Could the introduction of micro insurance be the catalyst for PCC legislation in South Africa?

South Africa has a well established and vibrant cell captive insurance industry with net written premium in excess of R6 billion per annum. But, although the cell concept was pioneered in South Africa, international cell captive markets have pulled ahead of us, with many introducing Protected Cell Captive (PCC) legislation, which is tailor-made for the unique structures of cell captives. By contrast, South African cell captives are regulated within the mainstream life and short-term industries. But now a discussion paper released by the National Treasury. The future of micro insurance regulation in South Africa could perhaps prove to be the catalyst that the cell captive industry has been looking for to convince government that PCC legislation should be adopted in South Africa.

The industry will certainly be encouraged by the discussion paper's recognition of the role that cell captives can play in the micro insurance industry: where the entity seeking to offer micro insurance desires more autonomy in the product design and management process and wants to share in the profit of the risk management, it can buy into a cell captive.

Micro insurers will be expected to provide insurance products for households that fall within the LSM (living standards measure) 15 groups. In essence, the concept is driven by the policy of financial inclusion, which centres on the delivery of financial services and products to lower income households. Micro insurance products, both life and short-term, are defined as risk products with a maximum benefit of R50,000 and a policy-term that does not exceed 12 months (health insurance and contractual savings products are specifically excluded).

There are several challenges facing the insurance industry with regard to micro insurance, one of the most significant being that the correct balance will have to be struck, and maintained, between market development and consumer protection. Insurance is, by its very nature, a relatively complex business and the target market is vulnerable to the risks of potential abuse and mis-selling.

The nature of the market lends itself to entrants who are familiar with its social, cultural and geographical elements, though these individuals and groups may not have the necessary skills to manage the "technical" side of the business. And this is where cell captives come in by providing underwriting, reinsurance, claims management, investment and accounting functions for clients (cell owners). This removes barriers to entry, provides protection for consumers and mitigates regulatory risk effectively creating a win-win situation for new market entrants, consumers and regulators.

In terms of the discussion paper, the start up capital for a micro insurer is proposed at R3-million, which creates a potential barrier of entry for small enterprises. The very persons who have access to and understanding of the micro insurance market could well find it difficult to participate due to lack of capital and skills. Using a cell captive, on the other hand, provides the perfect platform for someone to enter the market: capital requirements are not cast in stone and the cell owner can grow the capital and benefit from skills transfer while progressing to becoming a fully fledged micro insurer.

While there is still some uncertainty on the regulatory front regarding how cell captives will operate in the micro insurance space, the industry will no doubt be encouraged that the prospect of PCC legislation, which will put us on par with international jurisdictions may well be around the corner.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: 011 669-1001

Issued by:
Melanie Davis, PR@Work
Telephone: 011 615-3309 / 083 225 7450