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RENEWABLE ENERGY
Raring to go The list of renewable energy projects under construction, operational, or in the pipeline for South Africa is lengthy and exciting. The country is finally harnessing its bountiful natural resources to provide power. But the process has not been without its hurdles. Christy van der Merwe
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learning curve for us in South Africa, and the insurance industry has also learned a lot. The project conditions have been very different to Europe where most of the expertise lies.
A
s a fledgling industry in South Africa, it is understandable that the expertise in the renewable market locally is limited, and much of this has been recently learned. One of the biggest hurdles for the insurance industry in South Africa is that to be involved, it is preferred by lenders that insurers have, at minimum, an A- international credit rating from Standard & Poor’s (S&P). There is no local insurer with that rating because of limitations resulting from South Africa’s international credit rating as a country, which is BBB.
In this way, some insurers wishing to be involved with the South African Government’s renewable energy independent power producer procurement programme (REIPPPP) have struck up partnerships (not shareholding partnerships) with an international insurer with an international A- rating, and the expertise and experience in renewable energy projects. Mutual & Federal has teamed up with RSA Group and has about 15 renewable energy projects on their books from round two and part of round three when the insurer became more involved in the market. Mutual & Federal hopes to see an increase in the number of projects on its books going forward in the following bid rounds. “Renewable energy has represented a big
Where we thought construction might be the riskiest part of a project, we have learned that transit of equipment has been the most risky,” explains Samantha Boyd, head of corporate and niche insurance at Mutual & Federal. In June, Mutual & Federal announced that it has received an AA+ rating from Fitch, which allows the insurer to play in the global market, and this has gone a long way towards meeting the lenders requirements for the South African renewable energy programme. Another dominant player in the market is Guardrisk, through underwriting management agency (UMA) C&G RenewRisk, which has an exclusive partnership with UK-based UMA GCube, which represents Lloyd’s of London syndicates. C&G Renew-Risk MD, Mike Robson, says that the partnership gives C&G the required capacity for these big projects, as well as the expertise through significant skills transfer.
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Robson notes that C&G Renew-Risk has played a role in underwriting 18 projects within the REIPPPP, which he explains equates to 1 027 Megawatts (MW) insured, of which 760 MW are wind projects, 299 MW are solar photovoltaic (PV) projects, and 12 MW are hydro projects. Having been in the insurance industry for over 40 years, Robson says that the renewable energy industry has certainly been the most exciting and greatest learning curve in his career. He is passionate about the industry, and feels that South Africa is moving forward on par with what is happening in international markets. Seelan Naidoo, head of engineering at Allianz Global Corporate and Specialty South Africa explains that the basis on which the insurance placement is structured for renewable energy projects is a seamless policy through the entire life of a project. This incorporates various classes of insurance including coverage extensions, marine and transport and construction insurance,
necessity to include extensions such as mechanical and electrical breakdown, contingent business interruption and so on. And the coverage for the operational phase is required upfront, before financial close or even construction starts. The bidding rounds take place six months or even a year ahead of financial close of projects, and project developers need to show that cost-effective insurance is achievable to attain bankability of a project. Lenders and overseas investors require proof that financially sound insurers will provide cover, explains Boyd. Naidoo adds that the lenders requirements in terms of insurance coverage are, usually, not negotiable. There have been suggestions that the advisers to the lenders have not been pragmatic in insisting that the insurers be A rated because all
of the insurance capacity has had to be placed offshore. When this happens the insurers are far away from a risk and don’t have the same urgency and interest in a project, and it can take a lot longer to settle claims. It is understood that the credit rating requirements of the lenders on the next installment of REIPPPP projects will be relaxed, enabling local insurers to quote on projects. It remains to be seen to what extent this will happen, when the preferred bidders for the fourth round of projects is announced in November. More local insurers have been quoting on projects, and wait to see if they will be involved. In the report, SA’s REIPP procurement programme: Success factors and lessons, it is noted that the majority of the debt funding has been from commercial banks (R57 billion) with the balance from Development Finance Institutions (R27.8 billion), and pension and insurance funds (R4.7 billion). Eighty-six per cent of debt has been raised from within South Africa, and debt tenors typically extend 15 to 17 years from commercial date of operation. Some of the key lenders in the industry include Standard Bank, Stanlib and the Commercial Bank of China, the combination of which is said to have provided funding for about 940 MW of renewable energy. Nedbank also lauds its prominent position in renewable energy financing, reporting that in bidding round two, it closed five renewable energy transactions, and in round three, it provided debt funding to seven of 17 preferred bidder projects. ďƒ
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by July 2014. However, grid code compliance issues have delayed this, and financial close is expected in November 2014 as well.
is ordered from Europe, with long lead times for manufacture, and then long distance shipping of equipment.
In the report, SA’s REIPP procurement programme: Success factors and lessons, the authors Anton Eberhard from the University of Cape Town, James Leighland, and Joel Kolker from the World Bank note that to date, the REIPPPP has secured investment commitments of $14 billion, to build 3 922 MW of new renewable energy generating capacity.
Michael Steensma, underwriting and sales manager at Mutual & Federal, explains that some of the major risks include poor packaging of equipment and improper handling which may result in damage.
The insurables
The renewable story to date In March 2011 South Africa’s Integrated Resource Plan (IRP) was released, and this outlined the future of the country’s energy mix. The Department of Energy (DoE) proclaimed that renewable energy should make up a larger portion of the mix, and that by 2030, at least 3 725 MW of the country’s electricity should be generated from renewable sources.
