21 December 2012

South Africa: Regulations Hamper Insurance Growth

Pressure on life assurers to comply with regulations is reaching the stage where it is becoming a barrier to business growth, Sanlam chief executive Johan van Zyl has warned.

Van Zyl was speaking at a recent forum to discuss trends in the insurance sector organised by law firm Norton Rose.

Van Zyl says while regulation and compliance are necessary and promote a healthy industry, there comes a point when red tape goes beyond being useful and becomes a barrier.

South African insurers are facing a raft of regulations that include raising their capital buffers under the Solvency and Assessment Management (SAM) regime to those contained in the treating customers fairly (TCF) policy to be legislated in 2013.

Moreover, financial advisers must write mandatory examinations by the Financial Services Board (FSB) or risk being prohibited from practicing.

The regulatory pressure facing insurers is similar to that confronting local banks as the government prepares to implement the twin-peaks regulatory policy that separates market conduct (to be monitored by the FSB) from prudential regulation under the Reserve Bank.

Sim Tshabalala, a deputy chief executive of Standard Bank, recently said nearly 100 new and additional policies and regulations have been proposed for the sector in the past two years.

Insurers and bankers say the regulatory pressure is increasing operational costs and diverting management's attention away from growing their business.

Van Zyl says overly burdensome compliance, regulation and corporate governance are costing the industry "hundreds of millions".

"Growing cost pressures, rising prices and claims, lack of trust in the insurance sector and operational risks are all specific issues that insurers have to contend with," says Van Zyl.

In his presentation, he questioned the appropriateness of the volume and complexity of the current regulatory framework, much of which he says now merely serves to create uncertainty, drive up capital requirements and complicate business planning.

Van Zyl also lists pension fund reforms, the proposed National Health Insurance and the Financial Services Law General Amendment Bill as other additional concerns for insurers.

"For instance, while the SAM requirements will improve risk management, it will also cost the industry millions to implement," says Van Zyl. Likewise the NHI reforms are set to shake up the sector in a big way," he says.

"Add to this the growing demand for simple, tailored products, the move from basic insurance to tangible benefits, increasing skills shortages and a proliferation of insurance options and you have a scenario which proves very challenging indeed," says Van Zyl.

He says in the near future, local insurers will also have to deal with changes to offshore tax rules, an overhaul of performance related pay structures, the move away from re-insurance and more government proposals which could radically change the insurance environment.

He warns that the local insurers are "playing catch up" with international firms.

"The majority of the regulations implemented overseas have been introduced over a period of 15 years," Van Zyl says.

"Local insurers are required to implement the same changes over a period of two years, which unsurprisingly, is proving nearly impossible," he adds.

Van Zyl says the prospects for the insurance sector are bright owing to growth in the black middle income market, coupled with opportunities for organic and acquisitive expansion in Africa.

He says a global shift towards emerging markets such as Africa is due to uncertain growth prospects and sovereign debt fears in the more developed economies.

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