Gareth Stokes examines the rise and fall of South Africa's Intermediary Guarantee Facility
South Africa's short-term (or general) insurance marketplace is dominated by traditional insurers that distribute their policies via intermediaries. In time, a unique arrangement has evolved involving intermediaries -- and more recently premium collection agencies -- collecting insurance premiums from policyholders on behalf of the insurer. The history of premium collection provides unique insights into the interplay between regulators and insurance market operators -- and the rise and fall of institutions as stakeholders seek to mitigate the risks inherent in day-to-day insurance operations.
The law governing premium collection was introduced under section 20 bis of the Insurance Act of 1943, in around 1966. It required that intermediaries who collected premium on behalf of insurers be duly appointed by the insurer to remit payments; furnish security in favour of the South African Insurance Association (on behalf of the insurance companies); and pay over premium on expiry of 60 days (subsequently reduced to 15 days) after the end of the month during which the premium was received. Section 20 bis was amended many times through the years, before
being replaced by section 45 of the Short-term Insurance Act of 1998.
The legislated holding period meant that collecting intermediaries held significant amounts of insurer capital. This risk was partly offset by the legal requirement that intermediaries take out a guarantee totalling 30% of their annual premium collections. That guarantee had to be issued by an insurance company created by the insurance industry, or a registered commercial bank, or the Land Bank. Local insurers duly established and licensed an insurer called the Intermediaries Guarantee Facility (IGF) to provide cost-effective guarantees to the premium-collecting intermediary market. IGF was owned by about 21 local insurers who operated it on a not-for-profit basis, with 100% of its exposure reinsured among the participating insurers. The maximum guarantee was capped at ZAR20m (approx. £1.1m) and raised as appropriate through time, eventually reaching a cap of ZAR100m.
TEST CASE
"There was a long-held misconception that the IGF guarantees protected consumers, but it had no consumer aspect at all -- its primary function was to protect the insurers' premium"
The legal position of premium ownership was tested by the courts in a matter brought by the joint liquidators of AA Mutual Insurance Association against Price Forbes (an insurance intermediary) and Premier Milling Company (the policyholder) in the late 1980s. Premier had paid the insurance premium due on a contract works and public liability insurance policy to Price Forbes, just days before AA Mutual's short-term insurance business was placed under final liquidation. The liquidators petitioned the courts to compel the intermediary to transfer this premium to the insurer as a matter of law. The matter, subsequently upheld on appeal, was decided in favour of the liquidators.
Against this backdrop, IGF can be viewed as a market-driven response to the question: 'What happens if an intermediary goes belly up while holding an insurer's premium?' Barry Scott, ex-CEO at the South African Insurance Association, says the IGF was born of a need to control or regulate the premium-collection environment. The IGF performed without major incident for decades, with only one significant guarantee claim of about ZAR8m in the late 1990s. "There was a long-held misconception that the IGF guarantees protected consumers, but it had no consumer aspect at all -- its primary function was to protect the insurers' premium," says Mr Scott. This fact did not escape South Africa's prudential and market conduct regulators and forms the basis for how the IGF story ends.
The premium collection environment has seen major changes in recent years. The first is that intermediaries outgrew the guarantee facilities that the IGF was capable of offering. Mr Scott estimates that some 40 intermediaries were collecting premiums that required guarantees in excess of the IGF's ZAR100m cap; a cap that could not be further increased due to capacity constraints. The second is the arrival of specialist premium collection agencies that were soon facilitating premium collections for insurers on behalf of hundreds of intermediary clients.
Around 2016, the regulators started questioning the need for section 45. The Financial Sector Conduct Authority felt that premium collection was an "insurer financial soundness" issue, best dealt with under the Solvency Assessment and Management (SAM) regime (the local equivalent of European Solvency II). Section 45 was subsequently repealed as part of the shift to a 'twin peaks' regulatory framework. Another important development was the inability of the IGF, a licensed insurer, to meet SAM prudential requirements. After initially granting the IGF an exemption from the SAM financial soundness requirements, the regulator decided to pull the plug and IGF guarantees were terminated from 31 March 2019 in a managed process. There is no longer a legislated requirement for a credit intermediary to hold a guarantee -- instead, the authorities expect insurers and the market to manage the relevant credit risk -- insurers must take control of their capital, cash and data. Intermediaries have been negotiating the premium-collection issue, including any requirements for capital guarantees, with each of their insurance carriers.
"The industry has been self-regulating to find a solution to the operational and legislative requirements of the premium-collection environment for a number of years," says Mr Scott, who presently heads up Fulcrum Collections. "Fulcrum grew because the industry recognised us as a better solution than having thousands of intermediaries collecting and holding premium." He adds that efficient premium collection has become a volume business that requires heavy investment in people, systems and technology.
Gareth Stokes is managing director of Stokes Media in Johannesburg, South Africa