Editor
Notes From the Editor By Clive Franks
W
ith the start of the 4th Quarter and 2011 drawing to an inevitable close this is a time to reflect over the occurrences of the year gone by.
We have once again experienced some outstanding highlights in 2011, the first and foremost being the glittering and well attended prestigious FIA Awards which took place in June followed by the highly successful Insurance conference co- hosted by the FIA, IISA and SAIA. We also celebrated the appointment of Justus van Pletzen as the new CEO and Brian van Flymen as the New President of the FIA. The year was very intense with regards to the RE 1 and RE2 regulatory exams with the FIA at the forefront of discussions with the FSB mainly with regards to the language, format and time issues that were raised by our members, with the FIA achieving major concessions from the FSB, emphasising the influence that the FIA has as an organisation in achieving our goals and fulfilling our members needs. There were highly successful workshops carried out by the FIA with Anton Swanepoel throughout the country which according to the feedback received by members were extremely helpful in enabling them to have a deeper understanding of the questions and thereby helping them to pass the examinations. The IISA workshops were also run very competently and most helpful to those that attended them. The high standard in which these were run are greatly assisting members to pass. We have also seen a year filled with regulations that are to be enforced by the regulators and government in order to protect the consumer namely the Consumer Protection Act and Treating Customers Fairly. We have also reached the stage with the NHI whereby a green paper has been published in order to afford the majority of South African citizens affordable Healthcare. There are still many issues that still have to be ironed out in this regard and the roll-out will be spread over a number of years with the date of final role out predicted to take place by 2025. The main issue will be the funding of NHI, there have been various ideas put forward but these still have to be investigated and assessed before a final decision is made. With the December deadline looming for pension funds to comply with the revised Regulation 28 of the Pension Funds Act, trustees must ensure their funds are compliant. The Regulation was effective from 1 July 2011, but as compliance is complex the Registrar allowed for a transition period to 31 December. The transition period allows time for funds to not only adjust their portfolios to comply with the new asset limits, but also to adjust their monitoring and reporting systems to ensure compliance. Regulation 28 stresses that while tasks can be delegated, responsibility cannot be abdicated.
The FIA Advisory Council held its annual meeting on 14-15th November in Kopanong near Benoni. The president gave his feedback to the council and brought to the fore the results of the survey by Bluestream Consulting as to the needs of the members. The president also discussed the major issues going forward for the FIA and the relationships and the road ahead regarding regulation and the achievements and the FSB. One of the most significant issues emerging from the meeting was the need for a more snappy and professional form of communications which will be looked at very intensely and with the help of communication specialists. The launch of the FIA’s Code of conduct at a dinner was well attended with 80 captains of industry in attendance. The new Code of Conduct is fully aligned with FAIS but is also aimed at ensuring that our members remain compliant with future legislation such as Treating Customers Fairly (TCF), enabling you to align your business with the new legislation as seamlessly as possible in a format that is easy for both you and your clients to understand. This new Code of Conduct replaces our existing Code of Conduct - which has now been renamed the Code of Ethics and remains applicable to all FIA members. The incoming Chairperson of the Advisory was elected for the next term and congratulations goes to Gerrit Lambrects, Chairperson of the Southern Cape and will ex officio also serve as Director of the FIA. We would like to congratulate him and wish him all the success in going forward and pledge our full support of him in this capacity. We would also like to thank Steven Akakios the outgoing Chairperson for his graet contribution and the passion with which he served the FIA branches and members during his tour of duty. It was a privilege to work with Steven. Congratulations are also due to the Platinum and Southern Cape branches on jointly winning the Branch of the Year Award for 2011. Without the sacrifices and passion of the two branch chairpersons and their committees this achievement would not have been possible.
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TABLE OF CONTENTS FIA Insight The official mouthpiece of the Financial Intermediaries Association of Southern Africa P O Box 11901 Centurion 0046 Tel: 012 665 0085 Fax: 012 665 0534 Email: info@fia.org.za Website: www.fia.org.za Publisher Financial Intermediaries Association of Southern Africa Chief Executive Officer Justus van Pletzen justus@fia.org.za President Brian van Flymen brian@vanflymen.co.za Editor & Media Manager Clive Franks Fax: 086 642 4540 Cell: 082 306 9158 clive@fia.org.za Graphic Design Streak Design cc Cell: 083 447 2010 Editorial Contributors Brian van Flymen, Justus van Pletzen, Mike Stoker, Gareth Stokes, Linza van Aswegen, Barry Taylor, Gavin Came, Pieter Cronjé, Tim Rutherford, Dr Elmarie de la Rey, Quinten Matthew, Matia Titi, Johan Gouws, Geraldine Macphearson, Craig Lawrence, Gerhardt Meyer, Damien Mc Hugh, Izak Smit, Thomas Schlebusch, Alicia Goosen, Willem Smith, Nico Coetzee, Christelle Fourie, Ron Warren, Jeffry Butt, Frank Schutte Subscription Rate: R119.80 inclusive of VAT per annum Disclaimer: FIA national office has the name of an independent practitioner near you. The views expressed in this magazine are not necessarily those of the FIA. Readers following any advice contained in the magazine, do so at their own risk. The FIA does not endorse any product supplier or any advertisers’ products.
NB! Please find included with the magazine both an Afrikaans and English version of the FIA Code of Conduct as well as the pyramid of the FIA's Future Strategy.
Editor’s Soapbox
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1
Presidents Message
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4
From the Desk of the CEO
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6
Medical Tax Credit will Benefit Disabled
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7
Pension Funds Adjudicator
PAGE 10
Driving Specialist Insurance Sector
PAGE 12
Solvency Assessment & Management Initiative
PAGE 13
Safe Guarding Workers Death Benefits
PAGE 16
Retirement Planning
PAGE 17
Choosing An Independent Financial Advisor
PAGE 18
Short-Term Insurance Overview 2011
PAGE 20
Special Trusts in Financial Planning
PAGE 21
Financial Planning Highlights 2011
PAGE 22 PAGE 23
Healthcare Report Back 2011
PAGE 24
FIA Advisory Council
PAGE 26
Is There Still Need for an Advisor
PAGE 28
Growing Your Brokerage
PAGE 30
EB Roundup 2011
PAGE 32
Expensive Belongings Left in Vehicles Overnight
PAGE 33
Life Insurance Confidence Levels
PAGE 34
Hedge Fund Investors
PAGE 35
Outlook for 2012
PAGE 36
Demand for Specialised Insurance
PAGE 38
Defining Short-Term Insurance Risk Profiles
PAGE 40
Financial Planning Case Studies
PAGE 40
Clarity on Investment Costs
PAGE 41
Fire Safety Requirements
PAGE 42
Fight Against Fraud
PAGE 43
Decrease in Property & Vehicle Crime
PAGE 44
Snippets
PAGE 45
Appointments
PAGE 47
Safeguarding Against Piracy
PAGE 48
FIA President
President’s Message
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he Board of Directors of the FIA, following on a decision raised at the Advisory Council in 2010, commissioned a survey to determine the core needs of the members and the value offering that membership of the Association affords. Bluestream Consulting, who have the necessary experience of the intermediary industry as a consequence of handling our annual awards project, were appointed to prepare the questionnaire and coordinate this intricate process. Members will appreciate this was a lengthy and involved task but ultimately the detailed analysis provided by Bluestream clearly defined the requirements and expectations that membership should provide. Naturally the Board has been compelled to prioritise the areas of core focus and develop a strategy necessary to give effect to the value proposition. The pyramid enclosed herewith reflects in easily understandable format the results of the survey. This proposed strategy which has been adopted by the Board and approved by Advisory Council focuses on 3 areas of activity: Representation - To be the single respected voice and face of the intermediary industry by enhancing our status with all stake holders Professionalism - To create a sustainable, qualified and respected body of intermediaries Communication - To improve our current delivery by the inclusion of modern trends such as social media, amendments to the structure of the secretariat and improvement of relevancy Code of Conduct - The adoption of a method of operation which aligns with the requirements of the FAIS Act and is intended to assist members to engage with their clients professionally, honestly, with integrity and due skill. The code also contains an 8-step process for all members of the FIA to follow: 1. 2. 3. 4. 5. 6. 7. 8.
A comprehensive and professional introduction to clients Gather client information Enter into a service agreement with the client Conduct an analysis and prepare a client proposal Present the proposal to the client Enter into a Financial Service agreement with the client Implement the agreement Render continuous advice and/or intermediary services to the client
With the combination of both the FIA’s Code of Ethics and the new Code of Conduct, we can provide clients with the peace of mind that they are dealing with competent and reputable financial advisers who have their best interests at heart. The Board of directors are confident that this Code will contribute to professionalism from an intermediation point of view and is appreciated and welcomed by the FSB.
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Short-Term The FIA would like to take this opportunity in congratulating Mr Dennis Jooste on being appointed the new Ombusdsman for Short-Term Insurance commencing from January 2012. We at the FIA would like to wish him all the success in his office and assure him of our continued support.
Binder Agreements The Insurance Laws Amendment Act, Binder regulations were signed off by the Minister and have successfully advanced through the “public comment” process. There will be a fine tuning of the regulations and then will be presented to Parliament to be signed off and confirmation that the FSB have acted within the scope of their mandate. It is anticipated that these regulations should become effective from the 1st January 2012. Financial Planning The biggest bug bear is still the FAIS Act and its myriad of regulations. The roll out of FAIS, which started with the now innocuous looking PPR rules brought out by the life industry, has matured into what the authorities believe is a comprehensive regulatory framework, for a professionalized industry. Many would say there is still a long way to go. We will need to look forward to the promise of TCF and ultimately the “twin peaks” model, with the Reserve Bank and the FSB working in concert to oversee prudential regulation and market conduct. The actual on the ground implementation of the provisions of the FAIS Act is now a frustration to both intermediary and client alike. The implementation of the RE exams remained the most controversial development of the year. The FIA’s criticism related to the implementation of the exam rather than the principle. In a demonstrable show of the value of working with our regulator rather than adopting a confrontational stance, we were able to agree that the Afrikaans exams would be offered and that the deadline would be extended to June next year. Healthcare. National Health Insurance: The FIA believes and supports the notion that access to quality care is the right of every South African. The eagerly anticipated green paper on government’s proposed National Health Insurance (“NHI”) has drawn wide criticism from various sectors, mainly regarding its big price tag! However, once all the doom and gloom of expenditure has been digested, there are a number of very positive points that can be drawn from this policy paper. In a nutshell an NHI is good for any economy. Not having decent healthcare available to the broader population is a major failing for a country – especially when the capacity and expertise exists to provide far superior healthcare than what the average SA citizen currently receives. Employee Benefits The Minister of Finance proposed far-reaching changes to retirement funds, namely a maximum annual threshold on tax deductible contributions to a retirement fund of R200 000, the phasing out of provident funds and extending the range of service providers that are allowed to provide living annuities. The EB Exco, which has a seat on the Institute of Retirement Funds’ (“IRF”) Legal and Technical Committee, gave input via the IRF and also engaged with National Treasury on the necessity for extensive further discussion prior to implementation of any of the proposals. The revised regulation 28 was finally released. The key changes in the revised regulation are that a retirement fund may now invest a small percentage of its assets in hedge funds and that a retirement fund must now also comply with the limits on asset classes on a member investment level (previously a fund only had to comply with the limits on assets to the fund’s assets as a whole). Following industry engagement, the FSB granted extension for the implementation of certain parts of regulation 28 until 31 December 2011.
FIA CEO
CEO’s Report
T
he year 2011 will be remembered for its economic uncertainty, volatile markets and regulatory changes, but the biggest memory most intermediaries will take away from this year will no doubt be the RE exams and the negative emotions surrounding them. Thankfully, this has mainly proved to be unfounded, with the majority of members to date having passed these exams. With regards to RE 1, the FIA has achieved great strides in a positive direction by negotiating and addressing the concerns and needs of our members with the FSB. The FIA hosted numerous workshops which assisted our members in their preparations to face the exams with complete confidence. The FIA will analyse the status quo early next year in order to determine the need for further workshops. We also held a very successful Advisory Council on 14-15 November where the focus was on the future strategy supported by the necessary structures going forward. The Board of the FIA emphasised the importance of our branches. “The strength of this organisation lies in the numbers and the numbers are represented in the branches�. At the Advisory Council it was agreed that the FIA will implement the strategy and new value proposition by March 2012. Our biggest objective will be to empower and support branches in order to reach more members on the ground with quality information.
Our biggest challenge for 2012, to the industry and intermediaries alike, pertains to the FSB discussion paper in connection with the Definition of Intermediary Services and Remuneration which has to be submitted to the FSB by 30 March 2012 and requires the input of all our members for us to take a definitive decision in this matter. We have already established both short-term and long-term workgroups to analyse the document and prepare our view and response. I would also like to take this opportunity to thank the Board of directors, Exco members, and all our volunteers for their selfless contributions to and on behalf of their fellow members. I am sure that their effort is appreciated by all the FIA members. I trust that all our members will take a well deserved break over the festive season and return safely and well rested for the New Year. Kind regards Justus.
Medical Tax
New Medical Tax Credit for 2012 Will Benefit Disabled By Ron Warren, executive chairman of NuQ
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new medical tax credit will come into force in March 2012, replacing the existing medical aid cap amount, giving employees more deductions and providing extra benefits for the disabled, who currently qualify for the same cap amount as everyone else for PAYE purposes. This is according to Ron Warren, executive chairman of NuQ, who says that with the current cap amount, tax payers qualify for a deduction from their taxable income of R720 a month for each of the first two individuals that are covered by their medical aid contribution and R440 for each additional medical aid dependant when PAYE is calculated. “With the new medical tax credit, employees paying medical aid contributions will qualify for a deduction of R216 a month from their net tax for themselves, plus an additional R216 for the first medical aid dependant and R144 for each additional dependant,” Warren explains. He says that if the employee or any of the dependants are disabled or over 65 the employee will be entitled to a further deduction from net tax of R216 a month. “The draft Act is ambiguously worded in respect of this additional tax credit, and it is possible that an additional R216 a month is to be allowed for each person over 65 or disabled,” he adds. Disabled employees currently qualify for the same cap amount deduction as anyone else and Warren says that the fact that they are disabled is not taken into consideration when calculating PAYE. “Of course, when their annual tax return is submitted to SARS, they will be allowed their full medical aid contribution as a deduction from income,” he explains. “But from March next year, employers will need to keep track of all disabled employees and the dependants who are covered by their medical aid contributions.” He says that this could pose a challenge as there is no guidance in the draft Act as to how employers are expected to ensure that the claimed disability is genuine. Must the employer just accept the employee’s statement that a dependant is disabled, or must they request some form of proof? He adds that employers will also need to keep track of the ages of employees’ dependants, to determine whether they are under or over 65.
