Financial Services Board Submission
INSURANCE AMENDMENT BILL 2002 ("THE BILL")
1. The National Treasury and the Financial Services Board made presentations to the Portfolio Committee on Finance on the above-mentioned Bill in the briefing session that was held on 27 January 2003.
2. The following concerns were raised by members of PCOF:
3. A member of the public submitted a comment on the merits of the amendment of section 61 of the Long-term Insurance Act – this amendment will outlaw the working of the in duplum- rule (a common law principle). The in duplum rule states that unpaid interest on a capital amount due only accumulates up to an amount equal to the unpaid capital.
Par. 2.1
Funeral benefits currently underwritten by short-term insurers are of a short-term nature, which means that it only provides cover against the death of a policyholder for a specific term. Currently short-term insurers provide life-type benefits under the class of short-term insurance business defined in the Act as "Accident and Health" policies. The proposed amendment will not prevent short-term insurers from providing such life-type benefits, but only to stop them from referring to such policies as "funeral policies". Policyholders will still get the same benefits. However a circular will be issued to all insurers specifically informing them that they may no longer use the term funeral or burial in any advertising material or policy schedule.
Par. 2.2
The wording of the clause has been amended to address your concern. The State Law Advisors agreed to the proposed amendment – a copy of which is attached hereto – Annexure A.
Par. 2.3
The concern that medical schemes are selling "funeral policies" has been discussed with the Council for Medical Schemes. From the documents submitted to the FSB in this regard – (see Annexure B) is clear that medical schemes may not offer any funeral benefits whatsoever. Medical Schemes and administrators may only collect funeral benefit premiums provided such collection takes place separately from the medical aid contributions and is therefore not included in the business of the medical scheme.
Par. 2.4
The FSB is of the opinion that the amendment is not in conflict with the Constitution. The FSB’s opinion in this regard is attached hereto - Annexure C.
Par. 3
The FSB’s response to Rob Turrell is attached hereto- Annexure D.
Par. 4
Take note of Banking Council’s comment and will amend to include mutual banks.
Representatives of the National Treasury and the FSB will if required elaborate further on the above-mentioned issues to your committee on 07 February 2003.
Yours faithfully
DEON VAN STADEN
HEAD: REGISTRATION & POLICY
Annexure A
INSURANCE AMENDMENT BILL [B 52—2002]
11. Section 30 of the Long-term Insurance Act, 1998, is hereby amended—
(b) by the substitution for subsection (2) of the following subsection:
‘‘(2) A long-term insurer shall not declare a dividend or pay a dividend to its shareholders [if, and for so long as,]—
(a) while it fails to comply with subsection (1);
(b) if that has the would result that the insurer fails in it failing to comply with subsection (1); or
INSURANCE AMENDMENT BILL [B 52—2002]
11. Section 30 of the Long-term Insurance Act, 1998, is hereby amended—
(a) by the substitution for subsection (1) of the following subsection:
‘‘(1) A long-term insurer shall—
(a) have assets the aggregate value of which, on any day, is not less than the aggregate value, on that day, of its liabilities and capital adequacy requirement; and’’;
(b) subject to section 32, have, in the Republic, assets, the aggregate value of which, on any day, is not less than the aggregate value, on that day, of those of its liabilities which are to be met in the Republic, and the capital adequacy requirement in respect of those liabilities,
when the values of those assets, [and] liabilities and capital adequacy requirement are calculated [by means of—
(i) the method set out in Schedule 2; and
(ii) the financial soundness method] as set out in Schedule 3.’’; and
(b) by the substitution for subsection (2) of the following subsection:
‘‘(2) A long-term insurer shall not declare a dividend or pay a dividend to its shareholders [if, and for so long as,]—
(a) while it fails to comply with subsection (1);
(b) if that would result in it failing to comply with subsection (1); or
(c) if [the], after such declaration or payment [of the dividend would result in it failing to comply with subsection (1)], it would have assets the aggregate value of which would be less than the aggregate value of its liabilities, issued share capital and non-distributable reserves.’’.