Naidoo points out that there are a number of key insurance coverages applicable to renewable energy projects throughout a project’s life cycle. These include: marine and inland transit risks; construction all risks; physical damage/advance loss of profits; prehandover operational coverage; operational all risks and business interruption; contingent business interruption; and liability. As previously mentioned, it is the transit of equipment stage of the project that is presenting the most trouble for insurers when it comes to South African renewable energy projects. Much of the equipment for the projects
Realising that Eskom could not build this capacity on its own, the decision was made to introduce Independent Power Producers (IPPs) to build and operate these renewable energy plants. The catch is that these IPPs still have to sell the power that they produce to Eskom because Eskom controls the electricity distribution network. To contribute to the 3 725 MW renewables target, the government started the renewable energy IPP procurement programme, now known as REIPPPP. After a lengthy consultation process, the 3 725 MW target was further broken down into different technologies as follows: Wind –1 850 MW; Solar photovoltaic (PV) – 1 450 MW; Concentrated solar power (CSP) – 200 MW; Biomass – 12.5 MW; Biogas – 12.5 MW; Landfill gas – 25 MW; Small hydro – 75 MW; Small projects (under 5 MW) – 100 MW. The DoE then welcomed bids from IPPs to build renewable energy projects that would meet their requirements. The process was staggered into five bid rounds. These bid rounds became increasingly tougher, as developers had to increase local content while also bringing down the price. The DoE is currently busy with the fourth bid round, and announcement of preferred bidders is expected around 24 November, with the signing of power purchase agreements (PPAs) set for end July 2015. There have been delays in bringing the round three projects to financial close, which was initially expected to take place
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He adds that during the construction phase of renewable energy projects, the weather risks of wind damage, hail and lightning remain a concern, particularly when considering that wind turbines are incredibly tall structures, usually in open fields and highly exposed to the elements. Robson concurs, noting that the majority of claims seen have been transport related. Construction has not presented any great surprises, but the costs should be very well understood, he advises. He explains that if there is a claim for a wind turbine damaged while being erected, this could mean leaving the wind turbine tower exposed to lighting risks. It also means that a crane will once again need to be brought to the site to attach the blade once it has been replaced, and these craneage costs could push up what would ordinarily be a R2 million blade replacement claim, up to R7 million or R8 million.
Challenges for insurers In terms of rates, Mirabilis MD, Russell Myers, argues that the rates in general are low, and one would need to have about 20 or 30 of these projects on your books to be profitable. At present, the rates and deductibles are too unsustainable: “you can’t do sustainable energy at unsustainable prices,” Myers says.
Key risks for renewable projects • Accessing ground and soil conditions • Extent of wind disruption • Cable laying and cable theft • Access to construction sites • Start-up delays • Catastrophic perils exposure • Lightning damage • Technology utilised, proven or unproven • Failure of key equipment, such as transformers • Transportation
Mirabilis is the engineering and construction underwriter for Santam, which has introduced a seamless product that would be able to provide coverage for renewable energy projects because it encompasses the various insurances required over the life cycle of a project. Myers says that the insurer has put in some quotes through brokers for projects in the fourth bidding round, and it remains to be seen whether the powers that be will accept insurers that are not A rated internationally. “We hope that the government recognises local capacity.” Naidoo highlights that inadequate terms and conditions mean that the rating is not reflective of the risk taken on by insurers. Aggregation of limits, aggregation of deductibles, and inadequate time to conduct proper analysis and loss potential are other challenges facing insurers.
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It is rumoured that there have been construction and marine related losses in excess of R120 million for a single solar PV project under the REIPPPP. And a number of losses are still under investigation due to late notification of losses, or disposal of salvage by a client prior to loss assessment by insurers.
Below is a list of the 64 preferred bidder renewable energy projects that have been chosen to go ahead under the first three rounds of the government’s REIPPPP. All except one of the first round projects are operational, and the first project came on line in November 2013.
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The expanding renewable energy sector poses additional challenges for insurers says Nikki Juma, casualty head at Zurich SA. Before taking on these types of projects, insurers need to be certain that the developers behind the technology are reputable, and that equipment is tried and tested and meets industry standards. They also have to manage ever-changing innovations – technology in this sector is constantly evolving, and it can be hard to keep up, especially from a risk mitigation point of view. “Here, being a global insurer has its advantages – we are able to draw on our network of expertise and learn key lessons from our colleagues in other markets who have managed this type of technology before. We are also then able to transfer this knowledge to our brokers so that they can provide clients with the best advice and cover possible,” Juma adds.
WIND
Round one
Round one
Khi Solar One CSP (50 MW) KaXu Solar One CSP (100 MW) SlimSun Swartland solar park (5 MW) Rustmo1 Solar Farm (6.76 MW) Mulilo Renewable Energy Solar PV - De Aar (9.65 MW) Konkoonsies Solar (9.65 MW) Aries Solar (9.65 MW) Greefspan Power Plant (10 MW) Herbert Power Plant (19.9 MW) Mulilo Solar Pv – Prieska (19.93 MW) Soutpan Solar Park (28 MW) Witkop Solar Park (30 MW) Touwsrivier Project (36 MW) De Aar Solar Pv (48.25 MW) Droogfontein Project (48.25 MW) Letsatsi Power Company (64 MW) Lesedi Power Company (64 MW) Kalkbult Project (72.5 MW) Kathu Solar Energy Facility (75 MW) Solar Capital De Aar (75 MW)
Dassiesklip Wind Energy Facility (26.19 MW) Metrowind Van Stadens Wind Farm (26.19 MW) Hopefield Wind Farm (65.40 MW) Noblesfontaine (72.75 MW) Red Cap Kouga Wind Farm – Oyster Bay (77.6 MW) Dorper Wind Farm (97 MW) Jeffreys Bay Project (133.86 MW) Cookhouse Wind Farm (135 MW)
Round two
Round two
Zurich SA does not have any bound renewable energy projects on its books, but has quoted on a number of projects, and looks forward to expanding it offering in this space. While the challenges for insurers are numerous and the learning curve has been steep, the REIPPPP certainly has meant a lot more business for brokers, who are very often vying for the same projects. One of the major things that brokers have been urged to do, is to ensure that they fall within local regulatory requirements.