Pension Funds
Renewed Faith in Rulings of Pension Funds Adjudicator
T
he number of applications to the High Court for review of determinations issued by the Office of the Pension Funds Adjudicator (OPFA) has dropped.
This was reflective of renewed faith in the OPFA’s investigation and determination of complaints, says acting Pension Funds Adjudicator Dr Elmarie de la Rey. Writing in the 2010/11 Annual Report of the OPFA, Dr De La Rey said that when compared to previous years, as well as listening to feedback from stakeholders, she was satisfied the “substantial decline” in rulings being taken to the High Court was due to “renewed respect and confidence in the determinations made by the PFA”. Overall, at the end of the year under review, 6 220 new complaints had been received by the OPFA, 894 complaints had been settled by conciliation, 1 430 were determined, and 3 799 were resolved without requiring determination. Dr De la Rey said the OPFA has faced a number of challenges during the reporting year. Apart from dealing with the unexpected death on 6 November 2010 of Charles Pillai, the fourth Pension Funds Adjudicator, the OPFA had to deal with challenges around compliance with the provisions of the Public Finance Management Act 1 of 1999 (PFMA) and Treasury Regulations, the implementation of new policies, and outdated IT and case management systems. The planned improvement of the case management system, including the development and implementation of customer relationship software, as well as the ongoing skills development of all staff members, would contribute to complaints being resolved more expeditiously. In terms of challenges around compliance with the provisions of the PFMA and Treasury Regulations, Dr De la Rey said two staff members, the finance manager and the accountant, had left employment at the OPFA at short notice at the beginning of the financial year. “Fortunately an experienced consultant assisted until a new finance manager was appointed in May and a new accountant with effect from 1 September 2010. “With only one staff member remaining in Finance, the lack of continuity and the progression towards a more compliant environment presented certain challenges. “The situation has since improved considerably and it is anticipated that in the next financial year, the OPFA will be fully compliant with the PFMA and treasury regulations.” In terms of challenges posed by the implementation of new policies, she said a substantial number of formal policies were drafted and approved by the Financial Services Board in order to comply with the PFMA. The bulk of the policies were approved on 30 September 2010 and had to be implemented immediately.
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The implementation of various policies, which included the anticipation of the annual increase date from 1 April 2011 to 1 January 2011, performance-based increases and incentive bonuses, led to some dissatisfaction amongst staff members. These concerns
had all been addressed. One of the operational improvements implemented from April 2010 to reduce turnaround times in dealing with complaints and the backlog of complaints has been the formation of a dedicated team in the Adjudication Unit to deal with complaints lodged before 1 April 2008. This had successfully reduced the number of unresolved old complaints. It is anticipated that all complaints lodged prior to 1 January 2009 will be resolved before 30 November 2011. In a message in the OPFA Annual Report, Finance Minister Pravin Gordhan said National Treasury’s pursuit of the “twin peaks” model of financial supervision followed international best practice and sought to reduce regulatory risk. This was done by dividing the burden and authority in financial oversight between two institutions; one responsible for supervising consumer protection and market conduct, and the other responsible for prudential regulation. He said the OPFA had “a very important role to play in this new regulatory framework and in protecting members of retirement funds”. “The proper management of retirement savings is crucial to the welfare and wellbeing of South Africans, and also to the economy since they are a source of long term savings. “The OPFA has, since its establishment in 1998, done very well in affording members of pension funds an opportunity to have their complaints investigated and resolved in a procedurally fair, economical and expeditious manner, without the need to resort to the courts. “To further enhance accessibility to members of the public, the OPFA has since April 2011 been participating in the centralised complaints helpline for all financial Ombud schemes, where members of the public can phone a toll-free number for more information about the different financial Ombud schemes. “This bears proof of the greater measure accorded to representing and protecting member rights and interests,” Gordhan said. He added that the operations of the OPFA were forging ahead with the assistance of the reappointed Acting Adjudicator, Dr Elmarie de la Rey. “I am optimistic that Dr De la Rey and her team will continue to steer the ship and provide retirement fund members with a convenient and accessible recourse system and wish them well in this important role,” said Gordhan.
Driving Insurance
Expertise Key to Driving Specialist Insurance Sector By Quinten Matthew, Santam’s Executive Head, Specialist Business.
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thorough understanding of clients’ business and the industry challenges and risks they face are the key requirements for insurance clients in the specialist business sector, says Quinten Matthew, Santam’s Executive Head, Specialist Business. Specialist insurance is far more complex than everyday ‘off the shelf’ insurance and requires a set of distinct underwriting skills and industry experience. Essentially, it is the type of insurance which looks after companies or individuals with an interest in industries such as aviation, marine, logistics, construction, engineering and large complex industrial and manufacturing concerns. Santam brings 93 years of know-how and believes that industry knowledge, focus and understanding of a client’s industry, business and risks, is critical in the specialist business sector. “Specialist insurance is far more complex than personal cover because the environments that the client’s businesses operate in are affected by a very different set of risks. A broker and insurer that not only understand your business, but also the industry that you’re in and the challenges you face is best placed to navigate the inherent complexities involved,” says Matthew. Santam has developed relationships with close to 5000 brokers who are skilled to offer advice on how best to protect and manage these exposures. “Clients in the specialist business sector need to be treated differently. They expect to work with brokers and insurers that understand their business and that also offer bespoke insurance and risk management solutions. “Companies that offer a one-size-fit-all insurance offering are not sustainable in the specialist business sector, which is driven more by individual, expert advice, efficient claims resolution and an insurance solution that is tailored to match the very risks that they face,” says Matthew. “Clients want to know that their risk is secure. The value of an insurance firm is always delivered at the claims stage of the relationship and our ability to consistently and efficiently manage claims has been at the centre of our success. We have, over the last two years, worked hard at improving our claims division to make it the best in the business, and we plan to keep it this way,” says Matthew. Efficient claims resolution remains a top priority for the sector and for Santam.
Managing risk equals lower premiums Volatility in global economic markets, compounded by an increase in natural disasters around the world has forced 12
local companies and individuals operating in the specialist business insurance sector to take their risk exposure more seriously. Although South Africa has, to a large extent, been protected from the global economic crisis and natural disasters, these events have had a positive effect on the insurance sector because companies have become more prudent about their risk exposure and are managing their assets with more care. Santam says that this is a positive move for both insurers and clients and will ultimately result in lower premiums as insurers like Santam reward proactive risk management with discounts. “The benefit of proactively managing your risk, and understanding what part of that exposure to transfer to an insurer and what to manage yourself, is a key driver in obtaining lower premiums,” says Matthew.
Managing the challenges Although the local and African specialist market is set for exponential growth, both brokers and clients face some tough challenges in the year ahead. Matthews says that both large and small companies are increasing their liability insurance to meet the requirements of the Consumer Protection Act (CPA). Inconsistencies in regional municipal service delivery, wide-spread fraud and corruption have also meant that companies have had to become more serious about insuring against risks. Underinsurance and non-insurance is still a major concern for Santam. “It is worrying that during the floods of the beginning of this year, less than a third of those impacted were insured. It is old-fashioned to view insurance as a grudge purchase. Very few of us can afford to lose our livelihoods to a once-off catastrophe like that. It makes sense to understand the crucial value of protecting your assets and financial wellbeing appropriately,” says Matthew. Brokers and the insurance industry also face the challenge of complying with stricter regulations and legislation. Matthew expects that smaller brokerages and insurance companies will consolidate to manage these challenges. Although brokers are increasingly facing tougher competition from the direct market in personal insurance, the value of the broker, especially in a more complex specialist business segment, will continue to grow. “We don’t expect the value of the broker to erode in the specialist market, as these professionals are a critical source of information and advice that help clients navigate the complexity of the specialist insurance industry,” concludes Matthew.
SAM
Solvency Assessment and Management (SAM) initiative Source: South African Insurance Association. Ensuring Sufficient Eligible Capital Resources
O
ne of the first discussion documents approved for industry comments is Discussion Document 26 (version 5); “the classification and eligibility of capital resources”. Capital resources consist out of basic own funds, which consist of the excess of assets over liabilities and subordinated liabilities and ancillary own funds, which consist of items other than basic own funds which can be called up to absorb losses such as unpaid share capital or initial funds that have not been called up; letters of credit and guarantees and other legally binding commitments received by insurance and reinsurance companies. The primary purpose of capital resources from a regulatory perspective is to act as a shock absorber against adverse losses and to ensure that the insurer and reinsurer are able to meet its obligations to policyholders when they are due. From a macroeconomic perspective, requiring the insurer and reinsurer to maintain adequate capital in terms of both quantity and quality, enhances the safety and soundness of the insurance sector and the financial system as a whole. The document does not focus on issues relating to matters of valuation, rather it outlines the methodology whereby capital resources are classified in order to determine eligible own funds, which are as follow: • • • •
An assessment of the quality (characteristics) of the capital instruments comprising the total amount of capital resources Creating a list of capital elements that comply with the requirements. On the basis of the assessment, a determination of the capital resources eligible to meet regulatory capital requirements. Recommending approval guidelines for capital elements not listed in this Discussion Document.
The Discussion Document recommends that the capital resources are classified into three tiers, based on whether they are basic or ancillary own fund items and to the extent to which they possess the proposed characteristics, which are: Characteristics
Guide
a. Loss absorbency
The item is available, or can be called up on demand, to fully absorb losses on a going-concern basis, as well as in the case of winding-up.
b. Subordination
In the case of winding-up, the total amount of the item is available to absorb losses and the repayment of the item is refused to its holder until all other obligations, including insurance and reinsurance obligations towards policyholders and beneficiaries of insurance and reinsurance have been met.
c. Sufficient duration
When assessing the extent to which own-fund items possess the characteristics of permanent availability and subordination currently and in the future, due consideration shall be given to the duration of the item, in particular whether the item is dated or not. Where an own-fund is dated, the relative duration of the items as compared to the duration of the insurance and reinsurance obligations shall be considered.
d. Free from requirements and incentives to redeem
Whether the item is free from requirements or incentives to redeem the nominal sum.
e. Free from mandatory costs
Whether the item is free from mandatory fixed charges.
f. Absence of encumbrances
Whether the item is clear of encumbrances.
Divided into three tiers and between basic own funds and ancillary own funds the results Basic Own Funds
Ancillary Own Funds
Tier 1
Substantially possess characteristics of (a) and (b), taking inconsideration (c), (d), (e) and (f). Not allowed
Tier 2
Substantially possess characteristics of (b), taking inconsideration (c), (d), (e) and (f). Substantially possess characteristics of (a) and (b), taking inconsideration (c), (d), (e) & (f).
Tier 3
If not Tier 1 or Tier 2. If not Tier 2
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SAM are as follow: It is recommended that the division of the Tiers follow the advice coming from the EU as illustrated below: Recommended Tiers SCR • Tier 1 > Tier 2 > Tier 3 • Tier 1 > 50% of total Eligible own funds • Tier 3 < 15% of total Eligible own funds MCR • Tier 1 > Basic own funds Tier 2 • Tier 1 > 80% of total Eligible basic own funds • No Tier 3 Tier 1 should contain the highest quality of capital resources which fully absorb losses and enable an insurer and reinsurer to continue as a going concern. To be classified as Tier 1, capital instruments must be fully paid in. For inclusion in own funds, there should be certain minimum qualitative requirements. In particular, Tier 3 basic own funds should contribute toward avoiding insolvency as well as toward avoiding the acceleration towards insolvency. Based on the assessment guides above capital instruments can be grouped as such: Basic Own Fund
Ancillary Own Funds
Tier 1 requirements • Paid in ordinary share capital • Paid in equivalent of ordinary share capital of mutual undertakings • Other paid in capital instruments, including preference shares that absorb losses first or rank pari passu, in going concern, with capital instruments that absorb losses first. - Instruments that automatically covert to ordinary share capital, or to the equivalent of ordinary share capital of mutual undertakings, as and when the undertakings needs to absorb losses, and in any case when the undertaking breaches the SCR. - Instruments subject to write down as long as losses persist, as and when the undertaking needs to absorb losses, and in any case when the undertaking breaches its SCR. • Reserves, to the extent that they are available to absorb losses at any time arising from any segment of liabilities or from any risks, including: - retained earnings - surplus funds - revaluation reserves - other reserves • Paid in subordinated mutual member accounts
Tier 2 requirements • Ordinary share capital callable on demand. • Equivalent of ordinary share capital, callable on demand, of mutual undertakings. • Supplementary member calls of mutual undertakings, within the next twelve months, that can be made on demand, where the call generates Tier 1 own funds and is clear of encumbrances. • Letters of credit and guarantees which are held in trust for the benefit of insurance creditors. • Other capital instruments, callable on demand, that absorb losses first or rank pari passu, in going concern, with capital instruments that absorb losses first.
Tier 2 requirements • Called up ordinary share capital • Other called up capital instruments that absorb losses first or rank pari passu, in going concern, with capital instruments that absorb losses first. • Other capital instruments, including preference shares that do not have the conversion features required for Tier 1 but that display the features below. • Other capital instruments, including preference shares, not subject to write down as long as losses persist, but that display the features below.
