Regulatory models to support financial

Regulatory models to support financial

inclusion

The experience of South Africa

1. The future of MI regulation

•

Traditionally regulators only focused on stability

•

What can you expect from regulation in the future?

–

More pro-active regulation

–

Focusing not only on stability but also market

development (complimentary)

–

Specific focus on extending services to the low-income

market (bulk of market)

–

Increasing focus on consumer protection and market

conduct

•

2. SA microinsurance market

2.1% (375,000) have life cover (excl. fu

neral insu ra nce**) 0.41% (74, 0 0 0) have credit life insu rance. 2.1% (382,000) have a r e tail hire purchase ac co unt 1.5% (262,000) have sho rt term insura nce

Informal cover: 60.9% (4.4m) have b

u

rial

society membership only

Formal c

o

ve

r: 39.1%

(2.8m) have a form of formal fu

neral c o ver 39.9% (1.1m) have cover th rou gh a fu neral pa rlou r/ u n dert aker Source : Eig h ty 20 calc ul ati o n s b ased o n F inS cope 2007 (u si n g weig hting s derived from t h e Cens us 200 1) * The de fi niti o n o f LSM u sed is ac cord ing to the 2005 algori thm ** Does n ot impl y t h at resp on dents in th is se gment do not have funer al in sura nce, b u t th at the y h ave a form al li fe p ol ic y

Key features: •Large

voluntary MI market dominated by funeral insurance (40% of LSM1-5 ) • Mostly informal (61%) • Potentially large unregi stered fun eral insurance mark et •

Low awareness and understanding of compulsory credit life

(conservative

estimate 1.75m)

•

Much innovation

, but limited success

•

No significant penetration

beyond funeral

3. Key regulatory themes

1.

Informal and illegal insurance markets: Allowing

formalisation while ensuring a level playing field

2.

Challenge of protecting and including the poor:

unintended impact of market conduct

regulation

3.

Reaction on specific abuses: triggering

regulatory action to compulsory insurance

4.

•

Market conduct regulation

raises cost of providing advice

•

Allows non-advice models but

require sufficient disclosure

•

Split market into high-income ad

vice vs. lo w-income tick-box (uncertainty on legal p o sition) • Conservative compliance

officers and uncertainty

due to conflicting interpretations impact

on business models

•

FAIS Ombud

extending impact of regulation

•

Many current low-income

agents cannot qualify

(Category A and revising requirements)

•

Limited success of

passive models and regulatory unce

rtainty about compliance with FAIS

FAIS FSC _Mark et oppor tunity LSM 1 LS M 1 0 Br oker /adv ice r each Con sum er p ro tect io n Ex pa nd access Con sum er p ro tect io n Ex pand access T ick-o f-b o x/adv ice-less reach

Low

income

4. Challenge of protecting and including the poor

Sou rce: C ham berl ain, Bester , et al (2006) ( G en esis An alyti cs )

High

income

•

Relatively high regulatory barriers

•

MI defined as low risk allowing special dispensation on underwriting and intermediation

•

Microinsurance product category proposed

-Benefits cap $5000

-Term: 12 months or less

-Risk-only products

-Life and non-life po

licies potent

ially underwritten by same entity

-Simple terms and conditions

•

Reduced entry and compliance

requirements in line with lower

risk

Dedicated microinsurance license (including mutuals)

–

Reduced market conduct

requirements for all players

–

Uncapped or increased commissions

•

Improved

enforcement and recourse

Proposed new regulatory framework

6. Suggested regulatory guidelines

Guideline 1:

Take active steps to develop a microinsurance

market

Guideline 2:

Adopt a policy on microinsurance as part of the

broader goal of financial inclusion

Guideline 3:

Define a microinsurance product category

Guideline 4:

Tailor regulation to the risk character of

microinsurance

Guideline 5:

Allow microinsurance underwriting by multiple

entities

Guideline 6:

Provide a path for formalisation

Guideline 7:

Create a flexible regime for the distribution of

microinsurance

Guideline 8:

Facilitate the active selling of microinsurance

Guideline 9:

Monitor market developments and respond

Guideline 10:

Utilise market capacity to support supervision in

Thank you!

The Centre for Financial Regulation and Inclusion (Cenfri)

South African context

•

Middle-income country

•

Population: 47m

•

Inequality: Gini: 58

•

Poverty: 36% < $2 pd and 18% < $1 pd

•

High insurance penetration: Premiums 16% of GDP

•

Bank account take-up: 63% (FinScope)

•

Transformation and empowerment as policy

objectives of government

–

Financial Sector Charter

–

•

Significant coverage of compulsory credit life insurance

•

Poor value proposition and consumer abuse

–

Limited awareness of cover

–

Consumer’s right to choose provider

–

High charges

–

Inability to claim on benefits

•

Business imperative:

–

Significant reputational damage with clients and regulator

–

Lost opportunity to ‘make market’

and create loyal customer base

•

Industry enquiry following media exposition of abuse

•

Force regulatory reaction and potential exclusion from new

MI framework

Triggering regulatory reaction

Regulat ory requir ements (degree t o which al lowed t o c arry risk ) under-writte n entity ce ll owner Potent ial mic ro-insu rer Full insu rer all risk in last inst ance carr ied by cell ca ptive insu rer all risk in last inst ance carr ied by under-writin g ins ure r Graduat ion bas ed on ab ili ty to ca rr y r isk Sa m e l ev el o f requirem ent s as f or form al ins urer, bu t so m e ri sk is c eded Lt d requirem ent s bas ed on m ore lt d risk a sso cia te d w ith prod. def . frie nd -ly soci ety Sou rce: C ham berl ain, Bester , et al (2008) ( G en esis An alyti cs )