Bokpoort CSP Project (50 MW) Sishen Solar Facility (74 MW) Aurora-Rietvlei Solar Power (9MW) Vredendal Solar Park (8.82 MW) Boshoff Solar Park – Jacaranda Energy (60 MW) Upington Airport (8.9 MW) Linde Solar Scatec – operating (36.8 MW) Dreunberg Solar – Scatec (69.6 MW) Jasper Power Company (75 MW) Solar De Aar 3 (75 MW)
Amakhala Emoyeni (133.7 MW) Tsitsikamma Community Wind Farm (94.8 MW) Wind Farm West Coast (1 90.82 MW) Waainek (23.28 MW) Grassridge (59.8 MW) Chaba (21 MW) Gouda Wind Project (135 MW)
Most of the bidders in the first round were local developers and were supported by lenders, however in the second round, larger international power utility type organisations from other countries took part. These entities can fund the projects off their balance sheet and did not have the same insurance requirements imposed by lenders.
Round three
Round three
Adams Solar PV 2 (75 MW) Tom Burke Solar Park (60MW) Mulilo Sonnedix Prieska PV (75 MW) Electra Capital (75 MW) Pulida Solar Park (75 MW) Mulilo Prieska PV (75 MW) Xina CSP South Africa (100 MW) Karoshoek Consortium CSP (100 MW)
Red Cap – Gibson Bay (110 MW) Longyuan Mulilo De Aar 2 North (139 MW) Nojoli Wind Farm (87 MW) Longyuan Mulilo De Aar Maanhaarberg (96 MW) Khobab Wind Farm (138 MW) Noupoort Mainstream Wind (79 MW) Loeriesfontein 2 Wind Farm (138 MW)
Brokers on these projects should be aware that the South African Short-term Insurance Act requires local projects to be underwritten by a registered South African insurer. Noncompliance means that these entities could be reported to the Financial Services Board. One of the characteristics of the REIPPPP has been its dynamic and transparent process, which has fostered an entrepreneurial spirit among those involved. With that in mind, the industry will have to wait and see if there is likely to be any more involvement from local insurers as the fourth bid round results are announced in November.
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Other projects include: Small hydro from round two Stortemelk Hydro (4.4MW) Neusberg Hydro Electric Project (10MW)
Landfill gas from round three Johannesburg Landfill Gas to Electricity 18MW Source: Department of Energy
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MAS T E RS
37 745 MW (85.62%) 13 coal-fired power stations
South Africa’s current electricity mix through Eskom
2 426 MW (5.5%)
4 gas turbines (two run on kerosene, two run on diesel. Very expensive to run, which is why they are known as ‘peaker’ plants as they are only used at peak times when electricity demand is high)
2 000 MW (4.53%)
2 conventional hydroelectric power stations, and 2 pumped storage schemes
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Coal-fired power stations: Kusile 4 800 MW and Medupi 4 764 MW
1 910 MW (4.33%)
Pumped storage scheme: Ingula 1 332 MW
3 MW (0.0068%) 1 windfarm: Klipheuwel
Windfarm: Sere 100 MW
TOTAL: 44 084 MW
TOTAL NEW CAPCITY: 10 996 MW
1 nuclear power station (Koeberg)
Source: Eskom
The new build programme, which will add almost 11 000 MW to the grid, includes:
Claims example 1: The blades of wind turbines can be up to five metres long and are huge pieces of equipment. A blade manufacturer in China had processed orders for a number of blades for different projects in South Africa and was ready to ship the order to Port Elizabeth. One container held a number of blades for the different projects and developers. A storm in Hong Kong wreaked havoc and blew over the entire container damaging everything inside. Three different projects and six different insurers were impacted by the one incident.
Claims example 2: On the inland leg of the journey transporting equipment from the port to a remote project location, the fatigued transporter fell asleep at the wheel and the truck overturned. Sadly, the truck driver died, and the equipment was badly damaged.
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Sectional Dominic Uys
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intricacies Insuring a sectional title property is complicated at the best of times and underinsurance may just be one of the myriad hitches. RISKSA consults an expert on what the estimated 1.8 million sectional title owners in South Africa need from their brokers.
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ectional title properties hold a number of risks that owners are often unaware of. This is the opinion of Charle Halgryn, managing director of specialist underwriter Corporate-Sure (C-Sure). She notes that the company has recently dealt with multiple cases where claims have become problematic as a result. “There are a vast number of things that the broker has to understand beforehand. Chief among these is the answer to the question of who owns what. It is our experience that there are still quite a few things about sectional title insurance that the broker community at large need to fully appreciate. Unfortunately, a lot of brokers have started to
commoditise sectional title products due to the sharp rise in demand for sectional titles, and a lack of understanding,” Halgryn starts. Halgryn opines that the sector still needs to come to grips with the concept of body corporates as a consumer and customer in its own right, which involves a subset of legal entities that are neither private individuals, nor businesses. According to Halgryn, this has a direct bearing on the unique nature of sectional title products, wedging it squarely in two insurance territories. “From a claims perspective, the broker needs to understand this market. It is our experience that many brokers simply regard it as a buildings combined policy. It does not fit into
the standard commercial, neither the personal lines divide, as it has some characteristics of private homeowners insurance, in that it deals with property damage and public liability. It is also related to commercial insurance with features such as directors and officer (D&O) cover with distinctive cover extensions such as trustees’ liability and geyser maintenance cover,” Halgryn explains.
Who owns what? Halgryn begins by pointing out that there are some very specific rules as to who is responsible for what in a sectional title complex. This is defined by the relevant Acts affecting sectional title and community schemes in South Africa.
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“Ownership brings a duty of care. Brokers, therefore, need some understanding on the whole concept of who is responsible for common property versus personal property. The basic distinction here is between a legal body that consist of an association of people who have certain obligations under the law for the assets owned by a number of people, versus an individual’s obligations for their own, personal assets,” Halgryn says.
COMMERCIAL INSURANCE
SECTIONAL TITLE INSURANCE
The key here, according to Halgryn, is to fully understand the industry specific terms. “Terminology like: unit; section; schemes; the body corporate; home or property owners association; sectional title; share block companies or housing co-operatives are all part of the extended vocabulary to help the industry understand the nuances of what needs insuring and by whom,” she says. “I don’t think, for instance, that many property owners know that they have an unlimited liability in sectional title schemes. To give an example, if a client buys into a sectional title scheme, the Sectional Title Act determines that the client owns a unit consisting for their private section as well as an undivided share in a common property. The body corporate is the legal entity that takes responsibility of the common property on behalf of all the owners,” “Now, if the body corporate makes a wrong decision and underinsures by perhaps not taking the true cost of the building into account, or neglecting ancillary costs, which could amount to almost a third of the building’s value, and a catastrophic loss occurs, the individual owners can be held responsible for the cost of repair.
