Microinsurers can provide waiting periods similar to those imposed by traditional insurers, following the publication of an exemption notice by the FSCA this week.
On 4 March, the FSCA published INS Notice 3 of 2024, which provides microinsurers with a general exemption from Rule 2A.6.1 of the Long-term Policyholder Protection Rules (PPRs).
The exemption from Rule 2A.6.1 is subject to conditions.
The Authority proposed the exemption in October last year, when it published Communication 26 of 2023 (INS), together with the draft exemption notice. Input from stakeholders and the public was invited until 14 November 2023.
Read: FSCA proposes to align waiting periods for microinsurers and traditional insurers
The FSCA said it received comments from four industry stakeholders, all of which supported the contents of the draft exemption notice.
Rule 2A.6.1 of the PPRs for long-term insurers states:
“A microinsurance policy or a funeral policy may not impose a waiting period exceeding the shorter of one quarter of the term of the policy or six months in respect of policy benefits payable on the happening of a death, disability, or health event resulting from natural causes.”
Rule 2A.4.1 states that the contract term of a microinsurance policy may not exceed 12 months.
When Rule 2A.6.1 is read with Rule 2A.4.1, Rule 2A.6.1 essentially means that a microinsurance policy cannot impose a waiting period of longer than three months for a death, disability, or health event resulting from natural causes.
Traditional insurers that offer funeral policies can impose a waiting period of six months.
Reasons for the exemption
The FSCA said the waiting period restriction puts microinsurers at a competitive disadvantage because their products are subject to higher rates of adverse selection. As a result, their premiums may be higher than those of traditional insurers in respect of the same product type. Waiting periods are one of the few risk-management tools insurers can use to manage anti-selection risk, which is prevalent in the funeral market.
A shorter waiting period for the same benefit could result in a microinsurer inheriting or attracting higher risks, which may have been deterred by including longer waiting periods on a comparable funeral product offered by other life insurers.
The exemption allows microinsurers to provide similar waiting periods to traditional insurers, which aligns with the policy proposal in National Treasury’s Microinsurance Regulatory Framework policy document.
“The exemption will align the regulatory framework with the intended policy objectives of promoting market development, competition, and financial inclusion by enabling microinsurers to provide affordable and accessible policies to vulnerable and low-income consumers. The exemption will level the playing field between traditional insurers and microinsurers, promote market development within the microinsurance sector, and deepen financial inclusion through competitive pricing,” the FSCA said.
The exemption is an interim solution pending the new conduct framework under the Conduct of Financial Institutions (COFI) Bill. Longer-term solutions will be considered as part of the process of developing a regulatory framework under COFI and transitioning the existing sector laws, such as the PPRs, to the COFI framework, the Authority said.
Conditions of the exemption
The exemption is subject to a microinsurer adhering to the conditions set out in paragraph 2(2) of INS Notice 3 of 2024, which are:
- A microinsurer may not impose a waiting period of more than six months in respect of policy benefits payable on the happening of a death, disability, or health event resulting from natural causes.
- A microinsurer may not impose a further or additional waiting period in relation to policy benefits under a policy that is subject to the exemption, where the policy was entered before the date on which the exemption takes effect.
- The microinsurance policy provided under the exemption must have a term of 12 months.
The FSCA said one industry commentator sought clarity on whether sub-paragraph (c) means that an insurer must continue to provide insurance cover, even if it does not receive premiums until the policy contract reaches a 12-month period.
The Authority said sub-paragraph (c) must be read in the context of the Notice as a whole. The 12-month period is the contractual period contemplated when a microinsurer imposes the waiting period as allowed for in terms of the exemption. It does not mean the insurer must remain on risk if no premiums are received. Where a policyholder does not meet its obligations to pay the premium, the insurer is not required to continue providing cover.
