The FSCA is proposing to align the waiting periods that apply to microinsurers and traditional insurers by exempting microinsurers from Rule 2A.6.1 of the Policyholder Protection Rules (PPRs).
The proposed exemption will promote market development and competition and enhance financial inclusion by enabling microinsurers to provide affordable and accessible policies to vulnerable and low-income consumers, the Authority said.
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, a microinsurance policy cannot impose a waiting period of longer than three months for death, disability, or health event resulting from natural causes.
Traditional insurers that offer funeral policies can impose a waiting period of six months.
The FSCA is proposing to exempt all licensed microinsurers from Rule 2A.6.1, subject to the following conditions:
- A microinsurer may not impose a waiting period of more than six months.
- A microinsurer may not impose an additional waiting period in respect of an exempt policy entered before the date on which the exemption takes effect.
- The microinsurance policy must have a term of 12 months.
Moonstone asked the FSCA for clarification on how the exemption will impact microinsurers that have already been granted an exemption from the waiting period.
The Authority said if a microinsurer has already received an exemption from the same requirements, the exemption and its conditions will continue to apply to the microinsurer.
The general exemption, once made final, will only apply to a microinsurer with an existing individual exemption if the individual exemption is specifically withdrawn by the FSCA. Alternatively, if the individual exemption was granted for a specific period – for example, 12 months – then the general exemption and its conditions will apply when that specified period lapses.
Reasons for the proposed exemption
The waiting period restriction puts microinsurers at a competitive disadvantage because their products are subject to higher rates of adverse selection; therefore, their premiums may have to be higher than those of traditional insurers in respect of the same products. Higher premiums are to the detriment of vulnerable and low-income customers, the FSCA said in a communication explaining its reasons for the proposed exemption.
Waiting periods are one of the few risk-management tools insurers have to manage anti-selection risk, which is prevalent in the funeral market. A shorter waiting period for the same benefit offering could result in the microinsurer inheriting or attracting higher risks, which may have been deterred by longer waiting periods on a comparable funeral product offered by other life insurers.
Enabling microinsurers and other life insurers to impose similar waiting periods will allow for competitive pricing, to the benefit of customers.
The proposed exemption intends to restrict waiting periods for death or disability because of natural causes to six months, which aligns with the proposal mooted in National Treasury’s Microinsurance Regulatory Framework policy document (refer to paragraph 2.1.1 (h) on page 12).
The exemption is an interim measure pending the transition of the PPRs to a new conduct framework under the Conduct of Financial Institutions Bill.
Deadline to comment
Stakeholders and other interested parties are invited to submit their comments, using the comments template, by 14 November 2023. Comments should be addressed to Johann van der Lith and emailed to FSCA.RFDStandards@fsca.co.za.
