A lawyer at Norton Rose Fulbright has raised concerns about the constitutionality of the new Policyholder Protection Rules (PPR) and Demarcation regulations set to govern the insurance industry.
The proposed amendments to the PPRs, formally gazetted in December 2016, aim to improve market conduct in the insurance sector and ensure that customers are treated fairly.
Although well meaning, the legality of listing Treating Customers Fairly (TCF) outcomes as rules and inference that insurers must act with due skill, care and diligence, and “with due regard to the convenience of the policyholder” has come into question.
“There is a criminal offence and a penalty if you breach them, and they are in such vague terms that you won’t know whether you’ve breached them or not,” said Patrick Bracher, a director at Norton Rose Fulbright.
He said adhering to a vague concept of having ‘due regard to the convenience of the policyholder’ would prove difficult for insurers.
“Whose convenience? You might have 30 000 motor policyholders; you can’t have all their conveniences at heart. It’s just too vague to be penalised as a rule,” he said.
According to Bracher, the portion of the proposed amendments that would effectively make underwriting managers, a special class of intermediaries with expert industry knowledge, irrelevant is also unconstitutional.
As it stands, underwriting managers that act only for insurance companies are entitled to a profit share. However, under the amendments underwriting managers would only be able to share in an insurers’ profits by getting preference shares in the insurer and earning dividends.
“They don’t confine it to underwriting managers anymore. Any non-mandated intermediary, any broker in fact, can now get a profit share as long as they can persuade the insurer to give them shares. That cuts through the whole principal of encouraging underwriting management to allow this expertise to survive in the market. It was put in place around 2012 and now it’s being undone,” he said.
He said section 22 of The Bill of Rights that affords people the right to choose a trade that may be regulated by laws, implies that laws have to be rational, reasonable and not impede on the property act.
“If you’ve got somebody who set up a business as an underwriting manager – remember they set up that business because in 2012 that was put on the statue books by the same people who are now drawing a line through it – and if you take that away, that is unconstitutional. It’s not rational to draw a line through somebody’s entire business model between now and the end of December,” he explained.
The new PPR rules, which are open for public comment until February 22, will repeal the 2010 PPR rules. They are likely to take effect in various stages from May 1 for various provisions.
Bracher also questioned the constitutionality of the demarcation regulations, which will govern primary healthcare policies, medical gap cover and hospital plans.
According to government, the final demarcation regulations – also published in late December – intend to demarcate the supervision of medical schemes and health insurance products and “ensure that health insurance products do not undermine the social solidarity principles inherent in medical schemes, resulting in better protection for consumers”.
But Bracher said the rules will leave already vulnerable consumers more vulnerable as rules are geared toward protecting medical schemes.
“Section 27 of The Bill of Rights gives everybody the right to primary healthcare. People have rights at the moment because they are insured in terms of accident and health policies, as they’re known, and if something happens they’ve got the right to go to hospital and have their hospital expenses paid up to a limit. A lot of these policies [also] have cover for a certain number of general practitioner visits every year. That’s all been taken away now. All you can get is that R3 000 daily lump sum benefit if you’re lying in hospital but not everybody will be lying in hospital,” he said.
He said up to two million policies could be affected when the regulations take effect in April.