Insurance Bill; Health Promotions Levy

Meeting report

The Chairperson welcomed Members and stated that the delegates from National Treasury (NT) would brief the Committee on the Insurance Bill and that Members were welcome to give their opinions on the sugary beverages tax that was deliberated upon in their last meeting. He thanked Mr Ismail Momoniat for his presence and for working so hard to attend to all the meetings of the Committee. The Bill Insurance would transform the financial sectors and was targeted at financial sustainability. It is the low income earners that suffered when financial institutions failed. The Insurance Bill was presented as amended by the Standing Committee on Finance. He advised Members to read the ATC of 22nd of November where the report of the Standing Committee on Finance was captured.

Brief by National Treasury (NT)

Mr Ismail Momoniat, Head of Tax and Financial Sector Policy, National Treasury, said there was a need to protect the consumers of insurance products by ensuring that insurers keep promises made to the clients. He remarked that because insurance companies were more informed than the customers it became vital for regulators to protect the customers. Also, the protection would bring about trust in the industry. The present Bill did not cover all the regulatory functions of insurance nor ensured that appropriate businesses were engaged by the insurers in carrying out its obligations to clients and it did not address transformation needs hence, amendments were proposed. The Bill was first en submitted to Cabinet in January 2015, the Minister tabled it. Invitation for comments were sent at the end of 2016 and the public hearing was on 7 February, 2017. Presently, there are short term and long term insurance Acts, but some of the provisions of the Acts would be replaced. The Solvency Assessment and Management (SAM) framework was done to support the Bill but there were no international standards. He cited an example of the USA- the insurance in USA is regulated by individual states in the country. He remarked that there were lots of reinsurance in the insurance industry and some insurance company had been bailed out in the past. He observed that insurance was not as easy as banking because of the risks attached to it. He said there are forms of insurance that were not covered by the Act. One of the problems with the existing system was that different aspects of insurance were regulated by different Acts. Presently, Insurance Companies do not do pure insurance but provide certain products which were not generally covered by legislations. By value, vehicles and houses were often insured, but in terms of actual policies the richest insurance was funeral and legal insurance. He said the claims ratio for legal was low and this indicated that people might have been scared into certain kinds of insurance which they rarely needed. He said insurers had fine prints of policies and a lot of issues emanate from this when claims are made. He observed that there had been resistance from the insurance industry and benefactors of the previous approach. He said the new approach was more inclusive, would lead to stability and was appropriate for South Africa.

Ms Reshma Sheoraj, Director: Insurance Policy, National Treasury, said there was a need to apply the principle of proportionality, especially because of many small emerging insurance needs. The application of the principle was to compete in terms regulations since smaller players had been concerned on how the Bill would affect them. She said the Bill is enabling and empowering and had been structured into eleven chapters. She stated that the first chapter is on interpretation and objectives of the Bill.

Ms Jeannine Bednar-Giyose, Director: Financial Sector Regulations, National Treasury, said Chapter two was divided into four parts; part 1 to part 4, which explained insurance business in context of South Africa. Chapter two also explained the types of insurance products that an insurer was allowed to offer; otherwise it would require approval and policies regarding offshore businesses by insurers. She said it was the first time that foreign insurance companies were allowed to register in South Africa.

Ms Reshma Sheoraj explained that the third Chapter which was divided into three parts explained the issue of ownership and the requirements to ensure that the insurer would be able to carry out its functions effectively. The chapter also detailed the requirements for appointments, termination and changes in the control of insurers or the insurer group. Chapter four made provisions for licensing requirement and provided for micro insurance which is a significant development. It also has provisions for time stipulation for licensing, provisions for variation of licensing time or withdrawal.

Ms Jeannine Bednar-Giyose said Chapter five of the Bill, made provision for the governance framework; she listed what must be done for insurers to ensure compliance with governance requirement for which details are provided in the Bill. She said three pillars were set up for the insurance industry similar to those used in the banking industry. The three pillars were governance, financial soundness and public disclosures and provisions were made for these in Chapters five, six and seven.

Briefing by Financial Services Board (FSB)

Ms Jo-Ann Ferreira, HOD: Insurance Regulatory Frameworks, FSB, said Chapter eight dealt with transfer and other fundamental transactions required for mergers, re-organisation and takeover, requirements for approval of acquisitions and disposals. Chapter nine was on resolution and it refers to statutory management and curatorship under existing legislation, states the power of curators and specified requirements relating to business rescue and winding-up. She said the chapter was longer than other chapters in the Bill because it impacted on other Acts. She further explained that Chapter 10 dealt with Administration by insurers and was presented in two parts; the first part dealt with application and notifications and the second part dealt with powers and functions of the Prudential Authority. The last chapter, Chapter eleven was on general provisions of the Bill; regulation demarcation, special exemptions, and consequential amendments to Long and Short Term Insurance Act.(LTIA and STIA) She said there were requests to existing registrations to be converted to licenses which was an elaborate process. Schedule one involved consequential amendments to Financial Sector Regulations Act (FSRA), LTIA and STIA while Schedule two and three involved Classes and sub-classes and transitional Provisions respectively.