Tier 3 requirements • Callable preference shares classified in Tier 2 or Tier 3 • Other callable capital instruments
Tier 3 requirements • Other capital instruments, including preference shares, that do not display the features required for Tier 1 or Tier 2. • Deferred tax assets, [if not excluded from own funds]
A number of valid reasons exist for the Discussion Document to consider alignment with the banking industry to ensure an effective and sustainable financial services industry. Based on the above insurers and reinsurers should carefully consider their future capital plans. 14
Children’s Benefits
Workers Death Benefits Can Be Safe-Guarded For Their Children’s Long Term Benefit By Matla Titi, Head of Alexander Forbes Trust and Beneficiary Fund Services, a member of the FIA.
T
he legal guardians of children are often dismayed to learn that they will not receive a lump sum to allocate at their discretion upon assuming guardianship of a child.
While guardians often believe building or buying a house for the child is the best way to provide a secure future, Alexander Forbes Trust and Beneficiary Fund Services has found that nothing equips children to develop, acquire skills, become financially independent and break the cycle of poverty and dependence like an education. As the managers of R2,7 billion in assets for over 42 000 largely disadvantaged children, Alexander Forbes Trust and Beneficiary Fund Services finds that many guardians fail to make the distinction between the death benefits which are allocated to the children in their care and those which they themselves may be entitled to receive. So, while spouses may use their partners’ death benefits in any manner they please, “children’s benefits should be used to provide for basic living expenses and education” says Matla Titi, Head of Alexander Forbes Trust and Beneficiary Fund Services, Alexander Forbes Financial Services (Pty) Ltd. In short, retirement fund trustees are not legally bound by the will of the deceased when allocating funds to the deceased’s dependents. The legislative intent is to ensure that the death benefits of deceased workers are used to support their dependents, rather than to settle the debts of the deceased worker’s estate. As such, retirement fund benefits do not form part of the deceased’s estate and retirement fund trustees are under no legal obligation to settle a deceased’s bond or any other debt. Most of the beneficiaries in these beneficiary funds are not well off. Titi explains that, “although the average benefit size is around R100,000, figures disbursed to some surviving children can be in the region of three to four hundred thousand rand.” To poor communities this can seem like a large sum, certainly enough for extended families, grandparents or caregivers to buy or build a house for example. Yet “considering 16
how much the care and education of a child costs over an 18 year period this is not a limitless amount” adds Titi. So, while funds for living expenses and other needs are released according to each child’s particular circumstances and the size of the benefit “our main objective is to ensure that beneficiaries receive education and skills training appropriate to their capabilities and inclinations” says Titi. This means that funds are invested and distributed in accordance with the financial planning done for each beneficiary ensuring that children develop to their full potential as their parents would have wished. As such, aptitude assessments and career guidance aimed at securing the child gainful employment form a strong element of Alexander Forbes Trust and Beneficiary Fund Services’ offering. Where larger benefits are received, individualised asset allocation means that the Alexander Forbes Beneficiary Fund is often able to invest a portion of the younger children’s death benefits in equities, increasing and extending the capacity of the benefit to educate the child, often to tertiary level. Another popular misconception, particularly amongst higher earners, is the belief that group death benefit policy holders don’t need to take out insurance on their home loans as, in the event of their death, the loan will be paid off by their retirement fund’s death benefit scheme. Depleting a child’s benefit in order to settle a bond or buy a house would not achieve the deceased parent’s original intention of securing his or her child’s future. Titi often finds that where trustees elect to protect children’s benefits by placing them in the beneficiary fund, upon the death of a breadwinner no provision has been made to cover the bond on the family home. This often “leads to young beneficiaries and the surviving spouse either losing the home or unable to benefit from the sale of their home when they need it most” warns Titi. As such retirement fund members are urged to insure that they take out mortgage insurance when purchasing their homes as their death benefits will be used to support and educate the children they leave behind rather than to settle an outstanding bond.
Retirement Planning
Retirement Planning is Not an Event By Johan Gouws, Executive Director at Absa Investment Management Services With October having being Seniors’ Month, Absa’s Johan Gouws offered advice relating to retirement planning – especially for those on the road towards retirement. Most South African financial consumers are concerned about the extent to which they are financially prepared for retirement. Becoming dependant on others for financial support and having to adjust the standard of living they have become accustomed to, are the main concerns. These genuine concerns, however, do not necessarily lead to the required financial behaviour. Industry research shows that less than 10% of retirees achieve a position of complete financial independence. Most retirees are dependent on government, the community and/or family and friends for additional financial support to a greater or lesser extent. Many reasons exist for the current retirement planning crisis in South Africa. A weak savings culture has seen the average household savings as a percentage of Gross Domestic Product drop from around 5% in the 1980’s to negative numbers in recent years. The increase in the cost of living has been eroding the ability of financial consumers to save as their disposable income has declined. Increased levels of unemployment and lower remuneration increases have prevented consumers from improving their ability to save in recent years. An over-reliance on property as a savings vehicle has left many investors with an illiquid asset on which their income has been declining. The economic recession has not only negatively impacted on house prices but has also resulted in an increase in rental defaults. South Africans are generally lifestyle-orientated and are willing to take on debt in order to finance luxury expenses. Lifestyle expenditure together with a change in demographics has resulted in debt as a percentage of disposable income rising rapidly from around 50% in 2002 to close to 80% today. After paying off debt, very little money is left for savings and investment purposes. Increased longevity also means that people will live between 20 and 30 years after entering retirement, which puts additional demands on the capital accumulated at retirement. Although the challenges for South African financial consumers are very real, a change in the approach to preparing for retirement can achieve the desired results. One of the key requirements is to change the view of retirement as a once-off event that will be happening sometime in the future. Viewing retirement in this way results in consumers having a too casual approach when having to make the necessary provision in the
form of retirement capital. The result is that no definitive goals or objectives are set in ensuring that financial independence at retirement becomes a reality. Any well structured investment plan starts with a clear objective and timeframe. An appropriate investment strategy then needs to be designed and implemented with the assistance of a qualified and experienced financial planner. It is important that the investment plan is at least reviewed on an annual basis. This will ensure that the plan remains relevant and that it reflects the current financial realities and needs of the individual. Developing an appropriate investment strategy for each life stage is a critical ingredient in ensuring that the money saved and invested for retirement, works for as hard and as long as possible. This will ensure that sufficient capital is accumulated in order to provide the necessary income during retirement. During the active work years, the main investment objective should be that of wealth creation in order to build up a retirement capital pool for income purposes during retirement. This will require a more aggressive investment strategy with a greater allocation of the investment to shares which has proven its ability to beat inflation over time. Given the 30 to 40 years time horizon involved, an investor can afford to take on the necessary investment portfolio risk required to achieve returns above inflation as time smoothes out the impact of market movements. A spread of the investment across different asset classes such as property, bonds and cash will also contribute towards avoiding the potential loss of retirement capital. Beating inflation will ensure that the purchasing power of the retirement capital is protected in real terms. As one moves closer to retirement, the amount of portfolio risk that can be assumed becomes less as the timeframe towards retirement becomes shorter and the ability to afford any capital losses is reduced. Many investors, however, become too conservative with their investment at retirement even though they will typically still have 20 to 25 years to invest after entering retirement. It is, therefore, appropriate to follow a smoothed transition process into retirement based on the life-stage investment approach. This approach will avoid risks relating to market timing and not taking sufficient risk to protect retirement capital, and therefore income, against the constant erosion caused by inflation.
Table: A life stage approach to retirement planning Early Career
Middle Career
Late Career
Early Retirement
Late Retirement
Investment Objective
Wealth Creation
Wealth Creation
Wealth Creation & Preservation
Wealth Preservation & Consumption
Wealth Consumption
Required Returns
Inflation +6/7%
Inflation +5/6%
Inflation +4/5%
Inflation +3/4%
Inflation
Implied Risk
High
Moderate to High
Moderate
Low to Moderate
Low
Time Horizon
Long
Long
Long - Medium
Medium
Medium -Short
Following a life-stage approach will ensure that investors are clear about what returns they should target and the appropriate portfolio risk that they can afford during each life stage. Applying a life stage approach also lessens the risk of investors abandoning their long term strategy as a clear and consistent path is established on the route to financial independence at retirement. Retirement is not an event but a process that requires a specific objective, a well thought through investment strategy and a regular review. It should, however, be recognised that retirement planning is only part of a broader financial landscape which includes your risk, insurance and your estate planning needs. Retirement planning should therefore not be done in isolation to these other key elements of financial planning.
S A’s PREMIER INTERMEDIARY MAGAZINE F I A I N S I G H T
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IFA’s Dependant Financial Advisor
Choosing an Independent Financial Advisor to get you Through Life’s Tests
N
ot everyone is a financial whiz, capable of fielding their finances with the skill and precision of Jonty Rhodes on a cricket field. If you’re looking to successfully manage your finances, but lack the impeccable groundwork and all-rounder capabilities of our nation’s fielding coach, you should look for a financial coach and partner of your own. There are few better suited to fulfilling this role than a professional independent financial advisor (IFA). Like any good cricket partnership, working with an IFA takes team work, commitment and understanding over a prolonged period. Since an IFA can offer an objective and informed comparison of products and benefits, they are able to offer advice based on your personal needs and situation. “When looking for a financial advisor, you should try to find someone with whom you can develop a long-term relationship. Only then can an advisor become your financial partner in protecting your family throughout your lives. The key to finding the right financial advisor or broker is to look for a partner than can help you manage your total risk exposure and financial security – not just purchase insurance. Think of it as the financial equivalent of having Jonty to help you set the field,” says Craig Harding, managing director of Altrisk. Team selection As with national squad selection, the financial advisor you choose can determine the success of your efforts. This makes it one of the most important financial decisions you make, so you need to be sure of what to look for. Altrisk asked two leading independent financial advisors for their views. According to Lawrence Blake of Blake and Els Wealth and Risk Management in Johannesburg, when it comes to choosing a financial advisor trust is key – so you should look for the following attributes: • Find someone who remains unbiased about the products they recommend. Your IFA should represent more than one insurance company. This allows you to compare a variety of insurance products and decide on the one that best suits your needs. • Your IFA should be willing and able to determine your needs and find a bespoke solution for you. He should be willing to mould the solution to you, instead of shaping you to fit the product. • Make sure that your advisor is ethical – they have a moral obligation to act in your best interests and negotiate an insurance deal where your needs come first. • Look for a financial advisor who will be honest with you about the insurer that you choose, and who understands the importance of issues such as service delivery and claims settlement – purchasing an insurance policy should be about more than finding the cheapest rates. “The financial advisor should be an expert at what he does, able to compare products and provide advice based on solid knowledge and proven experience in the field. He simply cannot try to equate value to cost when it comes to planning your financial future and security,” says Blake. Rafieq Saville, principal of Professional Financial Solutions in Cape Town, agrees; adding that consumers are entitled to – and should demand – objective advice and service that is free of bias. 18
“The independent advisor offers a far wider choice of product and, accordingly, should have a good depth and breadth of product knowledge. This provides the client with better product comparisons and more in-depth technical information translated into easy to understand terms. He should also have a real interest in leading the client to a better understanding of his options and an informed decision,” he adds. Develop a long-term strategy Probably one of the greatest advantages to partnering with an independent financial advisor is that they look at your financial portfolio holistically. It would be folly for you to believe that you know everything about how to plan for your long term financial needs, or that you could be entirely objective about it. A good IFA will looks at your needs and potential risks over a long term – assessing everything from future goals to life cover, critical illness and disability, income protection, retirement, savings, investing, and healthcare funding. Sadly, there is no single product provider that can offer all of the necessary covers in one neat, well-organised and appropriately scoped package. “The beauty of an independent advisor is their knowledge of the products available on the market, and their ability to combine and manage them for you in a coordinated and integrated manner. This is something that very few consumers have the knowledge or time to do successfully,” comments Saville. Schedule regular team huddles Staying in touch with your financial advisor is critical to managing your portfolio and developing his knowledge and understanding of your needs. According to Saville, the regularity with which you meet will depend on your goals. These should be agreed upon with your broker at the outset. If your objective is simply to set in place a simple risk insurance solution, such as bond cover and a long-term retirement annuity to supplement your company pension scheme, then an annual update may be adequate. “If you are goal-driven in terms of your finances – perhaps with aspirations to retire young and wealthy, or to leave your job within five years to start your own business – your needs will be very different. Should you fall into this category you will need to work with your advisors to set up a financial strategy. This requires more frequent interaction to monitor investments and ensure strict alignment of your goals and the solutions set in place to achieve them,” Saville adds. It is also important to consider “trigger events” that may necessitate action or advice; such as retrenchment, divorce, or additions to the family. Any change in circumstance can alter your risk and should be evaluated as part of your financial plan and strategy. Going for the win The role of the independent financial advisor has become increasingly important as the global economy undergoes fundamental shifts. Now, more than ever, it is vital to know that the person you entrust with your financial future is a team player. Opting for a winning partnership could mean the difference between retiring on a winning streak versus going out for a duck!
Short-Term EXCO
Short –Term Insurance Overview for 2011 and Expectation for 2012 By Barry Taylor Chairperson of FIA Short-Term EXCO.
T
he “business” year is all but past and it is time to reflect on what we at the FIA Short Term segment have achieved and what is coming down at us as we move into 2012.
At the outset I must thank all those unsung heroes who work so tirelessly in the Short - Term Exco and in particular in the Commercial and Personal Lines sub committees. To George Marsh and your team, thank you and well done. It has been an “unwritten rule” that we react and respond with all haste when we receive a member query and I believe, that thanks to the committees, this goal has been achieved. Not forgetting Peter Atkinson for his invaluable assistance in ensuring that requests are responded to, articles written and deadlines kept. The short-term space has had a busy year and in addition to responding a large volume of technical and other queries we have made good progress in creating and building on relationships with stakeholders in the Industry. There has been regular liaison with the executives of the major insurers, with SAIA, SAUMA, SASRIA, The Association of Loss Adjusters, the FSB and Council for Banking. So what have we contributed towards our constituency and the greater industry during the past year? • The Insurance Laws Amendment Act, Binder regulations were signed off by the Minister and have successfully gone through the “public comment” process. The next step is a fine tuning of the regulations and then finally to Parliament for sign off confirming that the FSB have acted within the scope of their mandate. It is anticipated that these regulations should become effective from the 1st January 2012 but let’s watch this space. There will one year in which to align processes so it is recommended that members with Binders start to pro-act with Insurers in order to hit the road running.