From: Sonjani Nosiphino
Sent: 31 January 2003 03:50
To: Billy Clarke
Subject: INSURANCE AMENDMENT BILL
Dear Mr Clarke
We have considered the proposed amendments to section 30(2) of the Act (clause 11(b) of the Bill) and we agree thereto.
Annexure C
FINANCIAL SERVICES BOARD
INSURANCE AMENDMENT BILL, 2003
CONSTITUTIONALITY OF CLAUSES 7 AND 31
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1. During the Financial Services Board's recent briefing of the Portfolio Committee on Finance on the Bill, the question was raised whether the proposed new subsection (2) to section 18 of the Long-term Insurance Act, 1998, and the Short-term Insurance Act, 1998, respectively, would be in conflict with the Constitution.
2. The subsection compels any director or managing executive who resigns or whose appointment has been terminated by an insurer to inform the Registrar in writing at the latter's request of any matter relating to the affairs of that insurer of which the director or managing executive became aware in the performance of his or her duties and which may prejudice the insurer's ability to comply with the Act.
3. Two possible concerns have been identified:
(a) That the right of such ex-official to privacy of communication may be infringed (section 14(d) of the Constitution);
(b) that the information conveyed to the Registrar may be of a self-incriminating nature and prejudice the official in possible future criminal proceedings (section 35(3)(j) of the Constitution).
4. Before dealing with these two points it should be noted that the information which may be elicited in terms of subsection (2) is specifically limited to matters:
Subsection (2) clearly is aimed only at regulatory and supervisory information which the Registrar needs in respect of the insurer, which the Registrar can obtain from the director or manager concerned while he or she is employed by the insurer - amongst others in terms of section 4(4) of the Long-term Insurance Act. The purpose of subsection (2) merely is to enable the Registrar to obtain such information from the director or manager concerned when he or she has left the employ of the insurer.
5. Privacy
(a) By reason of the limitations mentioned in 4, it is most unlikely that "privacy of communication" as contemplated by the Constitution will ever be infringed through the operation of subsection (2).
(b) The argument has been advanced that, once the information has been divulged to the Registrar, the latter may in turn be compelled under the Promotion of Access to Information Act, 2000, to disclose it further.
(c) It is doubtful that this could ever happen. The Registrar's Office operates under secrecy provisions. See section 22 of the Financial Services Board Act, No. 97 of 1990. Moreover, the type of information which may be compelled in terms of subsection (2) would be of the nature immune to disclosure under the Promotion of Access to Information Act itself. Hence, what the Registrar has been told under subsection (2) is likely to be safer, from a confidentiality point of view, in the hands of the Registrar, than in those of the ex-official.
(d) Having regard to the "public interest" objective of subsection (2), and with the likelihood that "privacy" infringements will seldomly occur in the application of the subsection, if such infringements will ever take place the limitation of rights provided by section 36 of the Constitution is likely to prevail in a conflict situation between the ex-official's rights and those of the public at large.
(e) Section 14(d) of the Constitution is, in the event, unlikely to be impacted by the application of subsection (2).
(f) It must be borne in mind that the right to privacy is not absolute. An individual's right to privacy must be proportionately balanced against the need to promote and protect the public at large.
6. Self-incrimination
(a) Concern has been expressed that subsection (2) could lead to a situation comparable to a section 417 Companies Act enquiry with regard to which a part of section 417 has been held to be unconstitutional. (See 1996(1) SA 984(CC).) I doubt whether this analogy is justified.
(b) Firstly, the process under section 417 is formal by nature, presided over by the Master or by an officer appointed by the Master, where evidence is given under oath, witnesses cross-examined and assisted by legal representatives and where often the witness is suspected of concealing evidence regarding the company whose affairs are being investigated.
