Chapter 3- South African Specific Products (Micro-Insurance)

Question 1

Define Micro-insurance? (4)

Answer 1

• International association of insurance supervisors (IAIS) definition:
insurance that is accessed by low-income populations,
provided by a variety of entities,
but run in accordance with generally accepted insurance practices

• Low premiums and low sum assured

• Usually risk benefits as opposed to savings benefits
o life business and certain classes of non-life business

• Viewed as a mechanism to help alleviate poverty and promote financial inclusion

Question 2

Describe the background to micro-insurance regulation? (7)

Answer 2

In August 2011 regulatory framework developed by the national treasury including the following objectives:

• Formalise currently informal providers 
o promote regulated and well-capitalised insurers
o small business development

• Lower barriers to entry  broader participation  support poverty alleviation:
o Economic growth and job creation
o Increased access to protection against losses

• Enhance consumer protection in this market segment through prudential regulation
• Ensure effective supervision and enforcement, thereby supporting the integrity of the insurance market as a whole

The regulatory approach set out in the national treasury micro-insurance policy was used to updated:

• Micro-insurance provisions in the Insurance Act 2017
• Micro-insurance prudential standards
• Amended policyholder protection rules (long-term insurance Act)

Question 3

Describe micro-insurance products in South Africa? (4)

Answer 3

• Well-developed types:
o Funeral cover
o Credit life policies on consumer goods and micro-loans

• Not well-developed types:
o Health micro-insurance – demarcation between health insurance policies and medical schemes in RSA has limited activity here
o Non-life insurance (e.g. agricultural insurance)

Question 4

Describe the service providers of micro-insurance in South Africa under various Acts. (3, 10)

Answer 4

•	Co-operatives Act:
o	Burial societies offer non-guaranteed funeral benefits to their members and their dependants
o	Benefit size limited to R20 000.
o	Maximum 2500 members
o      No regulated by PA and FSCA

• Friendly Societies Act
o Friendly societies offer guaranteed funeral benefits up to a maximum of R15 000.
o Sometimes need annual actuarial valuation & actuarial scrutiny of benefit/ premium changes
o In future may be required to operate under co-operate Act or Insurance Act 2017

• Insurance Act 2017
o Max R100 000 for each life assured for life micro-insurance and accident and health non-life insurance (GOM)
o Max R300 000 for the policy for non-life micro-insurance excluding accident and health’ (GOM)
o Max R100 000 per life for funeral business under a life licence (GOI)

Question 5

Describe the amendment to the policyholder protection rules in LTIA for micro-insurers? (6)

Answer 5

• The term of micro-insurance products are limited to 12 months (not applicable to funeral polices)
• Policy benefits must be defined by a sum assured (rather indemnity)
• Waiting periods may not exceed one quarter of the term of the policy
• There are limitations on exclusions that may be permitted (Exclusions for pre-existing conditions are not permitted)
• Valid claims must be received within two days of full documentation

Micro-insurance business is less restricted by commission regulations and lighter FAIS Act requirements.

Question 6

Describe the responsibility of the head of actuarial function according to the governance and operational standards for micro-insurers? (8)

Answer 6

• Expressing an opinion on the adequacy of the calculations for the micro-insurers technical reserves and minimum solvency capital requirements including:
o Appropriate of methodologies and underlying used and assumptions made
o Sufficiency of the quality of the data used in the actuarial calculations
o Best estimates and associated assumptions against experience when evaluating technical provisions
o Accuracy of the calculations

• Evaluating and providing advice to the board of directors, senior management and the control function on
o the actuarial soundness of product development and design,
o including the terms and conditions and premiums,
o insurance obligations and other values
o and the estimation of capital required to underwrite products

Question 7

Describe the prudential standards regarding the valuation of assets, liabilities and capital requirements for micro-insurers?

Answer 7

Assets are restricted to cash and cash equivalent (with possible exemption) and must be valued at market value (market consistent valuation)

Technical provisions are calculated using a formula based approach comprising of the following:
• Unearned premium reserve (UPR)
• Outstanding claims reserve (OCR)
• Incurred but not reported reserve (IBNR)
• Unexpired risk provisions (URP)

Minimum solvency capital requirement is the maximum of R4 million or 15% of net written premiums in the prior 12 months

Question 8

Describe the regulatory reporting for micro-insurance required under different Acts? (3)

Answer 8

Insurance Act 2017
Micro-insurers are required to submit regulatory reports to the prudential author and financial services conduct authority

Friendly society Act
Business defined in the rules of the friendly society requiring actuarial scrutiny or required by registrar

Co-operative Act
Micro-insurance written under the co-operative Act does not have any regulated actuarial involvement.

Question 9

Describe the key risks involved in writing micro-insurance products? (6)

Answer 9

• Volume and Expense risk:
o Small contract sizes  must be sold in large volumes to recoup costs of distribution and administration
o Expenses also make up a large proportion of the premiums and needs to be monitored

• Persistency risk:
o Lower income market  premiums harder to afford (especially in poor economic conditions)
o  Mitigation: allow certain number of missed premiums, arrange automatic premium deduction from wages

• Underwriting risk increased by:
o (1) anti-selection risk lack of underwriting (medical & financial)
o (2) Business mix list lack of differentiation by age or gender
o (3) Additional lives (family members) covered
o  Mitigation: revise (reviewable) premium rates, the sum assureds are small which limits concentration risk, essential risk is appropriately priced

• Operational /Fraud risk:
o Benefits are paid within a few days/hours after receipt of claim form and death certificate
o Claims amounts are small  not cost effective to investigate all
o Limited info on additional lives covered
o  Mitigate: focus on syndicated fraud where accumulated losses are significant and using analytical techniques for proactive fraud detection
o The volume of business administered may result in failures of internal controls

• Regulatory risk:
o High costs of meeting the requirements are difficult to cover in the low premium environment
o BUT new micro-insurance regulation Insurance Act allows for lighter regulatory requirements

• Marketing and reputational risk
o High lapse rates combined with waiting period means that policyholder’s may be paying premiums for limited cover
o Relatively low financial sophistication which results in additional care in communicating benefits and restriction