PRIVATE HOMEOWNER’S INSURANCE 38 8 6
It can easily amount to millions, which the client may need to help pay out of his pocket because of the insurance shortfall,” Halgryn warns.
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For more information on how Emerald can assist your Corporate clients, visit our website or call us. T +27 11 658 8200 W www.emeraldsa.co.za E info@emeraldsa.co.za Find us on Facebook www.facebook.com/ emeraldrisktransfer Or follow us on Twitter www.twitter.com/ emeraldrisk Emerald Risk Transfer (Pty) Ltd (Reg. No. 1998/025512/07) is an authorised financial services provider (FSP No. 13893)
Similarly, excesses can also become complicated, since they apply to the policy. One needs to determine who is held responsible for the excess at claims stage. In case of damage to the complex or multiple units, it is again required to determine the damage to the individual properties, as well as the common property. Then one needs to clearly determine what is regarded as common property. The different Acts that apply, member agreements and the determined responsibilities, governs who is responsible for which portion of the excess. “Brokers also need the right systems and infrastructures in place before they start. You are not just dealing with one person on any given claim and you are going to battle to attend to everybody if you don’t have the proper infrastructure in place,” she imparts.
Liability complications When it comes to liabilities, the client is also entering a minefield. “If you look at standard public liability, it is very simple – the property owner is held liable for injuries or damage to other properties as a result of his ownership. This is pretty much where it stops. The same holds true for your sectional title scheme. There is public liability insurance that covers liabilities as they relate to the individually owned
property, component of the overall policy,” Halgryn says. In sectional title insurance, however, the owner can also step out of his relationship with the policy and sue the body corporate where they had failed in their duty of care. “This can become complex. We are currently busy with a case where the owner of one of the units in a complex fell and sustained severe injury in one of the exclusive use areas that form part of the complex,” Halgryn says.
“Now we need to determine in terms of the various acts that regulate ownership, whether the fact that she has exclusive use of that area, equates to true ownership. The minute that true ownership is proven, she doesn’t have a claim because she had the duty of care. In terms of the Sectional Titles Act, the title owner needs to go through a process of registering an exclusive use area, which then becomes their personal property,” “Alternatively, the Act also made provision
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for those who chose not to go through the cumbersome registration process. The Act allows the exclusive use areas to remain outside of the owner’s private property if there is unanimous agreement by all the other members. In that case, the member has exclusive usage while still not owning the facility. In terms of that, the rules set up by the members determine whether the liability falls on the body corporate or the individual member. One now needs to understand where this exclusive use area fits in, to determine liability exposure,” Halgryn explains.
Where broker input matters The major decisions concerning budgets, trustees and rule changes for sectional title schemes are made by the body corporate at an annual meeting. This, according to Halgryn, is where the broker also has a responsibility to inform his clients. “Payment for the administration and running of a sectional title scheme is shared among the owners. Costs incurred include insurance premiums, repairs and maintenance charges, the wages of cleaning, maintenance and gardening staff, and water and electricity used on the common property,” she says. “Brokers need to ensure that body corporates fully understand the economics behind their insurance policies and talk through the options which could help them to contain insurance costs with a sectional title specialist. Accordingly there are many opportunities for brokers to become involved in a market that will only continue to thrive as the appetite for higherdensity housing increases,” she says.
Complexity in the value chain Another intricacy of the sectional title market, according to Halgryn, is the complexity of the value chain. In contrast to a standard value
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MY
chain, consisting of insured, broker and underwriter, the sectional title chain has a few more links. “You have the owner, trustees, and body corporate. The body corporate appoints a managing agent who places the business with the underwriter via broker. When a loss occurs, it needs to be reported to the trustees, who are the insured. They need to decide whether to claim against the policy and pass that information on to the managing agent.” “The agent now needs to make a decision on whether the loss is a maintenance or insurance claim, since they also manage the levy fund. If they decide it is an insurance claim they pass it on to the broker. By the time the claim gets to the broker, quite some time may have gone by. “Trustees may not immediately have attended to it; the managing agent may have dragged his feet; trustees may even have changed managing agents in that time; information and paperwork could be lost; etcetera. “So I think there is a big responsibility in terms of the product provider to make sure that they can integrate this value chain and its intricacies into the process seamlessly,” Halgryn says. This, according to Halgryn, is where the future of the industry lies. “Considering treating customers fairly (TCF) and the expectations going forward, it is clear that we need to help this core value chain come together. We need to acknowledge that the different parties each play a specific role to ultimately serve the homeowner and create a platform that can seamlessly integrate these responsibilities. Ultimately we need to speed up the process to better deliver to the client. I foresee some major changes for our industry in light of TCF over the coming years,” Halgryn concludes. Composite
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Splitsville
and policy pains Dividing up assets between newly separated parties can cause a lot of difficulty for the insured. Dominic Uys
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I
ndustry veteran and author of the Dictionary for Short-Term Insurance, Charles Lindstrom, warns that short-term insurance policies are often overlooked during divorce proceedings, potentially leading to substantial problems, come claims stage. The Department of Justice and Constitutional Development last year recorded 50 517 divorce cases in South Africa and the numbers are rising, according to its most recent report. As a broker, the chances that one of your clients will get divorced at least once in the time that you know them, is relatively good. As one would expect, emotions tend to run high, and the issue of dividing up assets have been known to become problematic. Given the scenario that the court has successfully given both parties their rightful share, it often happens that one spouse takes ownership of property that is still insured under the other’s name. Christelle Fourie, managing director of MUA, notes that most short-term insurance claims received shortly following a divorce are incredibly complicated. “We have seen cases where the one spouse stops payment on the policies of certain items, knowing that their spouse is going to be stuck with the asset without cover at claims stage. We have also had cases where one spouse tries to claim for items like jewellery after the other has taken it. We then have to explain to the client that they can only claim after they have opened a case of theft against their ex,” Fourie says. “We also see cases every now and again where individuals contact us and accuse their ex of having submitted a false insurance claim at some time during their marriage. Whether the accusations are true or not, we can and do investigate. I think clients should be aware of the fact that they are bound to get caught out for false claims sooner or later, especially if there is an ex involved,” she says. At other times, problems with claims are the result of one or both parties not having done their due diligence where their policies are involved. “During the separation phase,
before the divorce is finalised, insurance needs often fall to the bottom of the priority list, placing the separated couple at an increased risk of insurance claim rejections or underinsurance. This can easily occur when one of the spouses moves out of the home and fails to inform the insurance provider of the new risk address,” Fourie adds.