(c) By contrast, subsection (2) envisages a mere request by the Registrar to furnish information on specific aspects of the insurer, in a manner similar to what the Registrar could have requested under section 4(2) of both the Long-term and Short-term Insurance Acts from the insurer itself. The only real difference is that in the case of the proposed subsection (2) the informant is an ex-official of the insurer.
(d) What has been found to be constitutionally offensive regarding section 417, is not the compelling of evidence, but the provision of section 417(2)(b) which reads as follows:
"and any answer given to any such question may thereafter be used in evidence against him."
There is no such provision in subsection (2). Hence, and without it being expressly provided for, an ex-official who will be compelled to give self-incriminating information at the request of the Registrar, will automatically enjoy the protection of section 35(3)(j) of the Constitution which provides as follows:
"Every accused person has a right to a fair trial, which includes the right –
(j) not to be compelled to give self-incriminating evidence".
(e) The right not to be compelled to give self-incriminating evidence is a constitutional right that no Statute can take away, our Constitution being supreme. The Registrar could, in a subsection (2) request, remind the director or manager concerned of his or her right not to give self-incriminating information. This the Registrar may do in the furtherance of fair administrative action.
(f) Furthermore, when acting under subsection (2), the Registrar will do so as an administrative organ who needs to apply fairness and natural justice at the risk of otherwise contravening the rules enshrined by the Promotion of Administrative Justice Act, 2000. Any attempt to extract information with a self-incriminating effect from an ex-official will militate against the principles of fair administrative justice.
(g) It must be borne in mind also that, in terms of section 39(1) of the Promotion of Access to Information Act, the Registrar may, and will, refuse a request for access to information obtained under subsection (2) if the disclosure of that information could reasonably be expected to prejudice or impair the fairness of a trial or the impartiality of an adjudication.
(h) What the proposed subsection (2) introduces, is by no means novel. Sections 19 and 20 of the Long-term Insurance Act, dealing with discharged auditors and actuaries of an insurer contain similar provisions. Reference may also be made to section 6(2) of the Financial Institutions (Protection of Funds) Act, No. 28 of 2001, which introduced powers for the Registrar to call for information from any institution (not only a regulated institution). None of these enactments contain a reference to "self-incriminating evidence", as section 35(3)(j) would in any event take care of that.
(i) As a matter of interest, an indication may be given of the procedures adopted by the FSB in examinations under the Insider Trading Act, 1998, or the Inspection of Financial Institutions Act, 1998, when a witness is either compelled or volunteers to give evidence, the effect of which may be incriminating to the witness in later criminal proceedings. Prior to testifying, the fact that there is a possibility of self-incrimination for the witness is recorded. The witness thereafter testifies in full. However, the recordal of potential self-incrimination in the testimony of the witness is sufficient to persuade the court in later proceedings, in exercising its discretion in ensuring a "fair trial", to excise that part of the evidence which is tainted by self-incrimination.
7. Conclusion
To sum up : the FSB is satisfied that the proposed subsection 18(2) will stand constitutional muster. No addition is necessary to safeguard the rights of an ex-official of the insurer against self-incriminating information requested by the Registrar. The ex-official will simply exercise his/her constitutional right to refuse to furnish such information.
FINANCIAL SERVICES BOARD
3 FEBRUARY 2003
Annexure D
FINANCIAL SERVICES BOARD
5 February 2003
INSURANCE AMENDMENT BILL, 2002
CLAUSE 20 : ABOLISHMENT OF IN DUPLUM RULE
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1. Clause 20(1) of the Bill introduces a new provision which will be section 61(1) of the Long-term Insurance Act, 1998. This provision has the effect of abolishing the in duplum rule in the case of a loan made by a long-term insurer to a policyholder on the sole security of a long-term policy.
2. The in duplum rule is derived from common law and provides that interest on a loan will stop running when the interest is equal to the unpaid capital amount of the loan. The effect of the introduction of section 61(1) to the Act will therefore be that once the accrued interest on the policy loan equals the capital of the loan, interest will no longer accrue and the insurer will on maturity of the policy be able to deduct from the proceeds of the policy only the capital outstanding plus an amount in respect of interest equal to the capital.
