Tier 2 Insurance Products – yesterday, today and tomorrow
By Peter Veal, Risk Consultant
Associated Compliance (Pty) Ltd
Although assistance insurance products (particularly funeral) have been around for a long time, the first we heard of ‘simplistic’ or ‘less-sophisticated’ general products, which the FSB now refers to as ‘tier 2’ products, was back in 2005 although the FAIS Regulator only addressed these for the first time in 2012.
Between 2005 and 2008, we saw the emergence of several collective industry initiatives to support the development of the low-income insurance and savings markets in South Africa. These initiatives were launched specifically to facilitate delivery on the objectives of the Financial Sector Charter. There were basically three types, being:
- Zimele products (life covers);
- Mzansi products (household contents and domestic buildings); and
- Fundisa products (savings for tertiary education)
By the beginning of 2012, although anticipated sales volumes had not materialized other than in respect of funeral policies, there was nevertheless a continued determination to ensure that these products would be made available throughout South Africa. One of the many challenges faced by participating insurers was the regulatory framework in place at the time which demanded that ‘point of sale’ representatives had to meet certain regulatory standards. The deadline to pass the RE 5 examinations was 30 June 2012.
There had been a considerable amount of ‘talk’ at the time concerning the introduction of microinsurance which would introduce a new FAIS license category with substantially relaxed regulatory requirements, but nothing had transpired. Consequently, ASISA and SAIA called an urgent meeting with the FSB to attempt to obtain some form of dispensation for the representatives that had little chance of passing the required regulatory examinations.
There were other industry bodies at the time with similar concerns, although in their case the issue was not the limited education of representatives, but the high regulatory examination failure rate. One such body represented finance and insurance (F&I) practitioners in the motor sector, and joined ASISA and SAIA in the meeting with the FSB.
The FSB responded on 6th June 2012 by publishing Board Notice 102 of 2012 which exempted representatives from the regulatory exams where those representatives dealt solely in personal lines products that require no or limited underwriting. This satisfied the requirements of ASISA and SAIA, but the motor industry was divided in its reaction.
The larger motor groups continued to demand that its F&Is meet the fit and proper requirements and ignored the exemption. Their primary reasons were:
1. The ‘no or limited underwriting’ condition could not be entirely complied with;
2. The full license subcategories allowed dealerships to keep their options open regarding new products that they might wish to introduce;
3. Some manufacturers (specifically BMW and Mercedes) offered good deals on motor comprehensive insurance and F&Is were expected to give advice on these products; and
4. Many insurance policies were sold to juristic policyholders which meant that they fell under the definition of commercial lines insurance which was prohibited in terms of the exemption.
On the other hand, many smaller independent motor dealerships took advantage of the exemption, and despite the failings mentioned above, still enjoy its benefits today. Sadly, there is suspicion that the above prohibitions are being contravened by some F&Is, although no sanctions have ever been imposed by the FSB.
The latest fit and proper proposal includes a definition and list of Tier 2 products. This will be welcomed by many practitioners as there are substantially relaxed regulatory requirements, such as exemption from regulatory examinations, class of business training and CPD.
Moreover, although the definition of ‘Tier 2 Products’ includes familiar low cost insurance covers such as assistance benefits, friendly societies and long and short term deposits, there are three specific products which are now clearly identified. These are:
- Long-term Insurance sub-category B1-A;
- Long-term Insurance sub-category B2-A; and
- Short-term Insurance Personal Lines A1;
On first glance, the new long-term products are easy to comprehend. B1-A is the same as B1 except that the products require no or limited underwriting. Similarly, B2-A is the same as B2 except that the premiums to be invested must be managed by the product supplier with no option by the policyholder to request a change or amendment to that portfolio.
The problem is that we don’t know what is meant by ’limited underwriting’. In the Board notice of 2012, which is repealed in the FSB’s proposal, limited underwriting had a clear definition. The only requirements were:
- the furnishing of a health declaration answering no more than eight questions; and
- the policyholder or life assured must undergo an HIV test.
It appears that both these prerequisites have fallen away. It is doubtful, however, that the FSB will leave it at the discretion of an underwriter to decide what is meant by ‘limited’ so I expect some guidance from them before long.
The short-term products that fall into this category can be clearly identified. They must fall within the definition of personal lines, require no underwriting and be subject to very few exclusions, a list of which is provided in the FSB’s proposal.
Sadly, the motor industry has not been fully accommodated in that many vehicles are registered in company names so a practitioner only registered for Tier 2 products will not be able to accommodate all customers.
Let’s hope that the regulator responds favourably this time and makes appropriate changes to the proposal before including it in our insurance laws.
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