Founder: Turnaround Talk
Trust is the cornerstone of any business. If you can show your target market that you are providing a product that will benefit them, and they trust these assurances, there will always be a demand for your product.
Examples of this can be found in famous brands such as Nike, Apple and Samsung. These companies charge a premium for their products. Yet, there is always a demand for them. Demand may decrease in times of economic turmoil, but it never disappears completely.
Insurance is one of these products. Before starting Turnaround Talk, I was a journalist in the financial services industry, focusing specifically on insurance. If I had R1 for every time I heard the line “insurance is a grudge purchase”, I’d be a very rich man. Yet, the reality is that the economic ramifications of being uninsured when a loss event occurs mean that the people who complain about the grudge purchase still pay their insurance premiums.
Most of the trust quotient in a relationship with an insurer comes at the claims stage. While many policyholders will point out that they have had very positive claims experiences with their insurers, many will tell you that they have had nothing but hell at the claims stage. Further, media reports have pointed out that trust in the insurance industry may take a lot of work.
In the beginning
Let’s go back to the height of Covid. The Pandemic caused many businesses to shut their doors in order to be compliant with National Lockdown measures.
Many of the country’s smaller businesses, that have business interruption insurance, claimed from their insurers believing that they had a valid claim. However, many insurers rejected these claims citing policy exclusions. One such case involved a well-known hotel in the Natal Midlands.
The hotel made the claim pointing out that there was a loss of income because Government issued a shutdown which prevented guests from visiting the hotel. The hotel’s insurer rejected a business interruption claim because the policy wording stated that the claim would only be valid if the hotel had to cease operation as a result of one of its staff members contracting Covid. According to the insurer, they would not honour claims that result from the Government shutdown.
This is just one example of how trust in the relationship with insurers can be jeopardised.
An article by News24 points out that the Ombudsmen for Long-term and Short-term Insurance recovered almost R400 million in benefits and payouts for consumers who were forced to turn to it to fight insurers to pay their claims.
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Between Covid-19 business interruption claims and the delayed payment of funeral and other life insurance claims, the offices of the two ombudsmen received more than 30 000 complaints.
The article adds that, in addition, the Ombud for Long-Term Insurance (OLTI) slapped life insurers with fines amounting to R950 000 for “poor service”.
The ombudsmen’s chairperson, Justice Leona Theron, said this “compensation” of consumers for poor service was not about “punishing” the insurers per se, but it was time that the rising levels of poor service be addressed.
Some 195 complainants were compensated for poor communication, lack of communication, poor administration, and other poor service from insurers.
Price fixing in the insurance industry
The insurance industry was shocked when news broke out at the beginning of 2023 that some of the country’s largest insurers were being investigated by the Competition Commission over allegations of price fixing.
The IOL article points out that, collectively, eight insurers investigated by the Competition Commission for price- fixing could be fined up to 25% of their turnovers by the Competition Tribunal, making the penalties the highest ever fined by South Africa’s competition authorities.
Competition Commission spokesperson Siyabulela Makunga said that while the hearings for the investigation were still some way off, and information from last year’s raids at the various insurers was still being analysed.
The IOL article added that the Competition Commission conducted raids on the insurers towards the end of 2022 and investigations showed that the insurers shared passcodes to one another’s pricing systems so they could fix prices of life insurance and investment products, including retirement annuities (RAs).
The IOL article points out that the insurers would then exchange their rate books. After 1991, pricing information was loaded on floppy disks, which they’d then exchange with each other. In 2013, they migrated to online platforms that could only be accessed with login details, and they would share the login details. The commission said it was not only pricing information that was shared. Technical information on the design of new products was also circulated to ensure that insurers all had similar products, thus eliminating competition among themselves.
The FSCA puts its foot down
A recently published article by News24 points out that the Financial Sector Conduct Authority (FSCA) suspended the licences of around 8% of the country’s financial service providers in its last financial year, with most cases relating to their failure to submit statutory returns or pay levies.
Releasing its inaugural regulatory actions report for the period 1 April 2022 to 31 March 2023 on Tuesday (18 April 2023), the FSCA said that while more than half the 984 affected financial service providers had their suspensions ultimately lifted, it had been forced to withdraw the licences of 420. It also noted that the number of lifted suspensions may increase further if financial service providers rectified their noncompliance.
The News24 article points out that the FSCA said that taking into account that many suspensions relate to a failure to submit returns, the 8% was not a major concern to the body, adding that after service providers had rectified their returns, this number decreased to less than 4%. There was also potential for this to decrease even further.
Speaking at a media briefing that followed the release of the report, Gerhard van Deventer, Executive for the enforcement division of the FSCA, said that suspensions can be lifted, adding that in total 938 suspensions related to non-submission of statutory returns, with 522 lifted after the problems that had been flagged were fixed.
“The FSCA further withdrew the licences of 420 FSPs (financial service providers). Withdrawing a licence means we cannot fix the problem and we cannot expose this person to the public, or the FSP did not rectify their noncompliance.”
The News24 article points out that Van Deventer added that some suspensions included more serious contraventions of financial sector laws.
How is the submission of returns still a problem that persists in South Africa? Did we not learn enough lessons from Steinhoff? This once again highlights the need for a crackdown on accounting standards in South Africa.
Reputational damage
I made mention of Nike, Apple and Samsung for a very specific reason. If there was an event or a scandal that caused a lack of trust among one of these brands, or an event that caused significant reputational damage, consumers can – realistically – boycott these brands and not be put in a compromising financial position.
Insurance is different, the prospect of facing a loss event without insurance is not an option for any South African outside of the one percenters who have significant wealth. The concerning thing is that you cannot even move from one insurer to another if insurers are colluding with each other.
The question is, what damage does this lack of trust do to insurers? The deck is permanently stacked against the policyholder if insurers can act with impunity and get away with it because they know that the public simply cannot self-fund a loss event.
Policyholders can take heart that they do have recourse through the Ombuds, the FSCA, the courts and the Competition Commission (in extreme, and rare, cases). It seems as if the house of cards may come falling down within the insurance industry. When it falls, how it falls, and the repercussions of the collapse remains to be seen.
