Insurance Watch

RET hobbled by intrusive and excessive regulation

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In its quest for control over the insurance industry, in the name of radical economic transformation (RET), authorites curtailed growth and capital job creation.

The South African insurance industry is an Oligopoly – a market structure like a monopoly, but in which a small number of companies has the majority of market share.

 This is not the creation of faceless “white monopoly capital”. It is an entirely predictable response to the intrusive and extensive overreach of muddled Government agencies in their quest for control of the industry, its regulatory exuberance curtailing industry growth, and thus capital and job creation.

 If the industry is to grow going forward, it needs to welcome and enable new entrants in radically new ways.

However, the current path, especially the impending “Twin Peaks” changes to legislation and the unproven Retail Distribution Review (RDR), will further limit new entrants, and make it almost impossible for existing insurers to transform and diversify.

Instead, expect more consolidation, greater exclusivity and more oligopoly.

 Contrary to the popular political view, the apparent lack of industry transformation results not from existing insurance companies’ intransigence, or lack of entrepreneurial drive from previously disadvantaged persons.

Instead, the current regulatory and legislative environment favours large-scale consolidation of existing insurers, making transformation and future inclusive growth highly unlikely. It creates and nurtures a monolithic mindset where everything must be rigidly controlled and innovation and flexibility severely subjugated to the power of authoritarian bureaucrats.

 With most premiums going to no more than four or five dominant insurers, the rest relegated to a minor league.

Present landscape

Skimming through the list of 98 Short-term insurers on the FBS’s website is an interesting exercise.

Once you eliminate the insurers owned by other major financial institutions – banks, other Insurers (for instance, Santam owns several smaller licences), the four or five State owned ones and those not active (First Central, saXum) – you are left with a small number of smaller “independent” operators.

This situation is exacerbated by constant consolidation of smaller underwriters and underwriting agencies, absorbed into existing insurers due impenetrable, ever-increasing, and invasive regulations.

 A generation ago, entrepreneurs created several bigger insurers and some came from intermediaries expanding their reach into becoming insurers – think Hollard, and Auto and General.

I am willing to bet though, that hardly anysuch Greenfields operations have been created in the decades since the advent of FAIS, itself one of the most expensive and least successful Acts in our country’s history.

Setting up insurer

So why is it so difficult to set up an insurance company? A cursory glance at current and proposed legislation is instructive:

 Firstly, you need great gobs of capital, though ironically, no capital is needed to operate an insurer. Expenses, claims and reinsurance costs are paid from written premiums, no capital is utilised. Capital requirements are merely to cover the possibility of things go wrong.

 The latest iteration of the experimental “Solvency Assessment and Management (“SAM”) regime for insurer capitalisation, goes far beyond the simple solvency measures, applied with almost 100% global success over the past century.

The traditional simple percentage of premiums as capital will no longer be enough. The Regulator will impose an additional minimum capital base (money in the bank) of north of many tens of millions of Rand, over and above provision for claims, operating expenses and operational risk.  

No single entity may own more than 25% of the insurer without the Regulator’s personal consent, and almost certainly not any individual with that level of shareholding.

Only institutional shareholding seems permissible, and funding likely have to be spread over several of those. It specifically excludes any potential financial industrialists, let alone Black candidates essential to the transformation agenda.

 In addition, entrepreneurs must lodge a detailed five-year business plan for regulatory approval, including operational expenses, underwriting standards, claims policy and reinsurance facilities.

They must agree to abide by a plethora of often inexplicable regulation on market conduct, and convince the Regulator that they have competent management and staff of “fit and proper” (read “educated, long-experienced and skilled”) – everything must be in place before a single policy is issued.

Then, skills like actuaries and lawyer to ensure compliance with the law and ever-changing regulations, also need to be on tap.

 You need deep pockets and strong legal skills to play this game.

Intermediaries

Insurance intermediaries, likewise, face regulations inhibiting the setting up new businesses.

Besides innumerable laws and regulations governing all small and medium businesses, insurance intermediaries are pressurised by intrusive protocols determining their income via commission regulation, their service levels and their market practices.

Their employees must be conversant with the minutiae of the regulations and laws, and the extent and implication of policies they sell. If they don’t pass stringent Regulatory examinations on these matters, they will lose their jobs.

Economists speak of “Barriers to Entry” when referring to aspects preventing new entrants into an industry’s market place.

Whilst not overtly protectionist, regulations frequently shelter current operators from new competitors.

In the SA context therefore, it is doubtful if any real transformation could possibly happen in terms of ownership or entrepreneurship for many decades to come. 

Moving forward

 Assuming the current enthusiasm for “radical transformation” could bring real change and the desired growth, how would that be achieved?

A radical solution in the insurance industry would, inter alia, be for Government to take the following steps:

  • Appreciate firstly that the insurance industry has the potential to enable small businesses and individuals to prosper by providing security against risk. Not every risk needs a major conglomerate to underwrite it;
  • Recognise the emerging market may need products beyond funeral and micro-insurance, and provide support in getting insurance concomitant solutions;
  • Review capital requirements for new insurers to a more risk-based approach, which may include a fund for possible failures instead of relying on capricious regulators and defective “Twin Peaks” type regulation in particular;
  • Adopt a more benevolent and supportive regulatory approach to small and medium intermediaries. New (Black) entrepreneurs will come from this market segment and create sorely needed employment to people in areas current big operators cannot service;
  • Admit the current bureaucratic regulatory environment is not suited to the national need to democratise our economy. We need South African solutions for South African problems – global developed economies are not equipped to advise us on how to achieve that; and
  • Abandon the notion of a state-owned insurer, which will merely reduce economic space for transformation of the industry into a broad-based supplier of risk management solutions, funded by willing private sector investors.

If this is not done, politicians must come to terms with the fact that the South African insurance industry has been forced by non-economic, bureaucratic and political forces to become an untransformed Oligopoly – the result of dogmatic civil servants’ overreach, intent on achieving hegemony of control over all aspects of our economy

 If the industry is to grow and transform at all, new entrants need to be enabled in radically new ways. The path since 2002, including RDR and the proposed “Twin Peaks” regulatory architecture, will greatly limit new entrants and make it ever more difficult for existing insurers and intermediaries to diversify.

All that may be expected under the current and pending regime is yet more consolidation and exclusivity.

 (Article supplied the Free Market Foundation. Dr Sandrock is a Director of several short-term insurance related enterprises and writes in his personal capacity.  The views expressed are the author’s, and are not necessarily shared by the members of the Free Market Foundation. This is a slightly shortened version of the original article.)

by Dr Gerrit Sandrock

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