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I have been “challenged” on numerous occasions as to how “we allowed” these regulations to be passed – well in my humble opinion the Intermediary has come out quite well if one goes back to the starting point where due to the conflict of interest Binders were to be disallowed to the point where Binders will become part of accepted practice and for which Intermediaries will be legitimately and fairly rewarded for their endeavours. However, and as a word of caution, Intermediaries are going to have to manage the conflict of interest that Binders create to ensure fair play all round. • Following very closely on the Binder issue was the formation of STRIDE (Short - Term Insurance Date Exchange) which has been championed by our own Arnold van der Linde in collaboration with SAIA. The purpose of STRIDE will be to enable the transfer of data efficiently and effectively from the Intermediary to the Insurer in a secure and seamless environment. Good progress has been made with regard to the standards, the IT platform and the formation of STRIDE as a business entity. The transfer of the data not only assists to achieve the requirements of the Binder regulations but will be essential for Insurers as the newly proposed solvency rules (Solvency Assessment and Management (SAM) or Solvency II as it is known in Europe) takes shape with a final implementation scheduled for 2014. • After many years of debate and to-ing and fro-ing we were able to find a common solution with the FSB for the revised Sec 8(2)a requirements which are now clearly defined. This issue is what was known as the RV7 in days gone by and sets out the protocols required to place business offshore. The new requirements give comfort to client protection as opposed to a control over the outflow of business. • Mid-year we were greeted with a surprise from the FSB regarding the restriction of earning of interest on premiums collected. We, along with the greater Industry were able to have this overturned but this could well raise its head in 2012 when Intermediary earnings are reviewed. • We at the FIA have participated with the SAIA in the formation of the Strategic Forum for Sustainability of Insurance, alongside the guidelines set by the United Nations. Formulatory meetings have
been held and we will hear more of this as we go into 2012. • My good friend Rod Pearson, who is now enjoying the fruits of retirement, must be delighted to learn that we have been successful in the negotiating of increased commissions for SASRIA business after many years of hard fought debate. This will benefit not only FIA members but all intermediaries who place SASRIA business. We are grateful to Cedric and his team at SASRIA for recognizing the work that the intermediaries do in the SASRIA space. Well, what to 2012? 2012 clearly will be a year in which many of the regulatory initiatives governing consumer protection will come of age and in addition to those mentioned above we will see the first phases of TCF (Treating Customers Fairly) be introduced. Much preparatory work is already underway with 6 Workstreams covering each of the pillars of TCF being debated by participants from all walks of the Insurance Industry including the FIA. Justus van Pletzen, CEO of the FIA sits on the TCF Steering committee. The next phase to the definitions of intermediary remuneration, in both the Financial Planning and Short Term space will come to the fore. This will include commission, fees, policy and admin fees with the overarching criteria that no single service should be paid for twice. Attention will be given to aligning the definitions of services as intermediary and intermediary services and to bring them closer to current day practice. While ongoing regulation is a given and with the FSB now stepping up their enforcement efforts, Intermediaries are advised to ensure that they are fully compliant with all regulation pertaining to their operations. We will hear a lot more on the RE 1 and 2 fronts but there is a willingness on the part of us all to embrace Education and Development as a key imperative to the sustainability of the Industry. The FIA have taken a lead in this regard through its recently formed Education committee as well as through the aims of the Strategic Risk forum (as mentioned above). The prevailing economic difficulties will no doubt bring its pressures to bear on the affordability of our products and services which, in addition to the plethora of “direct” offerings on the market, can lead to a good deal of consumer confusion. It is here where the skills of the innovative and pro-active intermediary will find the balance between offering alternative solutions in order to retain the business rather than see the business exit to the competition or to the masses of the “uninsured”. 2012 will undoubtedly see the move towards a new regime of communications and delivery where the buyers of our products, both old and young, will migrate to the electronic and social media thus enhancing speed of delivery and increasing all round efficiencies. Those who do not embrace these changes will lose that vital competitive edge so needed in such a competitive market. The value add of the short term insurance intermediary must be felt by all of their clients and this will no doubt be a determining factor in distinguishing between those who succeed and those who don’t. My thanks to all who have supported the FIA Short Term initiatives and projects in 2011 and wish you all seasons greetings and a fulfilling 2012.
Special Trusts
The role of Special Trusts in Financial Planning By: Geraldine Macpherson, Legal Marketing Specialist at Liberty Life A special trust is a trust created solely for the benefit of a person who suffers from a mental illness (as defined in The Mental Health Act), or, a person who suffers from any serious physical disability. This is known as a Type A Special Trust and has the following requirements: • The trustees may not have the discretion to pay income or capital to any other person whilst the qualifying beneficiary is still alive. • A qualifying person must as a result of the physical or mental disability not be able to manage his own financial affairs, or, if over the age of 18, not be able to provide for his own maintenance; and • The person must be alive on the last day of February of the relevant year of assessment - the trust will not qualify to receive the favourable tax treatment in the year that the qualifying person dies, and it will instead be taxed as a normal trust. • SARS must approve the trust deed as a Special Trust Type A and will register it accordingly.
•
•
Section 10A of the Income Tax Act, which allows the capital element of voluntary purchased annuity (VPA) to be exempt from tax, applies to Type A Special Trusts only. The following CGT inclusions and exclusions applicable to individuals, also apply to special trusts: - The annual exclusion of R20 000. - Inclusion rate of 25%. - R1.5 million primary residence exclusion, and R2 million exclusion. - Personal use assets excluded. - Compensation for personal injury, illness or defamation of the trust beneficiary. - On the death of the trust beneficiary, for CGT purposes only, the status of the trust as a special trust is preserved until the earlier of the disposal of all the assets held by the trust or two years after the date of death of the beneficiary.
The marketing opportunities created with a Special Trust Creating a Special Trust in your Will In 2003, a second category of special trust, Type B, was recognised with the following requirements: • A trust created in terms of the will of a deceased person, • Solely for the benefit of trust beneficiaries who are relatives of the deceased, • And, where the youngest beneficiary has not yet reached the age of 21 years on the last day of February in a year of assessment the trust will be taxed as a normal trust in the year in which the youngest beneficiary turns 21. • The trust beneficiaries must all be alive at the date of the death of the deceased - an unborn child may, however, also benefit. • A relative includes the spouse or anyone related to the deceased or his spouse within the 3rd degree of consanguinity, and includes an adopted child. • Each year the financial officer will submit the return to SARS confirming that the trust qualifies as a Type B Special Trust and request that it be taxed accordingly. What are the tax consequences of Special Trusts: • All the income tax provisions that relate to trusts in general, apply to special trusts as well. • A special trust is taxed according to the rates applicable to natural persons (18% - 40%). • Exemptions and rebates applicable to natural persons are not applicable to special trusts.
Children with mental or physical disabilities need special care which can be provided either at home with specialised care-givers or at specialised institutions, both of which come at considerable costs. Should the parents pre-decease their special needs children, who will bear the financial burden for their child’s special needs? A policy on the lives of the parents either owned by the trust, or, owned by the parent with the trust as beneficiary can satisfy this need, alleviating the burden on surviving family members, also giving peace of mind to specialised institutions that fees will be provided for. The use of a testamentary trust for minors is a must in every estate plan – particularly on the simultaneous death of both parents, or if the parents are divorced - on the death of either of the parents. There are benefits in providing for separate trusts for the children and the surviving spouse. Where the trust established for the surviving spouse is solely for the spouse’s benefit (with no discretion for the trustees to pay a third party during the spouse’s lifetime) then the assets transferred to that trust will still qualify for the section 4(q) deduction in the deceased spouse’s estate. The children’s trust will qualify for the favourable tax treatment as a Type B Special Trust, up until such time as the youngest child reaches the age of 21 (even though the general age of majority has been amended to age 18). Life assurance policies on the lives of the parents, payable to the testamentary trust to be established for the benefit of the minor children, can provide for the needs of the children as beneficiaries of the trust, creating financial stability and peace of mind.
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Financial Planning EXCO
Financial Planning-Highlights of 2011 By Gavin Came Chairperson FIA Financial Planning Exco.
• As we decisively enter the last quarter of 2011, the financial planning world can breathe a sigh of relief at a tough year well finished. • The big and overbearing gorilla in the room remains the FAIS Act and its myriad of regulations. The roll out of FAIS, which started with the now innocuous looking PPR rules brought out by the life industry, has matured into what the authorities believe is a comprehensive regulatory framework , for a professionalized industry. Many would say there is still a long way to go in that: • As yet, the FAIS Act and all of its structures have not prevented actual financial loss to any client. Invariably these losses occur through institutional failure not failure of advice. For a promise of better oversight of institutions who manufacture the products we will need to look forward to the promise of TCF and ultimately the “twin peaks” model, with the Reserve Bank and the FSB working in concert to oversee prudential regulation and market conduct. • The myriad of regulations in FAIS now threaten to become self fulfilling “regulation-forregulation’s sake” and there is a danger that the purpose of protecting the consumer will be lost in the detail of compliance with the laws. • The actual on the ground implementation of the provisions of the FAIS Act is now a frustration to both intermediary and client alike. • There are questions around the lack of interpretive certainty in the law, exposing clients and intermediaries to vague notions of what is required by the Act and what is not. An example is the vexed requirement of the annual advice to the client. There is an argument emerging that perhaps, having implemented FAIS and its regulations over a number of years, the time has come to review all that has been done and to streamline the provisions into a more consolidated code of conduct where the differences in, say short term insurance, financial planning EB and Healthcare are more clearly set out. The one-size-fits-all FAIS Act throws up a number of anomalies in many areas, including the questions asked in the RE exams. 22
There the ‘R’ word was mentioned! Together with the conflict of interests regulation, the implementation of the RE exams remain the most controversial development of the year. In fairness to the FSB, we all knew they were coming! The FIA’s criticism related to the implementation of the exam rather than the principle. In a demonstrable show of the value of working with our regulator rather than adopting a confrontational stance, we were able to agree that the Afrikaans exams would be offered and that the deadline would be extended to June next year - still a tall order but better than the totally unattainable December 2011 date. 2011 also proved to be a challenging year for client advisory work in the investment arena, with the global meltdown threatening the implementation of many financial plans and putting revenue pressure on the business of many financial planners. Finally, as the year draws to a close, the content of the controversial workflow 2 from the 2006 FSB paper has been put back on the table for discussion by way of a letter from the FSB to the Financial Planning committee, so if we thought that the role of a powerful association like the FIA would be redundant in 2012 the answer is a resounding, “no way!” Perhaps in the New Year we can ask ourselves, “What are we collectively doing to help to educate and create job opportunities for all our fellow South Africans?” If you don’t like the words “charity” and “philanthropy”, think of it as enlightened self interest as we build a society with members that will, over time become users and consumers of the advice we give and the product solutions that we offer. Next year will once again bring change, financial pressure and reward and excitement as the industry we all chose to operate in continues to challenge and evolve.
Annuities
Retirement is about a Series of Informed Choices over time By Craig Lawrence, Financial Advisor with Alexander Forbes Financial Planning Consultants. Selecting a living annuity at retirement and then evolving this, through a series of well-informed and professionally guided steps, into a guaranteed life annuity several years later could be, according to the numbers coming out of the retirement industry, the better approach to take. Combining the benefits of both living and life annuities over time eliminates the either/or approach that has typified annuity choices to date. Instead, the correctly timed purchase of both living and life annuities “allow the benefits of each type of annuity to address the shortcomings of the other since both present substantial risks even as they also offer clear benefits” says Craig Lawrence, Financial Advisor with Alexander Forbes Financial Planning Consultants. On one hand, living annuities invest your retirement capital in a selection of portfolios that allow retirees to meet their retirement income objectives and possibly grow their asset base. Any capital remaining upon the death of living annuity holders can be passed to their beneficiaries. Given longevity, however, retirees who invest in living annuities at retirement, especially if they retire young, are constantly troubled by how much money they should, or shouldn’t, be drawing each month. “Each withdrawal in excess of returns reduces their capital amount - and with it the growth of their living annuity” says Lawrence. As such, the longer retirees invested in a living annuity live, the greater their chance of running out of capital. On the other hand, life annuities remove the danger of retirees outliving their retirement capital by providing an income for life, regardless of how long retirees live. If they are inflation-linked, they also protect retirement income from inflation. Yet “the payments that retirees receive from life annuities often fail to keep up with the cost of living. They also generally do not allow retirees to provide a retirement inheritance for their children. Most importantly, however, given their cost, most people cannot afford to buy inflation-linked annuities at retirement” says Lawrence. To get around the various risks posed by the either/or living verses life annuity choice, Lawrence advocates combining, in a phased and carefully guided approach, the positive attributes of both a living and a life annuity. The combination of both, over time, “allows delayed annuitisation to help retirees meet their retirement goals over the full period of their retirement regardless of how long they live” says Lawrence. Simply put, delayed annuitisation means holding off purchasing a life annuity on the day you retire. Instead, keeping your retirement capital in a living annuity for a number of years after retirement allows your retirement capital to grow further by continued exposure to appropriately constructed investment portfolios” provided not too much is drawn down and the markets perform well. In short, “if properly managed, delaying the purchase of the pension offers the potential to purchase a higher pension at a later stage thanks to favourable fixed annuity rates” says Lawrence. As attractive as the “delayed annuitisaton process should be to retirees it is not for everyone and requires professional guidance” warns Lawrence. For example, understanding how much capital your lifestyle requires before considering a living annuity, how to invest your living annuity, how much you can afford to take out in payments each month, or when to convert your living annuity to a life annuity and at what price, are all complex decisions beyond the ability of most. Given the many choices and life-style driven decisions that the delayed annuitisation process requires Lawrence cautions that “it needs to be driven by each retiree’s individual situation and goals and closely guided by an experienced and qualified advisor.”