Options for the recently divorced “Effectively, following a divorce, the assets of the couple are split in terms of whatever arrangement has been agreed upon: This may include things like property, which may belong to dependent children. This is a matter for contractual agreement between the parties, not who paid for what, or under whose name a vehicle, for example, is registered,” Lindstrom starts. “However, where the insurance broker is concerned, there is only one critical issue: the policy must correctly describe the insured as well as the location of the insured property. In the period immediately before, during and just after the divorce it is probably best to note both parties as insured on the policy, and the broker would have to make sure that premiums are going to be paid in full,” he says. “All the options rest with the insured after a divorce. That is to say, they can decide if they want to continue with one policy covering both parties; somebody will have to be paying the premium, and provided both parties are named in the policy, there seems to be nothing to stop either party claiming. However, they cannot both claim for the same property.” “More usually, each will go their own way, even going so far as to change brokers or insurers. In which case, the uninsured party after the divorce holds no right of claim on the other party’s policy. So property which they acknowledge belongs to this uninsured party would obviously be excluded from any claim,” Lindstrom concludes.
Brokers have to care According to Lindstrom, brokers need to bear in mind that underwriters do not have to care.
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“Brokers need to exercise extreme care, first, in clearly identifying who they are acting for, and advising both the underwriter and the other party if they are not acting for one of the parties. Secondly, they need to ensure that they keep up with events so that the insurer can be kept informed,” he continues.
Once again, brokers can easily see difficulties of a similar nature arise when a client is sequestrated or bankrupted. “If the policies are not suitably amended, or if the underwriter is not advised of the changing circumstances, they may be entitled to repudiate their policy,” he says.
Along with this, the broker needs to make sure that the items have been valued. There have been occasions where one of the exes refused to hand over valuation documents – once again, out of spite. But you can always have the items valued by a professional, if that is the case,” Fourie says.
Changes in location of the insured property, and changes in interests in that property, along with possible changes of broker and the possible involvement of new underwriters can all serve to make issues increasingly complicated.
Pick a side
Another problem with having the policy under one name is that emotion often results in the other spouse not caring about the possessions and resultant insurance endorsements, placing the policyholder at risk of claim rejections, she says.
“I have had at least one instance where a couple had moved in together just prior to actually getting married, and because only one was named on the policy schedule I had to separate the stolen goods between ‘his’ and ‘hers’ and exclude the uninsured property. It was the broker who was left with egg on his face,” Lindstrom imparts. Lindstrom further notes that similar things can happen when a spouse dies, and all the property ends up on a policy held by the estate of the deceased spouse. “In such cases the surviving spouse may not be paid out for some time, giving rise to considerable hardship. Similarly, getting together, or splitting up, can give rise to large changes in sums insured,” Lindstrom says
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Fourie points out that, following a divorce, the broker needs to make it clear which of his clients he will be representing. “It is advisable for the broker to only represent one of the parties in a situation like this, to avoid conflicts of interest, “she says. The clarification of who owns which items must be clearly indicated in the divorce settlement to make the process of drawing up the policy easier, she says. “This is often where underinsurance or no cover for certain items come into play, when one of the spouses has forgotten to include an item in their own policy because they thought it was covered by the other spouse’s policy,” Fourie adds. “Now the broker needs to make sure that each item is insured under the correct name. He also needs to make sure that both parties are once again informed under whose name the item is insured, since there have been problems like items having double cover in the past,” she continues.
“For example, should the policy stipulate that other people are not allowed to drive the car, out of animosity the spouse may let other people drive the car and, should an accident occur, the claim could very well be rejected.” She adds that even if one spouse is still responsible for paying, there should be separate policies. “In fact it is better if the policyholder takes full responsibility for the payment, even if they are reimbursed through alimony, because an unpaid policy can also result in major problems when it comes time to claim.” The story continues in the long-term section of this issue, as we look at how splitting up can affect the client’s retirement savings.
Recognition of the
alternatives Dominic Uys
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A recent study denouncing homeopathy has again sparked up debate over whether it deserves a place among the disciplines of the medical profession, and whether already stretched medical schemes should be paying for this form of treatment. RISKSA has a look at what the future holds for alternative treatment in South Africa.
