FUNERAL INSURANCE AND BENEFIT ARRANGEMENTS

1. FUNERAL INSURANCE AND BENEFIT ARRANGEMENTS NATIONAL TREASURY Presentation to the Parliamentary Committee on Finance 6 September 2005

2. STRUCTURE OF PRESENTATIONS • National Treasury • Policy concerns • Overview of policy framework • FinMark Trust • Findings of the FinMark/Genesis study • Financial Services Board (FSB) • Update on legislation and enforcement

3. BACKGROUND • PCOF hearings on abuse in funeral benefits industry, November 2003 • Implementation of FAIS Act • Licensing almost complete • Many funeral operators brought into FAIS net • FAIS Ombud’s office operating since 30 September 2004 • Passing of Financial Services Ombud Schemes Act • FinMark study on funeral insurance (published April 2005) • FSB and NT workgroup established, to assess FinMark proposals. Workgroup meetings on-going.

4. POLICY CONCERNS • Fraudulent practices • Growth in unregistered operators (intermediaries and funeral parlours) • Fraudulent policies • Incorrectly repudiated claims • Fraudulent practices by intermediaries • Lack of appropriate risk underwriting: over insurance, under insurance, part insurance • Weak regulation and enforcement (i.t.o. LTI Act, FAIS Act)

5. POLICY CONCERNS • High level of lapsed policies and repudiated claims • Lack of education & understanding of nature of insurance • Perception that have bought a pre-paid/savings product • Poor disclosure by intermediaries • Contracts not in simple language • Repudiation due to non-disclosure of medical conditions • Group schemes: no disclosure of changes in policy terms • Affordability? Commission-driven • Appropriateness? Lapses when most needed (terminal illness or retirement)

6. POLICY CONCERNS • Problems in policy design • Payment i.t.o. funeral services, no monetary equivalent • Have to use services of specific undertaker • Often offered as package deal, limits comparability • Limits competition, inferior service at higher price • Cost concerns • No limits on commissions • Price caps? • Capacity problems • Organisational and record-keeping problems in group schemes and intermediaries

7. POLICY FRAMEWORK • Prudential soundness and financial stability: • Effective risk management models • Compliance requirements in proportion to systemic risk • Competition: • Improved disclosure and contestability • Encourage new entrants, reduce barriers to entry • Consumer protection: • Education, disclosure, market conduct regulation • Access and empowerment: • Appropriate and affordable products • BBBEE: enterprise development and financial co-operatives

8. POLICY INITIATIVES • Joint NT/FSB task team on funeral assistance business: • Appropriate prudential regulations/ risk management model • Appropriateness of insurance versus pre-paid model • Appropriate regulatory framework • Enforcement/regulatory changes (FSB) • Joint NT/FSB task team looking at cost issues in insurance: • Commission structures • Disclosure of costs • Improved competition • Financial Sector Charter: • Generic access standards: appropriate funeral insurance products • BBBEE: enterprise development and financial co-operatives