDUSTRY?

There are 67 registered L/T insurers and 6 registered L/T There are 67 registered L/T insurers and 6 registered L/T reinsurers. Of the 67 L/T insurers and 7 reinsurers, 36 are reinsurers. Of the 67 L/T insurers and 7 reinsurers, 36 are members of the LOA.members of the LOA.

The five largest companies are Old Mutual, Sanlam, Momentum, The five largest companies are Old Mutual, Sanlam, Momentum, Liberty and Investec. These five companies contribute 65.14% of Liberty and Investec. These five companies contribute 65.14% of the total income of the L/T insurance industry. the total income of the L/T insurance industry.

PARTICIPATION BY FORIEGN INSURERS IN THE PARTICIPATION BY FORIEGN INSURERS IN THE LOCAL MARKETLOCAL MARKET

L/T reinsurers are all foreign owned. Old Mutual is considered a L/T reinsurers are all foreign owned. Old Mutual is considered a foreign company since its primary listing moved to London. foreign company since its primary listing moved to London.


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Total Assets

35.33

22.1610.76

10.73

4.3

16.72Old Mutual

Sanlam

Momentum Goup

Liberty Group

Investec

Rest


• Old Mutual and Sanlam contributeOld Mutual and Sanlam contribute to more than half of South Africa’s to more than half of South Africa’s L/T insurance assetsL/T insurance assets


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Source : FSB (2001) Source : FSB (2001)

MARKET SHARE BY BUSINESS TYPEMARKET SHARE BY BUSINESS TYPE

Business Type Company % of marketshareLife Business Sanlam 24.83%Disability Business Old Mutual 38.53%Health Business Discovery 66.13%Fund business Investec 18.19%Sinking Fund Business Old Mutual 52.03%Assistance Business Safrican 28.90%

Company % MarketshareSwiss Re Life& Health 62.92Munich Re 12.94General & Cologne Re 11.79

ReinsuranceReinsurance


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FINANCIAL SUMMARYFINANCIAL SUMMARY

1999R’m

2000R’m

2001R’m

% Change‘99 to ‘00

% Change ‘00 to‘01

PRIMARY INSURERS INCOME

Net premiums 115 539 147 747 144 466 27.9 -2.2

Investment income 31 963 36 506 34 940 14.2 -4.3

Other income 2 049 7 714 11 532 276.5 49.5

Total 149 551 191 967 190 938 28.4 -0.5

Expenditure

Benefits 104 787 118 233 123 194 12.8 4.2

Management expenses

8 521 9 006 9 364 5.7 4.0

Commission 5 358 6 061 5 653 13.1 -6.7

Other expenditure 240 7 375 1 779 2 972.9 -75.9

Total 118 906 140 675 139 990 18.3 -0.5

Assets 645 110 709 382 744 398 10.0 4.9

Liabilities 525 731 601 326 664 031 14.4 10.4


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NET PREMIUMS BY CLASS OF POLICIES (2001)NET PREMIUMS BY CLASS OF POLICIES (2001)


43.3%

1.3%

0.5%

1.7%

44.8%

8.4%

43.3% Life business

1.3% Disability business

1.7% Health business

44.8% Fund business

8.4% Sinking fund business

0.5% Assistance business


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0.6%16.3%

9.6%

2.8%

5.4%

65.3%

0.6% Reversionary bonus

16.3% Smoothed bonus

2.8% With-profit annuity

5.4% Without-profit annuity

65.3% Market performance

9.6% Other

NET PREMIUMS BY TYPE OF BUSINESS (2001)NET PREMIUMS BY TYPE OF BUSINESS (2001)


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COMPOSITION OF BENEFITS PAID (2001)COMPOSITION OF BENEFITS PAID (2001)

2.6%

22.3%

7.6%

2.5%

8.6%

56.4%

2.6% Reversionary bonus

22.3% Smoothed bonus

2.5% With-profit annuity

8.6% Without-profit annuity

56.4% Market performance

7.6% Other


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INVESTOR PROTECTIONINVESTOR PROTECTION

743

837 869 903

1221

1057

1300

1691 17401684

0

200

400

600

800

1000

1200

1400

1997 1998 1999 2000 2001

Th

ou

san

ds

(Y1)

0

200

400

600

800

1000

1200

1400

1600

1800

2000

R'm

illi

on

s (Y

2)

Policies (Y1) Annual premiums (Y2)

POLICY SURRENDERS (L/T INSURANCE) POLICY SURRENDERS (L/T INSURANCE) (excl. pension fund and group life business)(excl. pension fund and group life business)

Surrenders as a percentage of new business:

1997 1998 1999 2000 2001% % % % %

Number of policies 26.9 25.1 25.2 16.4 24.9Annual premiums 16.6 17.2 24.3 21.5 24.8


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INVESTOR PROTECTIONINVESTOR PROTECTIONLAPSES (L/T INSURANCE)LAPSES (L/T INSURANCE)