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Healthcare EXCO
Healthcare Report Back for 2011 By Linza van Aswegen, Chairperson FIA Healthcare Exco.
T
he healthcare representative is most definitely leaving a challenging year behind
We dealt with the RE 1 examinations and have now started debating the RE2 product specific examinations that will soon follow. We have witnessed medical schemes amalgamating, schemes liquidating but above all, we have continued to provide a passionate and crucial service to our healthcare clients and thus the consumer. Over the course of the year, the FIA has held numerous successful meetings with the Regulators. We were fortunate to have met frequently with the Registrar for Medical Schemes, Dr Gantsho and his colleagues, as well as with Mr Gerry Anderson of the FSB. We serve on various committees and sub-committees and were therefore actively involved in health care related decisions as well as discussions. Among others, the Council for Medical Schemes has focused on the implementation of Prescribed Minimum Benefits (mandated benefits introduced by the Medical Schemes Act of 1998) by medical schemes, with various stakeholders being given the opportunity to comment. According to the Council for Medical Schemes’ (CMS) Annual Report 2009/2010, the evaluations revealed extensive non-compliance with PMB legislation by medical schemes. As a result, the CMS called for full compliance with PMB conditions. Perhaps the most anticipated development was the long awaited Green Paper on National Health Insurance. This paper detailed how essential healthcare will be provided to all citizens of South Africa within a period of 14 years. According to the media statement by Minister of Health Dr Aaron Motsoaledi: (the Green Paper is available on the FIA website) •
“NHI is not a war between the public health sector and the private healthcare sector. The challenge and the intent of NHI is to draw on the strengths of both healthcare sectors to better serve the public.
•
The NHI is not intended to destroy the private sector.
•
Improvement of quality of service in public hospitals must be non-negotiable.
•
Pricing of healthcare in the private sector must be tackled equally seriously
•
We need to make a distinction between a citizen participating in the NHI as a contributor and a citizen participating in NHI as a patient. If you earn above a certain income you will be required by law to make a contribution to the NHI fund.
•
Healthcare is a human right that every one of us is entitled to – this is a widely accepted international principle. This right should not depend on how rich we are or where we happen to live. The right to obtain healthcare is written into our Constitution.”
In his closing comments Motsoaledi adds that “the NHI is a meaningful way to reach across the wealth gap and to recognize our common humanity as South Africans … we all bleed, we all experience pain, and we all need decent healthcare.”
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FIA ADVISORY COUNCIL NOVEMBER 2011
FIA Code of Conduct Launch
Adviser vs Direct
With all the direct offerings in the market one has to ask - is there still a need for an adviser? By Frank Schutte, MD of Liberty Life - Retail Sales and Distribution.
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s consumers continue to get busier, their free time diminishes as does their penchant for doing anything that isn't convenient or quick.
Thus it is understandable how and why direct insurers have grown in popularity and market share. But people underestimate the value of a financial adviser, whether in helping them to plan better so that they can not only achieve their monthly financial goals, but to look at the long term and start saving for the future too. Far from being an unnecessary expense, a Financial adviser can perform a similar role as having a fitness trainer at the gym - you know you need to do it, but without that extra motivation and expertise to guide you, you just never quite get round to it. "Just as you would make an effort to find the right partner to build a relationship with at your bank, in your business or at gym, finding the right person to deal with your money is just as important - trusting them and having confidence in them is key," says Frank Schutte, MD of Retail Sales and Distribution. Schutte, explains why advisers play such a valuable role: Dealing with an insurance broker means that you can schedule an appointment and sit down to discuss your unique insurance needs. (S)he will be able to tailor an insurance policy to suit your cover requirements; at an insurance rate that will suit your pocket. If you prefer doing business on a face-to-face basis, and have someone who you can call whenever you have a question or an insurance related problem, then this is the way to go. An experienced broker has, over the years, become expert and specialised in the art and science of looking for the best insurance deal that fits a particular customer. As a customer, you become interested in insurance issues only when you are about to purchase insurance; the broker deals with insurance every day of the year and knows so much more about insurance issues. The years of experience as a professional in the business are not something a consumer can match with a few days of research, particularly changes in regulations covering financial services and the insurance industry. Even the most diligent customer will probably not go beyond looking at five different insurance offers before deciding to choose one product. With so many insurance products in the market, you will not really know if you have looked at the best possible deal for you. Provided that the broker knows enough about your particular circumstances to gauge your insurance requirements, the broker can offer you a much broader range of options than you would be able to generate yourself. This helps you find the product with the best value for you and make the most informed decision. Whatever your preference, make sure your money is with a company you can trust. 28
Risk Management
Growing your Brokerage By Michael E. Stoker Insurance Gateway® a division of Stoker Risk and ICT (Pty) Ltd www.insurancegateway.co.za
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irms with a 31 December year end will by now have finalised their budgets for 2012 and those with different financial year ends will almost certainly be reviewing the calendar year’s outcomes, and so, as you reflect on your final budget or performance over the current calendar year, in the context of growing your brokerage, consider these aspects, some of which may be short-term by nature and others, perhaps of a longer term strategic nature. INSURANCE RISKS In looking for growth opportunities, intermediaries could do worse than acquainting themselves with the top concerns of Risk Managers in business today, and where better to look than at the outcomes of the Cruywagen-IRMSA Risk Foundation’s full day Risk Laboratory, held earlier this year. A full day it was too, as delegates absorbed the content of thirteen talks across a wide range of subjects, of concern to today’s risk manager. Economic risks, cyber risks, governance risks, environmental risks, water risks, the risk of negative sentiment towards South Africa, of runaway crime and corruption, of the continually changing legal and regulatory environment and the impact of global socio-political events on business in South Africa were admirably addressed by a panel of top speakers. Professor Nic Binedell, founder of the Gordon Institute of Business Science (GIBS) spoke on the new risks and missed opportunities arising from South Africa’s membership of BRICSA, while Rich Mulholland provided a slightly irreverent but thought provoking talk on “Legacide”, that is, why legacy is the silent killer of innovation. The standard was high and there were many highlights throughout the day, however, it was Dr. Gert Cruywagen, Chief Risk Officer of Tsogo Sun and founder of the Cruywagen-IRMSA Risk Foundation who set the scene, in the pure risk management context. He emphasizes that every decision the Executive of an Organisation makes has three potential outcomes. It can ADD value, it can MAINTAIN value or it can DESTROY value, and consequently risk is the responsibility of the Executive. In the most fundamental sense, a risk is not only the possibility of something bad happening, but also the possibility of something good not happening. Cruywagen says in the past risk responses included the four “T’s”, that is, Treat, Transfer, Terminate or Tolerate risk, whereas today, risk responses also include Avoidance, Exploitation and Integration of risk. The top risks facing business today, as opposed to risks on a national level, identified at the Risk Laboratory were: • • • • • • • • • • • •
Recession deepening/continuing Runaway crime and security Negative sentiment towards SA Cyber Risks Lost opportunities Risks from BRICSA Governance requirements Environmental issues/climate change Constantly changing legal and regulatory requirements Socio-political events elsewhere - their impact on business in SA Water Risks Lack of innovation.
Other major risks facing business in South Africa today include labour unrest and strikes, civil unrest, deteriorating infrastructure, nodal shifts, population shifts/uncontrolled illegal immigration, distressed towns and cities and the inability to deal with catastrophes and pandemics. While on the face of it some of the risks may not appear to be the subject matter of insurance, if you apply yourself creatively you may find some indeed are. For instance could the failure of public utilities and prevention of access extensions on the client’s cover for business interruption (BI) be extended to include water risks not presently covered, or could the prevention of access cover be extended to include the consequences of climate change? Could the BI cover be extended to include pandemics as an insured peril? Could the “Riot Wrap Around” covers be extended to provide suppliers cover on a world-wide basis? Increasing concern over Governance Risks highlights the importance of offering clients Directors and Officers liability insurance, even for privately held companies, while concern over Cyber Risks opens the door for the marketing of Cyber Liability cover. With the rush to establish a presence in the social media environment on sites such as Facebook and LinkedIn, do you as a matter of course ask clients about their involvement in such activities, and explain the potential liabilities associated therewith and risk solutions available to mitigate some of these risks? Another area of concern within the Governance Risks sub-set is image and reputation and the market is ripe for a policy which would cover the cost of defending the brand in case of an event which may be harmful to the brand. Given that reputation forms part of the intangible value of a company not reflected on the balance sheet, in so as the value of the brand is concerned, such a product would provide significant value in the risk transfer space.
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Offering innovative risk solutions to meet these challenges will not only grow your brokerage, it can also enable your clients to take advantage of the upside of risk, by being able to offer goods or services in areas where their competitors may not be able to do so.
Risk Management
TARGETING GROWTH SECTORS Government policy also provides direction for intermediaries in so far as identifying ostensible growth areas in the economy, with regard to the targeting of new business initiatives. Without intending to be exhaustive some examples could be the desire to increase exports, which implies a growth in mining, manufacturing and tourism. The desire to promote labour intensive industries, infra-structure development requirements, the meeting of future energy and water needs, and the concomitant downstream industries, will practically create sub-economies within our economy, with opportunities for intermediaries in the short-term, healthcare, financial planning and employee benefits sectors. Microeconomic reform and the promotion of small enterprises presents growth opportunities for intermediaries willing to accept lower margins with higher volumes, and who can find innovative solutions to deliver cost effective tailored products to this segment. Micro insurance, as distinct from offerings to SMME’s will become a new sub-set as new legislation for micro insurance is tabled. Although there does not seem to be much interest in this segment by intermediaries, with current technology available there is really no reason why they shouldn’t be. These are just some examples, but it is the concept which is more important. So, the next time when the Minister of Finance presents a new national budget, get a full copy and read it with an eye to where things may be heading and what this could mean for your brokerage. Intermediaries are blessed really, blessed for choice that is. There are so many areas where they can choose to be involved in the industry, and so many areas where they can bring their skills to bear, to add value to individuals and enterprises, large and small. However, to achieve a higher growth rate than the industry average one needs to think out of the box and be careful not to allow “Legacide” to kill innovation within your organisation.
EB EXCO
Employees Benefits Roundup 2011 A year full of surprises
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or the role players in the employee benefits arena, 2011 was a year full of surprises
In the 2011/2012 Budget speech, the Minister of Finance proposed far-reaching changes to • retirement funds, namely a maximum annual threshold on tax deductible contributions to a retirement fund of R200 000, the phasing out of provident funds and extending the range of service providers that are allowed to provide living annuities. The EB Exco, which has a seat on the Institute of Retirement Funds’ (“IRF”) Legal and Technical Committee, gave input via the IRF and also engaged with National Treasury on the necessity for extensive further discussion prior to implementation of any of the proposals. National Treasury decided to place the proposals on hold for further consultation with all the role players the EB industry. • The revised regulation 28 was finally released. The key changes in the revised regulation are that a retirement fund may now invest a small percentage of its assets in hedge funds and that a retirement fund must now also comply with the limits on asset classes on a member investment level (previously a fund only had to comply with the limits on assets to the fund’s assets as a whole). Following industry engagement, the FSB granted extension for the implementation of certain parts of regulation 28 until 31 December 2011. • The EB Exco once again hosted a couple of EB educational workshops for FIA members in various centra. The workshops were well attended and positive feedback was received. Social security and retirement reform is still on the table and as its impact could potentially change the way intermediaries do • business within the EB environment, the EB Exco partnered with the Financial Planners Institute (“FPI”) to form a joint reform committee, This joint committee has already engaged with stakeholders on a multiple of disciplines to ensure that role that the intermediary can play in the reform process is understood and that the interest of the intermediary is taken into consideration in the reform process. As part of this initiative, the FIA and the FPI conducted a survey amongst their members and from the survey the following 3 focus areas emerged: - The role of government - The FIA is of the opinion that although government is the policymaker from a governance perspective, government must not be involved in the regulation or the operation of any national retirement scheme. - The role of the intermediary - The FIA Board approved funding to mandate a professional actuary to compile a model or financial document to quantify the value added by the intermediary in the EB industry - The process – To ensure that the FIA has adequate presentation in the Nedlac process, the reform proposals must be agreed in Nedlac. Both the FIA and FPI have Nedlac representatives and are actively involved in the reform discussions. Looking at 2012 The EB Exco will continue to address EB technical issues via the IRF’s legal and technical committee and where there is a potential conflict, it will be addressed directly with the relevant authorities. The EB educational workshops will again be hosted in 2012 and we are also investigating the possibility to partner with other FIA exco’s to improve the workshops even better The EB exco will continue engaging with other industry bodies and government to ensure that the role and best interest of the intermediary is understood and taken into account in any retirement reform process and/or employee benefit legislative change. 32
Theft from vehicles
80% of South Africans leave expensive belongings in cars overnight By Christelle Fourie, Managing Director of MUA Insurance Acceptances
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new South African survey has revealed that 82% of respondents leave expensive belongings in their cars overnight, not only exposing their motor vehicle to potential expensive break-ins but also leaving their personal and sometimes irreplaceable belongings vulnerable to being stolen. According to Christelle Fourie, Managing Director of MUA Insurance Acceptances, the survey, which was conducted on behalf of MUA, is particularly alarming given the recent South African Police Service Crime Report for 2010, which revealed a 1.8% increase in theft from or out of a motor vehicle. “For many people, their motor vehicles are an extension of their homes – a place where they feel safe and comfortable. As a result, it is a common mistake made by many to simply leave certain belongings in the car overnight believing that they will be safe until the morning.” The most common item left in motor vehicles were laptops with 24% of respondents admitting to leaving theirs in their cars overnight, according to the survey conducted by MUA Insurance Acceptances in conjunction with RISKSA. Small electronic devices such as mobile phones or cameras came in second with 22% and GPS devices were the third most common item left in cars. “In South Africa, we tend to be far more cautious on the issue of theft and safety, as a result of our high crime rate. However, the reality is that many motorists do still leave belongings overnight in their vehicles, and sometimes on full display to potential burglars.” Fourie says the types of claims for items that have been stolen from consumers’ motor vehicles have increased markedly following the recent criminal ‘trend’ of thieves interfering with the remote control locking of vehicles. “Motorists press their remotes believing they have locked their vehicle. However, interference – deliberate or otherwise – by third party remotes being pressed at the same time reportedly interferes with the locking process leaving the vehicle open and exposed to petty criminals.” “The problem for the consumer with these cases is that signs of forced entry are usually required by the insurer in order to show that the vehicle was broken into. If there is no sign of forced entry then the insurer must work on the assumption that the client simply failed to lock the car. In doing so, any claim would be rejected as the client failed to act with due care and diligence.” Fourie says motorists must be vigilant and ensure that when they leave their vehicle it is securely locked. “Go back to the vehicle to double check, as failure to do this may leave consumers at risk of having a claim repudiated.” “Unless belongings that have been left behind in a vehicle were hidden from view, it is highly likely that such a claim may be repudiated. In South Africa especially, terms and conditions stipulated by most insurers insist that belongings not be left on display. It is also important that clients are made aware of the fact that this general restriction often applies regardless of whether the client has unspecified all risks cover in place, as such a theft would be seen as negligence on the part of the client.” Fourie says in order to ensure that a claim will be covered most insurers will insist the motorist stores those items left in an unoccupied car within a locked compartment such as a cubby-hole or boot. “If the vehicle does not have a boot in which bigger items may be stored away, then it is possible that an additional excess will also apply.” “The best advice, however, is to ensure that any expensive and/or sentimental belongings are not kept in a vehicle at all,” concludes Fourie.