3. The appropriateness of the in duplum rule to current economic life, has been questioned for a considerable number of years. Already in a 1972 report the South African Law Commission recommended the abolition of the rule and pointed out that the Usury and Prescription Acts were sufficient safeguards against an unscrupulous creditor taking advantage of its debtor.
4. Severe criticism has also been expressed by various academics against the working of the rule. Reference may be made to the following words expressed by Alfred Cockrell (Professor of Law, University of Witwatersrand, member of the Johannesburg Bar) during an educational course on contracts held by the Corporate Lawyers Association of South Africa during June 1999:
"It is clear that the prohibition on interest "in duplum" shows sensitivity towards the social position of borrowers in the market place, since it seeks to protect debtors from abuse at the hands of their creditors. However in a modern economy the rule is both inappropriate and arbitrary. Since interest is the "life blood of finance", it is difficult to believe that there is any place for the "in duplum" rule. In any event, the reference to the yardstick of "double" provides an inherently arbitrary measure of consumer protection, since it bears no rational relationship to interest rates or the period of time for which a borrower has the use of money."
5. Very recently the Supreme Court of Appeal in the case of Commissioner, SA Revenue Service v Woulidge, 2002(1) SA 68 (SCA) held that "it is clear that the in duplum rule can be applied in the real world of commerce and economic activity only where it serves considerations of public policy in the protection of borrowers against exploitation by lenders". In the matter which served before the court, the rule was not applied. Therefore, at best, the rule is not a "hard and fast" one.
6. There were accordingly compelling reasons when in 1977 the previous Insurance Act, 1943, was amended by the introduction of section 68A, a provision similar to the one now proposed by clause 20(1) of the Bill. The omission of this provision from the 1998 Act was simply a mistake which needs to be rectified.
7. In particular as far as policy loans are concerned the in duplum rule is not justified for the following reasons:
(a) A loan from an insurer against the security of a policy can be differentiated from a normal loan by commercial money lenders. Policy loans must be regarded as advances made by the insurer against policy benefits rather than money loans in the normal sense (see Davis, South African Law of Insurance, 4 ed at 361).
(b) An advance on a policy from a life insurer is a unique financial arrangement that benefits both the debtor and the creditor. The latter, being the insurer, has the benefit of making the advance against the security of policy benefits payable in the future. The insurer controls the payment of such benefits and apart from the security is in a position to recover the indebtedness with relative ease.
(c) A number of benefits for the debtor (policyholder) may be identified:
(i) Easy access to a loan which the policyholder may not be able to raise on the same terms from the commercial money lending industry.
(ii) It accommodates the debtor's cash flow desires in that it is agreed that interest is not payable periodically (as would have been the case with a commercial loan) and that it will be a once-off payment together with the repayment of capital either later when the debtor is better situated to effect payment or ultimately when the indebtedness will be offset against the policy benefits.
(iii) It is optional to the policyholder to take a policy loan and the policyholder will obviously only exercise his or her discretion to do so if the terms of the loan are more favourable than those obtainable elsewhere. As the advance is secured by a policy which is a growing asset, the insurer may be well disposed to grant a loan at favourable rates.
(d) If the in duplum rule were to be retained in respect of policy loans (therefore if the proposed amendment is not adopted) the following disadvantages may arise for policyholders:
(i) In the case of existing loans insurers would be compelled to demand the repayment of interest once the amount has accrued close to the capital amount. This is the only way to ensure equity amongst all policyholders as it prevents borrowers from being subsidised by other policyholders. This would result in policyholders with loans having to find cash to settle their debt through a loan raised elsewhere or by a premature surrendering of part of or else the full policy.
(ii) If insurers were to guard against the possible effect of the in duplum rule, that would bring about additional administration which may have a negative impact on the terms at which advances may be made to policyholders.