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he topic of alternative medical treatments has been at the heart of some heated arguments over the years, but to date there have been few studies to provide definitive proof of either side’s claim. Among these, of course, is the discipline of homeopathy, which claims to be able to effectively treat ailments by means of minute amounts of herbal substances diluted in water. Over the years this branch of medicine has enjoyed quite a few good breaks, from the United Kingdom’s National Healthcare Scheme funding a homeopathic hospital to the tune of £1.28 million, to South Africa’s private medical schemes covering clients for homeopathic treatment. At the same time, it is also less regulated than more conventional disciplines, begging the question whether medical schemes should be taking it seriously. A potential nail in the coffin of alternative healthcare came in the form of a draft information paper, published earlier this year by Australia’s National Health and Medical Research Council (NHMRC). The document reported that there was no evidence to support homeopathy as an effective health treatment. The report is the most extensive effort to debunk the discipline to date. It assessed the effectiveness of homeopathy in treating 68 ailments, including asthma, arthritis, cholera, chronic fatigue syndrome, eczema, flu, heroin addiction and malaria. The conclusion was that it proved no more effective than placebos. In South Africa, homeopathy is recognised by the Allied Health Professions Council (AHPCSA) and practitioners consequently need to be registered accordingly. The Board of Healthcare Funders’ stance on the craft also gives a good indication that homeopathy seems to be in very little danger of becoming a lost art. “The BHF acknowledges that there are many people who do believe in homeopathy and alternative medical treatments. There is also some potential in a few of these alternative treatments, and we do support more research being done. We believe that it does have a place in the greater medical profession as a supplement to conventional medicine,” says Dr Rajesh Patel, head of benefit and risk at the BHF. “We are seeing mainstream and alternative medicine merging more. If, for example, a patient has to go through chemotherapy, the registered homeopath would prescribe remedies that could assist with the side-effects of the treatment. So instead of taking over the counter anti-nausea medication, the client can try an herbal solution,” adds Rob Wilson, director at Dave Wilson & Associates.
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Moving towards better regulation Stricter regulation of the homeopathic sciences is, however, on the cards for the near future, which may provide South African homeopaths with a firmer leg to stand on when it comes to making a case for medical scheme recognition. The Medicines Control Council (MCC) has published a roadmap to 2018, by when all homeopathic medicines will need to be registered in the same manner as mainstream treatments. “At the moment there is some reimbursement taking place for homeopathic treatments from some medical schemes’ risk pools. Our biggest challenge as a profession is, of course, trying to get more medical schemes to cover a bigger percentage of treatments from the risk pool,” starts Dr Neil Gower, national secretary to the Homoeopathic Association of South Africa. “Complimentary and herbal medicines already need to be registered with the MCC, whether you are talking about proprietary or publically available medicines. We’re obviously quite supportive of that because we need to be able to evaluate its efficacy.
Medical scheme cover
is set out by the Board of Healthcare Funders.
Wilson notes that brokers should be able to find policies that cater for clients that place stock in alternative medicine.
“Capitated schemes are completely closed to the issue and do not cover alternative treatment at all. Discovery’s KeyCare, for instance, doesn’t cover homeopathy, or even physiotherapy for that matter,” Wilson says.
“There is a movement amongst a lot of people who are looking towards homeopathy rather than mainstream medicine. And schemes do acknowledge the demand amongst their members for homeopathic medicine. While the industry is not as stringently regulated as other, more mainstream medical fields, the vast majority of schemes will allow their members to claim for these treatments and remedies on their medical aid savings account,” Wilson says. The schemes do however have conditions in this regard, the first of which is that the treatment must be prescribed by a provider who is registered with the relevant councils, such as the Allied Health Professions Council. Secondly the treatment or medicine must be prescribed for a clearly defined diagnosis that can be classified according to the coding structure as it
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Wilson points out that when brokers have meetings with their clients, they must make sure to ask whether the clients prefer to use homeopathic treatments as opposed to mainstream medicine. “That’s fine, but then the broker needs to inform the client of the conditions – it will be paid for from their savings accounts and the practitioner needs to be registered,” he adds. He adds it is important that the client understands that the extent to which they rely on homeopathy is entirely up to them. In the majority of cases, registered and reputable practitioners would tell the client that they should not be used in exclusion of mainstream medicine, but as an add-on.
“It has, unfortunately, not happened until recently because complimentary medicine has fallen into this big grey area over the last 15 to 20 years. Very little of it has ended up being registered,” he says. “A lot of the decisions regarding medical cover prior to this has been approached from the standpoint that homeopathy is simply tolerated in the market. The fact is, however, that practitioners in South Africa, as opposed to many other places in the world, are held accountable for the work that they do, just as much as other medical professions,” Gower says. “If there is any homeopathic medicine that makes any unproven claims, it will now need to first be registered with the MCC before it can be sold in the country. Part of the MCC call-up process is that they will be calling up high-risk medicines that fall into particular pharmacological classifications, to be dealt with upfront. The challenge now is that we are not really seeing an influx of new medicines on the market as a result of the process,” Gower says. “Another significant challenge for us is that we are now seeing medical schemes making decisions on which medicines to cover, without waiting for this registration process to be completed, which we believe is a little unfair. Patients are still receiving treatment, but the schemes are now deciding not to pay for that,” he adds. “As a profession, I see some risk for us over the coming years but there is also the benefit to the public that such a registration process is in the works,” Gower concludes.
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THE PEACE OF MIND TO RECOVER
A severe illness can happen to anyone at any age, and if your client suffers a severe illness, they will need the peace of mind to know that they are in a financial position to access the best treatment and opportunity to recover. With early detection and the right treatment, more and more people are surviving a severe illness, but it’s the recovery and rehabilitation expenses that can prove to be debilitating. If the unexpected happens to your client, they need to know that they are financially prepared when it’s time to fight back, and that they are able to focus on doing just that.
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GREENLIGHT’s philosophy to pay 100% if your client suffers a severe illness remains the same. We still strongly believe that recovering from a severe illness is expensive and your client shouldn’t have to worry about how to pay for rehabilitation costs, debt, time off work, meeting regular expenses and financial commitments and other unexpected costs when they should be focusing on the fight back to good health. We have introduced a more affordable severe illness benefit to our new range that pays an amount relative to the severity of the illness. This benefit includes the Cancer benefit enhancer which can boost your payout up to an additional 25%, limited to 100% of your cover amount.