Discussion

The Chairperson appreciated the delegates for the presentation. He observed that the proposed Omnibus was mentioned when the Committee dealt with the Financial Sector Regulatory Bill and was also mentioned in the presentation under Chapter nine. He asked the delegates when the Omnibus Bill would be tabled in Parliament.

Mr F Essack (DA, Mpumalanga) said the advertisements on insurance were many and there was a need to be careful especially for unsuspecting people in the rural areas. He said there was need for regulation of the insurance industry but he remarked that a lot of people got their income from small insurance businesses. He asked the team to state how the proposed Act would impact the small companies and how the prudential authorities would be address capitalisation to regulate the insurance industry. He asked what Lloyds was and what problems had been identified with Lloyds.

Mr M Monakedi (ANC, Free State) asked why Lloyds had to be mentioned specifically in the Bill. He asked for the key issues that arose during public hearings and if the amendments addressed the issues. He asked the team to state what the amendments were and what motivated the amendments.

The Chairperson said after the two days briefing, reports should be drafted. There would be a Committee meeting to deliberate on the reports of the two days meeting.

Mr T Motlashuping (ANC, North West) welcomed the presentation He asked about the process that was followed by the Standing Committee on Finance. He observed that Treasury had been briefed for 30mins but Members were expected to adequately apply their minds and hold a meeting to round off on it within 48 hours. He indicated that Members would need time to apply their minds on the brief before interrogating it as the NCOP would be endorsing the Bill. He asked the team to state how the Prudential Authority would be supervised and who it would account to. Also, he asked if the PIC and UIF would be part of the Bill.

The Chairperson said Members should feel free to express themselves and to indicate if they wanted the Committee to engage in Public Hearings. He said the NCOP Rule specified that a Public Hearing was not required for Sector 75 and 77 Bills. He said the process started since January 2015 but it got to the NCOP late. He indicated that he had made plans to ensure that the NCOP worked together with the Portfolio Committee on Finance in 2018 to avoid getting the Bill late in future.

Mr Motlashuping said the Land Access Movement of South Africa (LAMOSA) judgment must be considered when looking into the rules.

Mr Momoniat sympathised with Members on the late submission but remarked that the NCOP had the discretion to decide how to pass the Bill. Some Bills had inclusive deadlines but the Insurance Bill did not but there was a pressing need to apply the standards that were in the Bill.  The Financial Sector Regulatory Bill had established the prudential authority (PA). The PA is subject to the legislation and it is not a law unto itself. He said the licensing of insurance would be covered by the PA and Financial Sector Regulatory Bill. Treasury would still adopt how the PA operated in the banking industry because it was also important that the PA regulates finances similarly in the banking industry, so that the financial industry would be secured. He explained the implication of international regulations on South Africa’s financial institutions and the need to regulate it in a way that was fit and proper. The proposal for the regulation was to make sure that the delivery of the promises happened because people needed to know the money put into insurance it is safe. It is hoped that all pension fund insurance would not be dealt with differently from the Act because it was important that pension schemes were included. He remarked that the funds were not yet covered but they would ultimately be covered and assured the Committee that pensioners’ funds were safe. He said it would be easier to convince people that there funds were safe if it was covered under the Pension Funds Act.

Ms Bednar-Giyose said Treasury was looking at getting appropriate cover for the State on insurance.

Ms Jo-Ann Ferreira said all state--owned financial institutions were covered. The Public Investment Corporation (PIC) is the asset manager. It does not prescribe the mandate but the mandate was prescribed by Government. How they can be regulated is clear in terms of the regulation. She agreed that State and private financial institutions should be subject to the same regulations. A lot of the challenges faced by people marketed by insurance companies would be addressed from 1 January 2018 as the regulation of smaller insurers was in progress. There are also interdepartmental engagements to consider the smaller insurers and issues related to migrants’ insurance. There were lots of interventions and enforcement in regards to small insurers. FSB was in process of putting together a policy to be presented to National Treasury to address the small insurers in a way that will create efficiency. The industry pays levies and capitalisation would be addressed under the Financial Sector regulatory Act and a Bill would be tabled before Parliament on it. She said Lloyds was not an insurance company, but it creates a market. Lloyds is a very important market and it helps to absorb some of the risks in the insurance industry. The Bill requires that Lloyds go through the South African risk assessment.

Mr Momoniat indicated that Lloyds was a big and well-connected market.

Ms Bednar-Giyose said the draft of the Omnibus Bill would go for public comment early in 2018 and hoped that it would be tabled before the Parliament in the first half of 2018. The PA is created with the South African Reserve Bank.

Ms Janet Terblanche, Divisional Head of Policy, South Africa Reserve Bank, stated that a draft of the Bill of the Financial Sector Regulatory Bill was being finalised and would be tabled next year. It would deal with some other amendments to insurance and there is a requirement that enforces the PA to submit its annual report to Parliament.