8. On the question of clause 20(2) which provides that subsection (1) shall be deemed to have come into operation on 1 January 1999, the following needs to be stated: Two senior counsel's opinion were taken in this regard. The first opinion concluded that the in duplum rule does not apply to loans entered into prior to the effective date. It is essential that this amendment is retrospective in order to avoid an administrative nightmare. A further opinion was therefore obtained which suggested wording to render the amendment retrospective. This wording was largely incorporated into the current wording of clause 20(2). Insurers have therefore based their practice on these opinions as well as the applicable interest rates of the loan and the terms of the loans. Any suggestion that insurance companies have ignored the law and allowed interest to accrue without taking the in duplum rule into account, is not correct. Retrospectivity in this instance will serve to bridge the gap between the date of abolition of the previous Insurance Act and the date on which the amendment will become operative.
9. The Financial Services Board respectfully submits that the proposed amendment is both necessary in order to conform to a similar provision of the repealed Insurance Act and that overall policyholders' interests will be served rather than prejudiced by the amendment. As stated by the Woulidge judgment referred to in paragraph 5 above, the in duplum rule can be applied only where it serves considerations of public policy in the protection of borrowers against exploitation by lenders. For the reasons enumerated above this consideration does not apply to policy loans which in many respects are more beneficial to the borrower than ordinary commercial loans in the market place.
FINANCIAL SERVICES BOARD
Why Should an Insurer be granted an exemption to this rule when no other institution is?
The in duplum rule is only applicable to arrear interest, not normal calculated interest on a loan. This is why a bank may offer a product like a home loan where the value of interest over the period of the loan far exceeds the value of the original capital borrowed.
Insurers are not in business of lending money. 1% of total assets of the whole industry are invested in loans i.e. R8 billion out of R710 billion (2000). The fact that they are prepared to lend to policyholders is for the convenience of the policyholder that would otherwise have to surrender a policy or cede it to a bank. In the case of an emergency where a policyholder does not have cash to pay for a loan i.e. cannot afford the monthly payments to a bank loan, the insurer will lend the policyholder money without having to make any repayments. This is an exceptional case and does not apply to all policyholders that take loans from insurers. In this case, the interest on a loan will accumulate in arrears from the very first month of the loan. This is because no payments are made on a monthly basis.
The nature of a loan against a policy is unique in that the funds for this loan are drawn from the pool of policyholder funds. Although the loan is made against the surrender value of that policyholder, the pool of assets earning interest for all policyholders is diminished. Hence, if a policyholder does not repay the loan, it is other policyholders that must incur the cost of the loss of interest. In the case of a bank, depositors are not prejudiced as a result of defaulting lenders, shareholders are. This is one of the main reasons supporting the argument for granting insurers an exemption to the in duplum rule.
When the value of the outstanding loan, interest and arrear interest reaches R100 000, for example, in terms of the current situation, the insurer will be forced to terminate the policy to recoup the value of the loan. This however implies that the policyholder immediately looses the R1 million cover that the policy was providing. In addition to loosing this cover, the policyholder may not be able to find cover of this nature again (due to age or health conditions etc.)
If insurers are granted an exemption to the in duplum rule, they will not be forced to terminate a policy when the value of the loan, interest and arrear interest outstanding equals the surrender value of the policy. This implies that a person will have a choice to enter in to an arrangement with the insurer to repay the loan and interest without loosing the cover provided by the policy. In addition, the other policyholders whose pooled funds subsidized the interest on the loan will not be prejudiced by a policyholder who refuses to repay the loan when arrear interest stops accumulating in terms of the in duplum rule. If the in duplum rule remains in force, insurers will either require from the policyholder to pay the arrear interest or to surrender the policy. The surrender value of the policy is less than actual sum insured. The policyholder would therefore be worse off if the in duplum rule remains in force.
Rule 17 of the Long-Term policyholder protection rules, specifically deals with disclosure related to loans and cessions of policies (see Annexure "A").