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Life Insurance
Life Insurance Confidence levels Remain Strongest in Financial Services By Tim Rutherford Life Insurance Spokesperson of Ernst & Young
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n a quarterly survey, , Ernst & Young reports that life insurance confidence remains surprisingly robust in the third quarter, at 91 index points given the volatility of the investment market. This means that nine out of ten life insurers are satisfied with business conditions in the third quarter of 2011, marginally up from the previous quarter. Tim Rutherford, Life Insurance spokesperson at Ernst & Young confirms that life insurance confidence levels remain the strongest in the financial services sector, and are noticeably ahead of asset managers, where only seven out of ten are satisfied with prevailing business conditions. This is the 33rd quarterly survey measuring confidence in the life insurance industry. The research is conducted by the Bureau for Economic Research in Stellenbosch. Tim Rutherford comments, ‘The continuing strong confidence levels of life insurers are largely driven by sustained premium income, and remain high despite recent market volatility.’ He adds, ‘usually life insurance confidence is quite closely aligned to equity market strength. The third quarter of 2011 was an exception. However, the global stock market volatility that was experienced late in the third quarter appears not to have had an impact on the outlook for life insurers just yet, perhaps because the sharp falls in equities happened so late in the quarter.’ Rutherford continues, ‘Investment income contracted in the third quarter for life insurers, albeit only marginally so. Once again, this could be a result of the survey field work having been completed before the onset of renewed global market volatility at the end of September. On the other hand, investment income growth has fluctuated considerably for the last two years, with no clear directional trend visible. This is in stark contrast to the situation prior to the global financial crisis, when strong economic growth resulted in consistent investment income growth for the sector. ‘Even so’, he adds, ‘net investment income growth has been in positive territory overall, so has provided a visible boost to profits and to confidence levels.’ ‘The real driver for confidence though, has been the very bullish premium income trends, which have largely remained robust despite lacklustre economic conditions. This explains the divergence in confidence between asset managers and life insurers’ says Rutherford. Asset managers are even more reliant on equity markets as an earnings driver than what life insurers are, and have reported a noticeable decline in confidence since the end of 2010. Life insurers, on the other hand, have seen favourable trends regarding new business flows, and overall premium growth.’ Another major driver of life insurance profits is improved efficiencies. ‘We saw that in the third quarter, life insurers reported improving efficiency metrics (their administration ratio expressed as a percentage of premium income). In this regard, life insurers are not alone in the financial services sector. The banks have been focused on improving cost efficiencies ever since the outbreak of the global financial crisis.’ Rutherford continues, ‘Life insurers are in a stronger position to tackle their efficiencies in that they are currently benefitting from stronger revenue flows, unlike the banks, which have faced weaker income earnings since 2008. Most of the major life offices indicated that they are indeed focused on efficiency improvements, and will continue to do so over the next few quarters.’ Other survey findings include: • Outflows grew marginally ahead of inflows during the third quarter; • New business volumes remain strong, with expectations that this will continue into the fourth quarter; • Strong improvements were made in bringing the lapse rate down, whilst there was a simultaneous improvement in policy surrenders; and • Life insurers continue to increase both employee and agent headcount, as increased distribution resources require additional inhouse administrative capacity. Concludes Rutherford, ‘This was another strong quarter for life insurers, who have had a good 2011 thus far. However, the renewed concern stemming from investor uncertainty across the globe could yet trigger a considerable change in outlook in the fourth quarter. Thus far, the life insurance sector has defied the economic odds, by reporting consistent premium growth through a period where unemployment levels were high and household indebtedness similarly so. At the same time, they have focused their efforts on ensuring cost growth is manageable, and benefitted from strong tailwinds in the form of investment income earnings. Their fortunes in the fourth quarter will largely depend on how the global economy performs, in so far as it impacts South Africa.’ 34
Hedge Funds
Hedge Fund Investors Should Ensure that their ‘Coach’ is World Class By Thomas Schlebusch, CEO of Blue Ink Investments.
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n many ways, the job of a fund of hedge fund manager can be compared to that of the Springbok rugby coach. Like the coach who selects and manages a team made up of individual players, a fund of hedge funds manager selects and manages a portfolio of individual hedge funds, each with their own specific roles and skill sets. This is according to Thomas Schlebusch, CEO of Blue Ink Investments, who recommends that both parties get the following five key factors right in order to form a winning combination that will deliver the goods: 1.
Individuals with experience and track records
When it comes to constructing teams for both international rugby and fund of hedge funds – it is crucial to pick a team of individuals that have experience accompanied by proof of a historical track record. This philosophy characterises the current strategy employed by coach Pieter De Villiers who’s starting 15 going into the 2011 Rugby World consists of a core of experienced individuals such as John Smit and Victor Matfield, who both have over 100 caps each. This also includes extensive experience in high-pressure tournaments such as the British & Irish Lions series, Tri-Nations and also the 2007 Rugby World Cup - a tournament that South Africa won thanks to key efforts from, among others, Smit and Matfield. It is equally crucial that each of the underlying hedge funds included in the fund of hedge funds portfolio is run by investment professionals that have been in place for the majority of the performance history (an investor making an investment into hedge funds is backing the manager’s skill rather than taking a view on the direction of a market or an asset class). Ideally a hedge fund of funds manager will look for a manager of a fund with a track record of longer than three years. He will closely evaluate what the managers experience level is, as well as what skills he possesses. 2.
4. Balance and style It is up to the coach or fund of hedge fund manager to devise the style that he feels will be most successful and then pick the players best suited to that particular game plan. For example, if the coach decides that an expansive style is required, he will select players who are good at running and passing the ball. Similarly if a fund of hedge fund manager is running an aggressive portfolio, there will be a higher exposure to equity managers with more leverage. In a hedge fund of fund, the manager needs to firstly decide how much exposure he would want to similar manager strategies/styles, i.e. fixed interest arbitrage, market neutral etc., and within that style he will have to select the managers who he feels are best at extracting value within that style. There also exists a fine balance between identifying the best individuals and getting sufficient diversification as per the overall team objectives. In rugby terms, a good example would be selecting a balanced loose forward combination. This means that sometimes, a great player is overlooked because he is too similar to the other loose forwards in the team and instead, the coach may go for a player that although not as individually brilliant, brings a different dimension to the team because of his unique abilities. In a fund of hedge fund portfolio, many factors are considered in the allocation process. These include performance, correlations, diversity of strategy, risks and drawdowns.
Choosing individuals with strong support teams 5.
Being a successful international rugby player requires the ability to focus on one thing only - playing rugby. This means that it is crucial for players to have support staff that look after non-core issues such as finances, endorsements and contracts and to ensure that other daily administration duties are taken care of. The same applies to individual hedge fund managers. International studies have shown that the largest numbers of hedge fund failures are caused by daily office and administration issues which take up too much of the fund manager’s time, causing performance to diminish. For this reason, fund of hedge fund managers place a lot of importance on ensuring that each individual hedge fund manager has a strong back office support before including them in the portfolio. From a corporate governance point of view, they will also insist that all non-core administrative functions are outsourced to the best providers of that service. These include custody, administration and pricing as well as risk and mandate compliance monitoring. 3.
Following process
Both the Springbok coach and the hedge fund of funds manager must at all times ensure that the individual players adhere to the overall team strategy. This means clearly formulating and communicating objectives and philosophies and ensuring that processes followed by the individuals are consistent and sustainable. In a hedge fund, this also means adhering to the mandate and investment guidelines agreed to between the fund of hedge funds and the manager.
Size is important
While conventional rugby wisdom says that a good big player will always beat a good little player, competitors such as Heinrich Brüssow and Gio Aplon have proven the opposite. The converse also applies to hedge fund managers. History has shown that smaller, more focused hedge funds have yielded greater returns with more consistency. This is largely as a result of smaller managers being more nimble and secondly, being hungrier to perform, and by definition, also more willing to negotiate favorable terms with investors. Fund of hedge fund managers are therefore more likely to include smaller, more flexible hedge funds in their portfolios. However, one has to distinguish between large or small funds and large or small fund management houses. Smaller, more nimble funds are preferred within a large management house due to the backing and governance that exists compared to a smaller management house. Just like coaching the Springboks, managing a fund of hedge funds is a challenging proposition. However, if done correctly, these funds can produce spectacular results with most consistently beating their respective benchmarks over the short and long time periods. Now consider coaching the Barbarians team, being able to select from the best rugby players in all the positions from across the world. This is the benefit of international hedge funds of funds.
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2012 Outlook
It’s Time to get Back to Business By Gareth Stokes Online Editor for FA News.
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year ago we predicted a tough 2011 for the financial services sector. The prediction proved true as intermediaries struggled to coax shell-shocked consumers to purchase risk and savings products with their dwindling disposable incomes. In many respects the challenges facing healthcare, insurance and investment professionals through 2012 are similar to those raised 12 months ago. On the global stage we fear that post-recession economic growth remains sluggish and that “new normal” returns are here to stay. All we can do is hold thumbs the Euro-zone sovereign debt issue, which blighted much of 2011, will be put to bed early in the New Year. Education and regulation are at the heart of the domestic financial services debates. Top of mind for intermediaries is the mid-2012 deadline to complete the Level I Regulatory Exams (RE) – and we are fairly certain the Financial Services Board (FSB) will not announce further extensions. Most Financial Intermediaries Association (FIA) members have already tackled the exam and we urge those who have not yet taken the plunge to do so. Let’s refocus on business through 2012! The Level II RE exam has been postponed indefinitely at this stage and the FSB, with various industry bodies, is hard at work to avoid a repeat of the Level I hiccups. We are confident that further iterations of the education component of financial sector regulation will go more smoothly. With buy in and cooperation from the FSB, education institutions such as INSETA and the intermediary, additional steps on the road to professionalism in the industry should be hassle free. The compliance burden permeates every sector of the industry, whether employee benefits, healthcare or investments, and intermediaries will have to stay up to date with these changes through 2012. It is estimated there were 454 new Acts, bills, regulations, codes, circulars, directives and standards which impacted the insurance sector in 2010 alone… Who knows what the 2011 and 2012 tallies will be! Treating Customers Fairly (TCF) is the big legislative talking point at present. Stakeholders will have to make sure that TCF does not overlap or contradict other acts such as the Consumer Protection Act, Medical Schemes Act, Long and Short-Term Insurance Acts for example. And from an intermediary perspective the TCF will have to mesh seamlessly with the FAIS Act… The FIA, together with other industry representative bodies and product providers, is serving on the FSB Steering Committee to thrash out the technicalities. Seven working groups have been established to look at the six TCF outcomes. It is a huge task but the industry is committed to find a practical solution for both the format and the rollout of TCF. Intermediaries will probably enjoy the shift in focus in regulation beginning 2012. The six outcomes of TCF are aimed at product providers and company executives rather than the intermediary only. Yes, advisers are still subject to the fair advice outcome, but these issues are already largely addressed by the FAIS Act and its various Codes. There is no doubt the financial services environment is tougher than a decade ago. Intermediaries face many additional pressures which impact on the profitability of their activities... Annual license fees, professional membership fees, representative organisation fees, practice management fees and professional indemnity are the reality of doing business today. As new compliance charges mount and the debate around intermediary remuneration heats up, independent financial advisers will be hard pressed to maintain profits through 2012. Our only hope is that regulators can distinguish the varying roles played by industry stakeholders and accommodate these differences in future legislation!
The compliance burden permeates every sector of the industry, whether employee benefits, healthcare or investments, and intermediaries will have to stay up to date with these changes through 2012.