(excl. pension fund and group life business)(excl. pension fund and group life business)

874

1032 994934

1433

1496

1710

1758

1723

1514

0

200

400

600

800

1000

1200

1400

1600

1997 1998 1999 2000 2001

Th

ou

san

ds (

Y1)

1350

1400

1450

1500

1550

1600

1650

1700

1750

1800

R'm

illi

on

s (

Y2)

Policies (Y1) Annual premiums (Y2)

Lapses as a percentage of new business:

1997 1998 1999 2000 2001% % % % %

Number of policies 31.6 30.9 28.8 16.9 29.3Annual premiums 23.6 22.6 25.3 21.3 22.3


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INVESTOR PROTECTIONINVESTOR PROTECTION LONG TERM INSURANCE OMBUDLONG TERM INSURANCE OMBUD

The Long-term Insurance Ombudsman functions under the auspices of a The Long-term Insurance Ombudsman functions under the auspices of a voluntary arrangement. voluntary arrangement.

The ombudsman only considers complaints where the insurer involved The ombudsman only considers complaints where the insurer involved has indicated that it considers itself bound by the rules of the industry has indicated that it considers itself bound by the rules of the industry arrangement. The ombudsman’s services are free. More than 75% of arrangement. The ombudsman’s services are free. More than 75% of registered life insurers subscribe to the voluntary Long-term registered life insurers subscribe to the voluntary Long-term Ombudsman’s Scheme. However, if a more appropriate measure is Ombudsman’s Scheme. However, if a more appropriate measure is applied, i.e. asset value, more than 98% subscribe to this scheme.applied, i.e. asset value, more than 98% subscribe to this scheme.

The number of new complaints submitted to the ombudsman increased The number of new complaints submitted to the ombudsman increased by 25% during 2001 to 5 257 compared to 4 210 in 2000.by 25% during 2001 to 5 257 compared to 4 210 in 2000.

The ombudsman identified three major areas of complaints, namely The ombudsman identified three major areas of complaints, namely communication/administration failure (944 cases), claims disallowed on communication/administration failure (944 cases), claims disallowed on account of policy terms not being met (945 cases) and alleged misselling account of policy terms not being met (945 cases) and alleged misselling

(460 cases). This pattern is similar to previous years(460 cases). This pattern is similar to previous years.


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INVESTOR PROTECTIONINVESTOR PROTECTION

11%

12%

6%

14%

57%

11% Misrepresentation/misselling

12% Lack of service/poor administration

6%Low maturity values

14% Repudiated claims

57% Other

L/T INSURANCE COMPLAINTS TO THE FSB : L/T INSURANCE COMPLAINTS TO THE FSB : 2000-20012000-2001

• 1071 complaints 1071 complaints were received 2000-01were received 2000-01• 85% of which were 85% of which were dealt with successfullydealt with successfully



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INVESTOR PROTECTIONINVESTOR PROTECTION S/T INSURANCE COMPLAINTS TO THE FSB : S/T INSURANCE COMPLAINTS TO THE FSB :

2000-20012000-2001

• 433 complaints 433 complaints were received 2000-01were received 2000-01• 82% of which were 82% of which were dealt with successfullydealt with successfully


9%

5%

42%44%

42% Claims disputes

5% Alleged Short-termInsurance Act contraventions

44% Other

9% Unauthorised premiumdeductions


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INVESTOR PROTECTIONINVESTOR PROTECTION SHORT-TERM INSURANCE OMBUDSHORT-TERM INSURANCE OMBUD

• As is the case in the L/T industry, the S/T Ombud is As is the case in the L/T industry, the S/T Ombud is entirely entirely funded by the industry. funded by the industry.

• An insurer is debited a fee in respect of each An insurer is debited a fee in respect of each complaint complaint received.received.

• Insurers have no right to appeal a ruling by the Insurers have no right to appeal a ruling by the Ombud.Ombud.

• In 2000-02 the Ombud received between 20 and 50 In 2000-02 the Ombud received between 20 and 50 complaints per day totally 5000 complaints for the complaints per day totally 5000 complaints for the year.year.

• The success rate is 31% of complaints and in 2000-The success rate is 31% of complaints and in 2000-01 a 01 a total amount of approx. R18 million was recovered total amount of approx. R18 million was recovered from from insurers.insurers.


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INVESTOR PROTECTIONINVESTOR PROTECTION • FAIS ACT, 2002FAIS ACT, 2002

• POLICY HOLDER PROTECTION RULESPOLICY HOLDER PROTECTION RULES

• CONSUMER EDUCATIONCONSUMER EDUCATION

• FINANCIAL SERVICES OMBUDS SCHEMES FINANCIAL SERVICES OMBUDS SCHEMES BILLBILL



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QUESTIONS?QUESTIONS?


1 the insurance amendment bill, 2003 presentation to the portfolio committee on finance 27 january...

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