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D U A FR
Hospital cash plans under the microscope Christy van der Merwe
The issue of medical aid fraud was one that featured prominently at the 15th annual Board of Healthcare Funders conference held earlier this year. One of the larger areas of contention is that of the hospital cash plan, and particularly the fraudulent activity in this arena that is said to be costing both the long-term insurance industry and medical aid schemes in South Africa millions of rands. 66 8 4
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he hospital cash plan (HCP) has become more popular in South Africa, with an estimated 1.5 million policies in place, providing cover for about 2.4 million people in South Africa, according to the 2012 FinMark review. This number could be much higher now, as medical costs continue to increase, and it is estimated that about 50 000 new policies are sold every month, and policyholders can purchase policies from various providers. The HCP policy pays a daily cash amount for every day spent in hospital, and the benefit usually becomes payable after day two or three of hospitalisation, depending on the contract.
there is a potential increase in fraudulent claims where collusion is helping dishonest policyholders make claims they are not entitled to, and patients are being treated for minor conditions which could be treated out of hospital. These patients are also being kept in hospital for much longer than needed, enabling a claim from their hospital cash plan which requires a minimum three-day hospital stay. The ASISA has reported fraud statistics showing that in 2011 ASISA members detected 549 cases of fraud worth R4 million, and in 2010, some 649 cases were detected worth R12.6 million. Many excessive HCP claims appear to be part of organised syndicates and scams, and often specific hospitals are targeted and doctors and hospital staff can be party to the crime. If abuse of HCP continues to escalate, insurers have said they may be forced to implement tough measures to ensure the financial viability of these products such as raising premiums, introducing standard cancellation clauses and even stopping HCPs. Head of group forensic services at Discovery, Marius Smit, says that HCP products provide a perverse incentive for people to go to hospital, and stay there as long as possible. He highlights that while long-term insurers may be losing money to HCP fraud, the medical schemes in South Africa often lose up to 10 times more money than long-term insurers thanks to HCP fraud. He provides research showing that there are concerns over significant differences in hospital claims for medical schemes and HCPs. This research shows that the average hospital admission rate for HCP policyholders is up to five times greater than for Discovery Health medical scheme beneficiaries. And the average length of stay for HCP admissions exceeded Discovery Health medical scheme patients by between 40 per cent and 60 per cent. The policyholder is admitted to hospital first, and makes the claim once discharged. On the one hand, explains Association for Savings and Investment South Africa (ASISA) policy advisor, Brad Frank, HCPs play a vital role in South Africa as they alleviate the financial burden of hospitalisation, especially for self-employed individuals or policyholders experiencing emergencies not covered by their medical scheme. The products are generally easy to understand and are designed to help consumers cope with unexpected hospital expenses. However, in the current market environment
No pre-authorisations are required, which is viewed as the major problem. This is an area where administrators play a role in the medical aid environment, ensuring that all medical procedures that go ahead are legitimate, and ensure ability to track frequency of claims. Case studies have shown that the number of ‘outlier’ hospitals, where potential fraud is most often identified, is higher in KwaZulu Natal. Syndicates are said to be sending out notifications to policyholders, informing them when there are beds available in hospitals. The case studies have traced repeat offenders, and examples include a 43-year old who was
admitted to hospital with left hand pain and stayed in the hospital for three days, received pain medicine, and was discharged with no investigations. The person was found to have been admitted to hospital 17 times over two years. Another potential fraud case was discovered when a 46-year old man was admitted to hospital for a urinary tract infection, stayed in hospital for four days and received pain medication and antibiotics and was discharged. The person had 18 hospital admissions over two years, while the family had over 30 hospital admissions over two years. “These are alarming numbers, and medical schemes must come up with strategies to address this,” says Smit. Although there is conflict between the two providers (medical aids and HCPs) because HCPs are there to cover a shortfall, fraudulent and unnecessary hospital admissions hike up costs for both providers.
How to recover Getting rid of HCPs is not the answer to the issue, emphasises Frank, because it is a much-needed product in South Africa that helps people to cope with the costs of medical emergencies. “There needs to be greater collaboration between the insurance industry and the medical aid industry. This will allow us to identify trends and high-risk areas or fraud cases. If fewer people are admitted to hospital, both parties save,” says Peter Kerford from MMI Holdings. Having a more holistic view of an individual, such as knowing who has a medical aid as well as two or three HCPs could alert companies to potential fraudulent activities. Smit estimates that about 30 per cent of Discovery Health medical scheme beneficiaries also have HCPs. In addition to industry collaboration, a way forward has been plotted in an attempt to lower the incidences of fraud in the HCP space. Some insurers have started including cancellation clauses in their HCP contracts thus protecting honest policyholders from premium increases Insurers are also encouraged to report unscrupulous practitioners to the Health Professions Council of SA. There will also be a process to review and implement a protocol around multiple claimers including: identification of multiple claims from a single policyholder and the reasons for admission and treatment done; the creation of a ‘flagging system’; and ability to look at the claims history of the policyholder.
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What
income benefits mean for life cover Brad Toerien, FMI CEO
The debate between lump sum and income benefits has long existed in the disability space with the ideal disability portfolio including a combination of lump sum (to settle once-off expenses) and income benefits (to replace a regular income stream).
I
n the life market, income – based solutions have struggled to achieve market share due to continued faith in traditional lump sum solutions. However, there are very good reasons to consider a combination of lump sum and income – based life benefits when structuring a client’s life cover portfolio, and the reasons are very similar to those put forward in the disability space.
Lump sums introduce risk Using a lump sum benefit to match a client’s
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(or client’s beneficiaries) long-term income requirements introduces a number of risks: 1. Reinvestment risk: At what rate of investment return will the beneficiary be able to re-invest a lump sum pay-out? Will the investment return prove sufficient to provide for the beneficiaries’ inflation adjusted income needs over an unknown future period? Given that the appropriate investment strategy generating a 3 – 5 per cent per annum real return over the longterm is reasonable, a client drawing down
3 – 5 per cent of their investment each year should receive an inflation adjusted income stream in perpetuity. However, there are risks in this approach: • Market volatility: Generating a positive long-term average real return is expected, but there is no guarantee that this return will be earned in each future period. A period where the return generated underperforms against the long-term expectation will either require that the beneficiary reduce the amount of their monthly income
timing risk to the beneficiary. If the payout is received at a point in time where markets are expensive, it may not be appropriate to invest the full proceeds immediately or it may not be possible going forward to generate the real returns required. 2. Beneficiary behavioural risks: There is simply no guarantee that the beneficiary will invest lump sum proceeds appropriately to provide an income or that they will be disciplined in the long term with respect to the sustainable rate of draw-down. In the absence of sound financial advice (which may or may not be followed), it is doubtful that most recipients of large lump sum amounts have the financial knowledge necessary to create a sustainable long-term plan. 3. Longevity risks: The simple fact is that people are living longer. The traditional paradigm of planning for an individual to live to the age of 75 – 80 no longer applies. This means there is no way to determine how long we require an investment to produce an income, and this makes it difficult to set the drawdown rate at the correct level. This is problematic where a lump sum amount is expected to provide an income stream for the remainder of a beneficiary’s life.