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Advertorial
Sasria Limited moving forward …
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asria Limited (Sasria) has been in existence for over 30 years; at formation it only provided cover for political riots, politically motivated acts, and terrorism. Over the years the Sasria covers were extended to include non political elements such as non political riots, strikes, and public disorder. Sasria functions through a network of Agents who have to be registered short term insurance companies. Due to this business model, partnership between Sasria and Agent companies as well as brokers is critical in providing adequate insurance covers to our mutual clients and giving optimal service. Brokers play a vital role in the ‘marketing’ of the Sasria product to commercial and corporate clients. Upon being appointed as the Managing Director (MD) for Sasria in July 2011, Cedric Masondo introduced a few changes to streamline the functioning of the business. The focus is on improving the functioning of the value chain as well as giving focus to effective management of stakeholder relations. Mr Masondo joined Sasria in 2009 as an Executive Manager: Underwriting; his appointment was following a new strategic position that Sasria embarked on at that time. He has been in the insurance industry for eighteen (19) years; he started his careers at Allianz Insurance as a trainee manager. ‘I gained experience on various aspects of short term insurance internationally and locally, says Masondo. The Sasria executive team is made up of three executive managers plus the managing director ie Financial Director, Executive Manager: Business Support, Executive Manager - Stakeholder. The Financial Director, Karen Pepler, was appointed in July 2011 after acting as the managing and financial director for a year. Mrs Pepler has consulting experience in various industries such as the mining, transport, pharmaceutical and the media industry. Prior to Sasria she was with Deloitte and Touché Special Services Group from 2005 where she held various positions. Ms Nomsa Wabanie is the Executive Manager: Business Support, this division is responsible for governance, risk management, and human capital management. Ms. Wabanie has ten years working experience in the financial sector; she has previously worked for ABSA Bank in various positions. She joined Sasria in 2006 as Executive Manager: Governance. The newly established division called Stakeholder Management is headed by Thokozile Ntshiqa. Mrs. Ntshiqa has been in the insurance industry for twelve (12) years, eight (8) of those were in Sasria. She started her career in insurance at Mutual and Federal Insurance and has worked for various insurance companies before joining Sasria in 2003. The executive team, management and Sasria staff as a whole is committed in improving operational efficiencies of the organization as well as improving stakeholder relations. The focus for the next year, says Masondo, is on improving stakeholder relations and thereby creating an environment that is customer focused hence the establishment of the of the Stakeholder Management Division in August 2011 . The division focuses on managing the distribution channels, staying abreast of industry changes, enhancement of products, analysing the industry needs and designing solutions to meet identified
needs, dissemination of product knowledge to all stakeholders, and improving brand awareness. Furthermore Sasria embarked on a Business Process Reengineering project which focused on reviewing all processes of the organisation with the view to optimise efficiency. Also linked to improving customer centricity, Sasria has developed a Customer Web Portal (CWP) to provide a web interface for the administration of claims, coupons, group schemes processing and communication between Sasria and Agent companies. Sasria has already noted great improvement in the claims administration through the CWP. Although Sasria is the only insurer for special risks in South Africa, it is imperative to ensure that the cover it provides is clearly understood by all stakeholders so that it is effectively marketed, that the distribution channel is well managed and provided with the technical support at all times, and that our operations are efficiently managed at all times. Sasria is striving for excellence and to maintain good working relations with all Brokers and Agents. Sasria contact details: For claims queries please contact claims@sasria.co.za ; for underwriting queries please contact underwriting@sasria.co.za ; for complaints and compliments please contact complaints@sasria.co.za or thokon@sasria.co.za
Our goal is to help create an environment for positive growth and change, by lending stability and offering peace of mind in the fact of special risk.
www.sasria.co.za
Specialised Insurance
Mergers and Acquisitions Growth Market Sparks demand for Specialised Insurance By Alicia Goosen of Aon.
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he need for specialised mergers and acquisitions insurance has been thrown into sharp relief by the flurry of such transactions of late says insurance brokers and risk solutions providers, Aon South Africa. The company’s comments come against the background of figures which show Mergers & Acquisitions (M&A) activity in SA surged 133% last year as growing consumer purchasing power made local companies attractive. According to independent Mergers & Acquisitions intelligence services provider, Mergermarket, total transactions of this nature in SA last year were some $15,7b, the strongest showing since the economic meltdown in 2008. Large cap deals were particularly strong, amounting to $11,5bn or 423% up from 2009. This year the most prominent acquisition is the Massmart-Walmart deal. Anticipating a continuation of the trend , Aon’s Alicia Goosen expects increased demand for Warranty & Indemnity insurance (W&I) which can be put into place at any point of the deal process, including after completion, although it’s normally placed at the signing of the transaction. Such covers can assist in eliminating or mitigating exposures resulting from any unidentified and unanticipated inaccuracies in such warranties and should be seriously considered she says.
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• • • • •
“In the current economic climate insurance rates have decreased by some 50% in the past 24 months or so and insurers are prepared to be flexible on M&A covers, particularly in distressed sale situations where more innovative structures may be needed. “Also, large insurers have specialist teams dedicated to the correct review and analysis of M&A transactions and the ultimate task of providing tailored solutions specific to the individual deal and its role players. “However keep in mind that Warranties and Indemnity cover is only one product in an array of M&A insurance related protection. Other more common types of covers available are: •
“Basically Warranties & Indemnity Insurance transfers the risks from the buyer and seller in an M&A scenario to the insurer, in the process facilitating a more streamlined transaction. “These risks include, amongst others, breach of intellectual property representation, for example breach of copyrights, patents, trademarks and trade secrets, breach of financial statement representation, environmental liabilities, political risks and fiduciary and benefits liabilities. “Cover helps protect the insured from financial loss caused by a breach of representation or warranty to which the policy applies. It thus eliminates many of the concerns arising from the transfer of representations and warranties that buyers and sellers encounter in the preamble to an M&A and which, in many instances, are the very reason why a deal does not reach finality. “Absence of such cover could potentially impact the buyer or the seller of a business by exposing them to liabilities from the breach of various warranties. Appropriate cover of this nature therefore offers significant benefits in providing cost effective solutions to a range of transaction hurdles including: 38
Protecting the seller and the buyer for a breach of the sellers’ warranties (or tax indemnity) given in a sale agreement. Use as a strategic tool by sellers to protect their divestments and enhance their rate of return. Use by buyers to protect their investment and increase their financial protection. As a strategic tool to make a bid more competitive in an auction process. Ring fencing known risks. Covering costs incurred in the defence of a warranty claim -- cover can be arranged for the full sale price.
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Tax insurance where the success of a corporate transaction can hinge on a specific tax outcome whether it relates to a past or future restructuring Claim or Litigation buyout which covers the costs of court judgment or an approved settlement and defence costs incurred in litigation up to an agreed limit. Failed Bid Insurance geared to cover the losses that companies may sustain due to a Merger or Acquisition not reaching completion. This could be as a result of a number of factors including one of the parties pulling out or legislative difficulties.
“With the new Companies Act already in force, it’s interesting to see that much attention has been paid to the processes involved in Mergers and Acquisitions as well as specific references to the duties, responsibility and accountability of the Directors and Officers involved in these transactions. “These amendments highlight the onerous duties of those individuals tasked with the actual execution of what, in many instances, equates to multi million Rand deals and brings to the fore the risk of personal liability should these duties not be enacted with utmost care. Clearly this will only increase the current necessity for an insurance solution.”
Risk Profiles
Defining Short-Term Insurance Risk Profiles - a Fine Art By Willem Smith, CEO Old Mutual’s iWYZE valuables insurance
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nsurance companies take great care when determining the monthly premium for your short-term insurance. Their calculations are based on exactly what you insure and the likelihood of future loss or damage. In order to project the likelihood of a loss or damage, insurers calculate your insurance risk profile. Some of the factors used in this calculation are: what type of valuables you are insuring, your age, gender, where you live, the types of security devices you have installed at your home and in your car; your claims history and the value of the items. Using these factors, the insurer can analyse whether you present a high or low risk. The appropriate premium is calculated based on this, which is why it is imperative that you are honest when providing your information. Why is risk profiling important? Insurers are constantly investigating ways to keep insurance premiums affordable. However, inflation means that the costs of employment, administration, repair and replacement will always go up. While insurers can’t do much to reduce these costs, one of the most important measures companies take is to ensure that clients pay the correct premium for the risk they present. Simply put, if insurance companies do not price according to individual clients’ risk profiles, you could end up unfairly funding the claims of others. This is because all premiums go into the same pot of money from which claims are paid. Younger drivers, for example, present a higher risk and therefore should pay higher premiums. If their information is misrepresented and they pay a lower premium, the older more experienced drivers will end up funding their claims. The Road Traffic Management Corporation compiles a Fatal Crash Report from vehicle accident statistics across South Africa. This does not reflect the minor fender-bender accidents that might result in insurance claims, but focuses on only fatal accidents. They found that in 2009 92.5% of all drivers killed in crashes were male and 7.5% female. Men between the ages of 25 and 34 were at the highest risk of becoming fatalities compared to other age and gender groups. So, when it comes to car insurance, younger male drivers are statistically the greatest risks to road accidents and car insurance claims, hence the more expensive car insurance premiums they have to pay. There is also evidence of a strong correlation between a person’s claims history and the likelihood of that person claiming again in the future. Their premiums will therefore be decided keeping these statistics in mind. Insurance is a contract between the client and the insurer, and needs to be carefully managed based on a fair assessment of risk. Once again, transparency and honesty from both sides are essential to ensure a fair deal and a happy relationship.
Financial Planning
Financial Planning Case studies Managing Executive for Absa Financial Services Distribution, Izak Smit,
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bsa Financial Services announced that it is once again sponsoring the University of Johannesburg's annual Financial Planning case study presentations for 2011.
Third year BCom Finance students are given a case study from which they have to provide a financial plan for a hypothetical client. The case study is presented to an audience comprising experts from the financial industry, the Financial Planning Institute and Absa Financial Services executives, to mention a few. Managing Executive for Absa Financial Services Distribution, Izak Smit, says, "Our decision to sponsor the Financial Planning case study is informed by our continued commitment to contribute to skills development in South Africa." "This initiative compliments the good work that we are already doing through the Absa Adviser Academy." Professor Gideon Els, Head: Department of Finance and Investment Management at the UJ says: "We strongly believe that the Financial Planning case study presents the students with an opportunity to put to practice what they have learned in their studies." The case study, which is given to the students at the beginning of the year, includes all aspects of financial planning such as tax, estate planning, retirement planning and business insurance among others. The case study is done through several stages. In the first stages of the case study, 250 students work individually on different aspects of financial planning. They later form groups of between three and six, which present to lecturers in Financial Planning at the University. Based on technical and visual aspects of their presentations, these groups proceed to make presentations to a panel of experts comprising of officials from the UJ's Department of Finance and Investment Management, the Financial Planning Institute, and Absa. Members of the first winning group will each receive an amount of R3500; of the second group will each receive 2500, while those of the third group will each receive R1500. Absa has been funding the Financial Planning Case studies for the past two years. ment of risk. Once again, transparency and honesty from both sides are essential to ensure a fair deal and a happy relationship. 40
RIY
Clarity on Investment Costs: Reduction in Yield Decoded
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hen it comes to our investments, we all like to know exactly what we’re paying and precisely what we’re paying for. Unfortunately, determining the individual fees payable to your intermediary, administrator and asset manager can be challenging. In fact, it is still common practice for many product providers to disclose the total cost of a product as a single number, known as the “reduction in yield” (RIY). RIY is defined in the South African Actuarial Journal as the percentage-point reduction in annual return over the period of saving that is equivalent in overall effect to the erosion of value due to all charges. For example, a RIY of 3.5% p.a. means that you will pay an average annual fee of 3.5% over the term of the investment. As such, RIY is particularly popular in gauging fees in old generation products, where these fees tend to be lumped together and products are sold with fixed investment terms. However, we believe there is a more appropriate measure of fees for new generation investment products that are not bound by a specific investment term – especially when considering the assumptions that riddle the RIY calculation. Firstly, RIY can by definition only be calculated generation products don’t have. The very cannot be applied on open-ended products.
using a fixed investment term, which most new nature of the calculation means that RIY
It is also important to consider that the term influence on the RIY percentage: The longer should therefore be careful of buying products periods. The future is always uncertain and the change in the next 30 years. If you decide to percentage fee you would have paid would originally quoted.
used to calculate the RIY has a significant the term used, the lower the RIY. Investors based on RIYs calculated over 25 and 30-year products you have available are likely to move your money after five years, the actual be significantly different to the RIY you were
The second limitation of RIY is that this measure is an average fee calculated over the entire contracted term. As such, the actual fee you pay on a year-to-year basis during the term will most likely differ from the RIY, leaving you with uncertainty as to what your exact costs will be over a given period. This is especially true if your product provider offers you a loyalty bonus, meaning that the longer you stay invested, the lower the fees you pay. As such, your fees in the first five to ten years of your investment term may be significantly higher than the RIY. Your assumed investment return and the escalation of your investment contributions will further impact this measure. Increasing your expected investment return will decrease the RIY, but of course there are no guarantees as to how your investment will perform. And of course there’s the impact of costs that may be incurred should you wish to switch your underlying funds or punitive penalties that may be levied should you reduce or cease contributions once upfront commission has been paid. RIY has gone a long way to assist investors in determining the costs of their investment products. It does, however, have its limitations and product providers should take the next step in disclosure by providing you with a full breakdown of the actual investment fees you will pay.
Firstly, RIY can by definition only be calculated using a fixed investment term, which most new generation products don’t have.
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Fire Safety Regulations
Businesses Urged To Comply With Fire Safety Regulations Or Face Sever Consequences Manuel Chikwanda, Senior Risk Engineer at Lion of Africa Insurance
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ecent incidences of shopping malls found to have inadequate fire-safety standards in place have highlighted the importance of businesses adhering to fire safety regulations. South African businesses are urged to comply with fire regulations or bear the risk of major financial outlay and liability due to damaged property and assets or human lives. Over the course of the past few months, Long Beach Mall, Maynard Mall, as well as the Fruit and Veg City and Sportsman’s Warehouse in the Tokai on Main shopping centre in the Western Cape have all recently been shut down for a period after city fire safety inspectors found the fire detection systems and smoke detectors not in working order. Manuel Chikwanda, Senior Risk Engineer at Lion of Africa Insurance, says these incidences raise some major concerns regarding the readiness of many businesses to deal with unexpected fire. He says as fire season approaches – especially in fire-prone areas such as the Western and Eastern Cape, businesses need to take the necessary steps to ensure that all fire safety assessments are conducted and that standards are met. “The cost of non-compliance far exceeds the cost of compliance when you consider the loss of profits, operational delays and reputational damage that occurs when a centre is shut down by the authorities. Businesses must not fool themselves that they are saving money by ignoring fire-safety requirements,” says Chikwanda. According to Chikwanda, shopping centres and big retailers should regularly assess their fire safety procedures. This means ensuring that there are approved fire protections in place and provision of safe passage for all people in an emergency. He recommends that a number of bodies, such as the Automatic Sprinkler Inspection Bureau, Fire Detection Installers Association, and Fire Protection Association of Southern Africa can be approached for professional assessment of fire safety. “Insurance companies and brokers also have in-house risk engineering teams that also assist with assessing fire safety adequacy at shopping centres and large retailers,” he says. According to Chikwanda, some aspects of fire safety require daily attention. He believes it is these issues that are often neglected by companies because they do not form a part of the organisation’s key tasks. “Checking that exit doors and escape routes are free of obstacles and work smoothly as well as testing public address systems should become a part of a business’s daily routines. However, a full fire safety assessment should be scheduled for a shopping centre at least once every year,” he says. Chikwanda says that in many cases business owners are not aware of the insurance implications of not having sufficient fire protection in place. He explains that the contract of insurance places the duty of care upon the insured, which generally encompasses compliance with relevant statutory requirements for prevention of loss, as well as other best practice requirements that could be imposed by insurers. Not having sufficient fire protection in place could therefore be construed as a breach of the insurance contract, Chikwanda says, and at worst could result in claims not being honoured. “Inadequate fire protection always results in the severity of loss being much higher than it would otherwise have been. This high loss ratio consequently results in an increased cost of insurance in subsequent periods,” says Chikwanda
“Insurance companies and brokers also have in-house risk engineering teams that also assist with assessing fire safety adequacy at shopping centres and large retailers” 42
Fraud Prevention
TransUnion introduces a New Line of Defence in the Fight against Fraud Geoff Miller, CEO of the TransUnion Credit Bureau.
