Insurers plying their business in South Africa are learning the hard way that non-compliance with the country’s financial services regulations constitute a serious challenge to their sustainability. In the past few weeks, local financial services stakeholders have witnessed the demise (or imminent demise) of a medical scheme and a non-life insurer, plus a Hollywood-blockbuster-worthy raid against eight of the country’s leading life insurers.
In the first matter, the executive of Health Squared Medical Scheme (HSMS) applied to the courts for the voluntary winding up of a medical insurance scheme with more than 23 000 members; in the second, a court-appointed curator teamed up with the Prudential Authority (PA) to apply for the liquidation of a 70-year-old non-life insurer, Constantia Insurance Company Limited (CICL). We have covered the CICL matter in a separate piece .
Unfortunately, the war between non-compliance and insurer sustainability is proceeding on another front, under the all-seeing eye of South Africa’s competition authority. Case in point: on 25 August 2022, groups of machine gun toting enforcement officers raided the premises of eight of South Africa’s major long-term insurers, on what many expect was a fishing expedition of sorts to find documentary support for the allegations of anti-competitive behaviour being levelled against these businesses. These raids constitute a real threat to insurer sustainability because, aside from the negative publicity associated therewith, the Competition Commission can levy administrative penalties totalling up to 10% of an insurer’s gross turnover in the year or years of the contravention.
Commenting on the raid, the Competition Commission said: “We have reasonable grounds to suspect that [the eight insurers] have engaged in collusive practices to fix prices and/or trading conditions in respect of fees for investment products (such as retirement annuities) and premiums for risk-related products, namely, life insurance cover such as dread disease cover, chronic medical condition cover, disability cover, life cover and funeral assistance benefits.” These practices contravene section 4(1)(b)(i) of the Competition Act.
The allegations included that the insurers had “shared information on premium rates for risk-related products and fees for investment products, which enabled them to adjust the prices of their existing and new insurance products”. This writer was caught offside by the release, though he must confess to having given financial services firms the benefit of the doubt on too many prior occasions. In this regard, however, we must opine that premiums on the aforementioned products are generally set on an actuarial basis, and that the fees on the investment products mentioned are quite competitive, being within a few basis points across the market. What, one wonders, would be the point on collusion in this narrow ‘space’?
The industry experts we consulted with offered a range of guesses as to whether or not the allegations would stick. Most were perplexed as to why one of the country’s largest life insurers had been excluded from the list; and one or two wondered whether the implicated insurers had somehow ‘dropped the ball’ by sharing information during the Covid-19 pandemic. Insurers might argue, mused the expert, that it was necessary to share certain information during pandemic times… If we had to sum up the experts’ take on the veracity of the allegations, we would use the word ‘incredulous’. The consensus was that collaboration on the scale suggested was unlikely, though there must have been some ‘smoke’ to get the courts to grant the search warrants.
It is also worth noting that the investigation into the alleged misconduct started as far back as January 2021. In other words, the regulator has been sitting on this allegedly incriminating ‘evidence’ for more than 20 months; and its first action has been to go in search of concrete evidence. Of course, the Competition Commission is nonplussed by the disruption or inconvenience its activities might cause, simply noting that it would “seize documents and electronic data, which would be analysed together with other information gathered to determine whether these firms have contravened the Act”. Red herring or smoking gun? Africa Ahead will be sure to inform you as the next steps in this saga unfold.