The Chairperson said the Financial Sector regulatory Bill was enacted at the beginning of 2017; the Committee would request Treasury to give an update on it. He said it was important because the Committee must put some of the information in its legacy report which is meant to capture the work done by the Committee during its tenor.

Ms Sheoraj said one of the major issues raised during the public hearing was the slow pace of transformation in the financial sector. During the deliberations, some smaller emerging players felt the Bill was not clear about the transformation plan. She highlighted the slow pace of transformation in management controls, diversity and entrant of black insurers. She said the resolution on the input was that it was required in the Bill that insurers applying for license must submit transformation plans on ownership, procurement and diversity. Some felt that the license was intended to limit micro insurance companies because of the mention of micro insurance license in the Bill. The resolution was the provision of Micro insurance framework to allow financial inclusion without compromising consumer protection and to formalise the micro insurance industry. Some smaller insurance felt that the Bill would contribute to high cost of regulations. However, this was not the case because it would contribute to pay out of promises to ensure the financial soundness of the insurer.

Ms Ferreira highlighted the changes in the Financial Sector Regulatory Bill. There was also uncertainty about the continuation of registered insurance. This was dealt with in Schedule 3.

Health Promotions Levy (Sugar Tax) as contained in Rates & Monetary Amounts and Amendment of Revenue Laws Bill

Mr Motlashuping expressed concerns with the discussions the previous day on the sugary beverages tax (Health Promotion Levy). It was important that the Committee consider the way the tax would impact on employment. He asked if it was not possible to regulate sugar use. Health is important and he would like to be healthy but the Committee must compare the benefits with the increase in unemployment that would happen because of the action.

The Chairperson asked Treasury to state what would be done with the levies collected on the HPL. He said the effect of the levy must be compared with unemployment.

Mr Essack said the HPL discussion was interesting. Excessive sugar consumption is a challenge and required an intervention. He gave an example of the intervention on tobacco through various promotions. He asked if there had been considerations for other types of interventions other than the HPL; he cited examples of putting the quantity of sugar in a bottle of soda by using labels.

Mr Motlashuping said it would be a futile exercise if it was about increasing revenues and asked what SARS had been doing to maximally collect revenue.

The Chairperson said the presentation indicated that the Sugar tax would be reviewed in 3 years. He asked the team to state the outcome of engagements held on the sugar tax.

Mr Momoniat said a delay in the passing the Tax Bill could cause crisis as the current tax rates were based on the previous year. The latest time for passing the Rate Bill should be by 31 December 2017 and it was not feasible to wait till February before passing the Bill.  There were estimates that there would be 5000 to 7000 job losses. Treasury had never rushed on any tax issue and it had looked at the situation critically. He said it had tried to find alternative uses for sugar. The Departments of Trade and Industry, Agriculture Forestry and Fisheries, Economic Development, National Treasury and Health had been engaged on the introduction of the HPL. The situation was balancing between health and employment. He said regulation was not enough, and cited the example of carbon emission. Sugar tax had been done in other countries. Coca Cola lobbied because it knew that the decision of South Africa may influence some other countries. There was nothing new in COSATU’s submission on 28 November and it was similar to other presentations. Although a lot of jobs would be lost but over time jobs it will be recovered and people would live longer and encouraged Government to follow through. The sugar tax would not achieve much in isolation but would be used along with other interventions such as education and promotion of the dangers of sugar. A number of states in the US were lobbying for sugar tax, and Mexico also had a similar action. The UK also announced a sugar tax and it was in process of being passed. South Africans were fatter than people from other African countries. A model is required to determine precisely how many jobs would be affected. He said what would be done is that the society would ultimately pay the Bill. Price had a huge effect on purchase of sugar and ultimately society would pick up the tax.

Mr Motlashuping said he hoped that people would get their tax returns on time and hoped that salt would not be taxed too.

Mr Ismail Momoniat said salt was very cheap and had been regulated in a lot of processed foods.

The Chairperson said the explanations made by Mr Momoniat made him feel better about the Sugar Tax. The Government allocated funds to the farmers and must look after them. He did not get a clear indication of what the Sugar tax would be used for, but insisted that it must go to the poor. Also, he asked Treasury to state the responsibility of the Sugar task team.

Mr Momoniat said the Sugar tax would go into the national revenue account and would be appropriated. The challenge about allocating money was ensuring that people spent the money for what was intended. The task team would monitor the impact of the Sugar tax on jobs to ensure that government did what it should be doing and implemented what should be done.

The Chairperson said the team would be monitored on a quarterly basis by the Committee and not annually. He encouraged Members to keep reading and be updated so that they could be informed. He thanked everyone for the session, stated that the Committee would reconvene on the Bills and discharged the delegates.

Outstanding Minutes

The Committee considered the minutes of the meetings for 18 October, 24 October, 1 November and 8 November all of 2017.

The Minutes were all adopted without any amendments.

The meeting was adjourned.