RYNO Killing himself with 30 a day.
Income benefits mean less risk Income benefits remove serious risks from the beneficiary. Instead of receiving an unwieldy lump sum, they receive an inflationlinked guaranteed income stream that pays out for the full term specified, irrespective of the external economic environment. Very simply, reinvestment, behavioural, and longevity risks are retained by the insurer rather than transferred to the beneficiary.
draw-down or draw down at a higher rate. Either way, a period of under-performance could seriously jeopardise a perfectly reasonable investment plan. • Inflation risk: There is no guarantee that investment returns will exceed inflation in each future period which would give rise to a similar outcome to market volatility – the beneficiary will either need to adjust their income requirements or draw against the investment at a higher rate than planned. • Timing risk: Lump sum pay-outs transfer
This does not mean that lump sum benefits are not of value in the life cover space. As with disability cover, a combination approach is best. Income benefits provide a guaranteed income stream for the required period, ensuring that the amount is used as the Life Insured intended. Some lump sum could then be used to pay once-off debts while the rest could be re-invested in line with long-term investment goals. There is no doubt that income benefits have a place in any life cover portfolio where the client is seeking to match their beneficiaries’ future income needs. The reality is that any solution that combines the potential benefits of a lump sum reinvestment strategy with the certainty of a guaranteed income stream is likely to reduce the overall risk inherent to their financial plan.
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With a little help from
my friends
In June of this year, auto insurer, Guevara opened its doors to the UK market. Setting this company apart from the competition is the company’s claim to be a true peer-topeer (P2P) insurance company. But while the company describes itself as a revolution in insurance, the fact remains that others have tried this route and failed. Dominic Uys
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Members choose their pools in one of two ways. They are either invited by a friend or family member, or the company will suggest the best fit. Higher risk members pay a higher amount as a joining premium and are assessed in the same way as other mainstream insurers approach new policyholders. From there the member continues as usual and, in theory, could start seeing rewards for safer driving behaviour from the following year.
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hrough its peer-to-peer system, Guevara claims to be able to reduce policyholders’ premiums by around 50 to 80 per cent. The concept is based on the methodology that members pool their premiums in groups that they select or that are allocated to them by the company. The unclaimed money in the pool will subsidise a reduction in premiums for the following year. Safer driving pools can see year-on-year decreases in premiums, but this also means that the unsafe driver pools could essentially see premiums rise. The company points out, however, that premiums are capped, providing at least some safety net for members.
Members who claim often, or who are considered to be reckless, can also be silently voted out. The company can then reassign the member to a new group. If members’ friends or family join the company later, members can also elect to change to their pool. The concept seems simple enough, and the company certainly proved its appeal by selling around £100,000 in premiums within the first 24 hours of officially opening shop. Guevara is moving in on a business sector that has been exclusively operated by one Germany-based operator in recent years. It is important to note that peer-to-peer insurance has been attempted in the market by several companies in the past, with the majority of hopefuls folding. Friendsurance seems to have survived the odds, however, having operated in the space for the past four years. Friendsurance launched into the European market in March of 2010, covering most mainstream short-term policies from liability to auto insurance.
Proven model Friendsurance spokesperson, Eva Genzmer tells RISKSA that the company’s P2P model proved itself effective by year three of operation. “In 2010, the founders of Friendsurance realised that many people own insurance policies that they rarely or never use. However, insurers do not reward caution and fair play. Ironically, it could also mean less work and lower operating costs for the insurers themselves. We developed the Friendsurance Method, which allowed policy owners to regularly get some of their premiums back if no claims are submitted,” she starts. As with Guevara, Friendsurance policy owners form small groups, with a part of their premiums paid into a common pool. If no claims are submitted, the members of the group get some of their money back at the end of each year. Small claims are settled with the money in the pool while larger claims are settled by the insurer.
“In either case, policy owners always enjoy full coverage and do not pay more than they would without Friendsurance. In 2013, more than 90 per cent of those who took advantage of the Friendsurance Method received some of their premiums back,” Genzmer says. “To form the groups, Friendsurance links policy owners in the same lines. Alternatively members can create their groups individually and connect with people that they know. They can invite friends and family or match their Facebook and Linkedin contacts with the Friendsurance members,” she continues. “Currently, our peer-to-peer insurance concept can be used for existing personal liability, home contents, and legal expenses insurance policies with different values as well as for new insurance policies, which are taken out on Friendsurance.de.” When a claim is submitted, it is displayed in the personal account of all group members – without giving any details.
Positive reception Keeping the company’s lights on over the four years of its existence has not been easy, according to Genzmer. “There have been regulatory challenges as well as actuarial challenges. It also took some time to find partners. As a newcomer in an established branch, you are either dismissed outright or not taken too seriously. But this is normal and simply something one has to overcome as a new player in a new market,” she says. The response from the market however gradually turned to a positive one, with its business model convincing institutional and private investors from the internet scene to buy into the company. “Among them e-ventures as well as the Hong Kong billionaire Li Ka-Shing and his technology focused Horizons Ventures. At the same time we have increased our customer base to a good five digit number,” Genzmer reports. “Today we also cooperate with the most renowned insurance providers in Germany. They like to work with us because they save costs with our Friendsurance principle. We have a proven track record of reducing fraud while at the same time reducing operational costs for the handling of small claims. Our vision for the future is to enable all policy owners to profit from the Friendsurance method as we believe that insurances should become cheaper when you don’t have claims,” she concludes.
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