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ecent statistics from the South Africa Fraud Prevention Service (SAFPS) (September 2011) show approximately a 60 percent increase in the number of stolen identities reported in the first half of 2011 compared to a year ago. To assist the financial industry in combating this scourge of fraud, TransUnion – a leading global credit management company - announced that it has launched a new and improved authentication service, which offers businesses more rigorous levels of customer authentication. TransUnion’s Authentication Service leverages typical personal/financial information together with ‘out of wallet’ information, mined from a diverse set of proprietary databases, including motor vehicle, motor vehicle insurance and retail accounts. Consequently, it’s infinitely harder for one fraudster to collate this breadth and depth of information for the purposes of impersonation and theft. “Businesses are traditionally relying on a limited set of verification questions, derived only from the information that they hold on that customer, said Geoff Miller, CEO of the TransUnion Credit Bureau. “Given the increased sophistication of fraudsters, the integrity of these data sources are ever more vulnerable to phishing attacks and are frequently accessed by external parties wishing to impersonate actual customers. In today’s commercial landscape, fewer consumer interactions are conducted face-to-face, which is obviously the perfect scenario for impersonation fraud. Increasingly consumers engage with call centres and virtual channels to increase credit limits, apply for new cards, change services or amend personal details. While these new consumer communication channels support a wide range of business benefits, it also creates a greater need for organisations to verify the identity of their customers virtually. In addition to the authentication services, TransUnion now offers the option of a One Time Pin (OTP) service, which is sent to the consumer as an additional security control. This OTP service, coupled with a dynamic rules engine that allows for ‘intelligent question selection’, offers businesses an unprecedented level of authentication. “Implementing a more rigorous authentication process will enable you to reduce your risk of falling victim to customer impersonation. By mitigating your exposure to fraud, you can protect your business against substantial financial losses, reputational damage and potential legal costs,” said Miller. “These Authentication Services help streamline processes, reduce turnaround time, greatly reduce physical document collection and enhance reliability – all benefits which can be passed down to their customers.” TransUnion’s Authentication Services form part of a comprehensive suite of anti-fraud solutions, including prevention, detection, ID management and investigation/response tool, that used together provide an even finer net of protection.
Implementing a more rigorous authentication process will enable you to reduce your risk of falling victim to customer impersonation.
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Crime Statistics
Insurers Applaud Statistics showing Decrease in Property and Vehicle Related Crime - Increase in Crimes against Business Remains a Concern SANTAM
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antam, South Africa’s leading short-term insurer today said that the overall decrease in crime reported for South Africa in the period April 2010 to March 2011, compared to the previous years, is encouraging.
The insurer said it is confident that South Africans are starting to take steps to mitigate risks such as car theft and burglaries by taking simple measures such as fitting tracking devices or gearlocks in vehicles and installing enough safety measures for their homes such as alarms, safety gates and burglar bars.
The company said that although property related crime (which includes burglary at residential and non-residential premises and theft of vehicles in the absence of the victims) accounted for 25.8% of all reported serious crimes during this period, the remarkable decreases of -11, 3% in motor vehicle theft and -4.8% in burglary at residential premises was promising.
The increase in crimes against businesses remains a concern for Santam, which also offers commercial insurance for both large and small businesses. The report showed that for the period between April 2010 and March 2011, business robbery increased by 0.9%.
These statistics are noteworthy for the insurance industry and for us, as the biggest insurer of car and household insurance. Industry bodies such as the South African Insurance Association (SAIA) and the Insurance Crime Bureau have been pivotal in decreasing vehicle theft by putting pressure on motor manufacturers to improve vehicle security measures. We have been advising our clients to manage their risks proactively to ensure that their assets are safe. We hope that the consistent decline we recorded in motor claims over the past few years, decreasing by an average of 3% in the last year, is an indication that our clients have acknowledged our advice by implementing safety measures to protect their assets,” says Shehnaz Somers, Head of Personal Lines at Santam. Not only do safety measures increase the safety of vehicles and homes and make it harder for criminals to take advantage of them, they also lower insurance premiums for policyholders. “The decline in motor claims we have observed in the last year has allowed us to offer our policyholders lower premiums, a benefit that comes with adopting proactive risk management behaviour,” continues Somers.
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Whilst various business groupings and associations such as Business Against Crime have indicated a decrease in business robberies, smaller businesses remain vulnerable to crime. Accounting for 22.7% of overall robberies against businesses, Spaza’s (township shops) and Tuck shops remain the hardest hit by robberies. These smaller enterprises are targeted as they mainly run their stores on a cash basis. “The bigger businesses are fortunate enough to adopt risk mitigating strategies such as onsite cameras and tightened security but single and start-up business owners remain vulnerable to having assets such as cash on the premises, computers, cell phones and other small items that can easily be informally traded by robbers,” says Louise Pharo, Head of Commercial Lines at Santam. Police Minister, Nathi Mthethwa, confirmed the difficulty in managing the robberies leveled against small business but announced that a National Small Business Robbery Strategy, which would be finalised by the end of the year, would be rolled out nationally to combat the problem. Santam welcomes the announcement by the Minister: “Working together, insurers and civil society, in partnership with government and the police force, can do more to mitigate and decrease the risks posed by crime,” concludes Pharo.
Snippets FIA Platinum Branch On Friday 21 October 2011 the FIA Platinum Branch held their year-end function at UKUTULA (Place of Quiet) Lodge near Brits. It was an exceptional day spent close to nature with some remarkable highlights. No doubt the most enjoyable part of the outing was being able to spend time with Cheetahs and Lions (not of the Rugby variety but the real thing). The guides were of an exceptionally high standard showing their love of nature and their vast knowledge and particular affinity to the wild cats. Everybody enjoyed the opportunity to feed and pet the lion cubs and also pet the cheetah. All enjoyed a splendid lunch and altogether a most enjoyable day was had by all.
FIA Protea Branch Year-End Lunch. The Protea Branch of the FIA held its year-end luncheon at the Wanderers Club in Johannesburg on Tuesday 25 October 2011. The lunch was well attended with a feedback presentation by President of the FIA, Brian van Flymen, on what has been happening and achieved by the FIA over the past year. Mike Schussler the renowned economist gave an overview on what has been happening on a global as well as national economic front and what can be expected in the near future. Congratulations to Len Tindell who was elected as chairperson of the Protea Branch and to Phil Cooper who was elected as vice-chairperson.
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Anton Swanepoel Workshops I am the 59 year old blind FSP-owner who attended your RE1 exam workshop on 14/06/2011 at Roodepoort Country Lodge and pleased to advise that I passed the Rep exam with 82%. Allow me to take this opportunity of sincerely expressing my appreciation for your most valuable and skilled workshop presentation which I was easily able to follow and absorb. At first I was very nervous and depressed with the inception of the RE exams but feel by far more confident and comfortable with the challenge in this regard. - Rodney van Blerk
Boland Branch On 5 and 6 November the members of the Boland branch met at Paternoster along the West Coast for their AGM and year end function. Special guests were divisional chairman, Robin Lautenbach, and Tygerberg chairman Tim Timmerman. On the 5th Robin celebrated his birthday and was given a special challenge to blow out numerous candles which relighted themselves the minute they were blown out! At the AGM, the committee for 2012 was elected, and Riaan Geldenhuys was elected chairman for 2012. The committee is from left to right: Pieter Nieuwoudt, Lynette Hugo, Divvie de Villiers, Andries Britz, Salomi Steenkamp, Robert Watson, Hermie Boonzaaier, Ryno Geldenhuys, Riaan Geldenhuys and Jacques Jacobs.
Winners of the FIA Branch of the Year Award 2011.
Advisory Council.
Peninsula Branch
Congratulations to the Platinum and Southern Cape branches who have jointly won the Branch of the Year Award for 2011. Without the sacrifices and passion of the two branch chairpersons and their committees this achievement would have not been possible.
It is with great pleasure that we would like to announce that at the Advisory Council Meeting of 15 Nov Gerrit Lambrechts, Branch Chair of the Southern Cape was appointed as the incoming Chairperson of the Advisory Council and will ex officio also serve as a Director of the FIA. We would like to congratulate him and wish him all the success in going forward and pledge our full support for him in this capacity. We would also like to thank Steven Akakios the outgoing chairperson for his great contribution and the passion with which he served the FIA branches and members during his tour of duty. It was a privilege to work with Steven.
On Thursday, 10 November, the Peninsula branch hosted yet another very successful charity golf day at King David Golf Club. A total amount of R 51 000 was handed over to the following four beneficiaries: Ruyterwacht Preparatory School, St Joseph’s Home for chronically ill children, Kleinmond Animal Welfare Society and little Inako Kom’s family to enable them to insure Inako’s hearing aid. Zurich Insurance Company was instrumental in providing the insurance at a discounted rate. There were 144 Golfers who participated and the prizes presented to the teams of four went down to thirteenth place. 24 sponsors consisting of almost all the product providers provided golfers with eats and drinks on the course and their generosity enabled the Peninsula Branch to make the handsome donations described above. In the photo are from left to right Neil Marquard (Regional Manager Western Cape Zurich Insurance Company), holding Inako is Arthur Phillips (Area Business Development Manager, Zurich Insurance Company Ltd), Welcome Kom (Inako's father) Michael Morris (Chairman of the Peninsula Branch of the FIA) and Inako's mother, Ntombi Kom. FIA Peninsula would like to thank all the sponsors and players who contributed towards making these life-changing donations possible
Tygerberg Tak
Op Vrydag, 11 November, het die Tygerberg tak hulle Algemene Jaarvergadering op die skilderagtige wynplaas Nitida buite Durbanville gehou. Die komitee vir 2012 is verkies en die nuwe voorsitter is Leon Swart. Tim Timmerman gaan die rol as vise-voorsitter vervul. Die res van die komitee is v.l.n.r.: Agter: Stephan Bestbier, David October, Getrude October, JJ van der Spuy en Tim Timmerman. Voor: Gideon Meyer, Juanita Malherbe, Leon Swart (voorsitter), Shane Accom en Elizma Bartlett.
PICA AWARDS We at the FIA would like to take this opportunity to congratulate Andy Mark and the RISKSA Team on being the recipients of the 2011 Watling Trophy for Magazine of the Year at the annual PICA Awards in the business category. (Best Overall Consumer Magazine went to Elle and Best Customer Magazine went to Woolworths Taste magazine so our trade magazine was in good company). Congratulations once again to the RISKSA team who have always been committed to intermediaries and our financial services industry – Well done!
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Appointments Ombudsman Short-Term Insurance
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The Board of the Ombudsman for Short-Term Insurance announced the appointment of its new Ombudsman this week in Johannesburg. Dennis Jooste (Pic 1) will take over the role of Ombudsman from Brian Martin with effect from 1st January 2012. During his accomplished career Dennis was the managing partner at Bowman Gilfillan Incorporated Attorneys, where he practised for most of his career. As a Fellow of the South African Association of Arbitrators, he has substantial experience in dispute resolution. In 2008 he was ranked as the number one dispute resolution attorney in South Africa by international association, The Practical Law Company. He is familiar with the short-term insurance industry having represented insurers in claims disputes and litigation during his time as a practising attorney. ALTRISK Ryno de Kock (Pic 2) has been appointed Head of Distribution and Sales at Altrisk. Ryno is a certified Financial Planner and has extensive experience in marketing insurance solutions to the broker community. Prior to his appointment at Altrisk, he was head of sales for Standard Bank Financial Consultancy. Nedgroup Investments. Ian Ferguson (Pic 3) (Head of Cash Solutions, Nedgroup Investments): Ian Ferguson recently joined Nedgroup Investments to focus on growing the Cash Solutions area. Sean Segar (Pic 4)(Cash Solutions, Nedgroup Investments) Sean Segar recently joined Nedgroup Investments to focus on growing the Cash Solutions area. Imara Group Imara, the Pan-African financial services Group, has appointed Richard Ford (Pic 5) as Group Marketing Executive, effective from 1 November. He will be based in Johannesburg. Ford was previously a portfolio manager at Imara S.P. Reid Stockbrokers. He holds a B.Comm (Finance) degree from Bond University and is a JSE-registered equity and futures trader with a grounding in settlement and equity and futures compliance. STANLIB STANLIB Asset Management has announced the appointment of Terry Eichhoff (Pic 6) as Head of Intermediate Services for its institutional business. This is in line with the company’s vision to reinforce its position in the market place as one of SA’s leading asset management companies. OMIGSA. Old Mutual Investment Group SA (OMIGSA) named Ben Kodisang (Pic 7) as the group’s new Head of Distribution, Marketing and Strategy. Peter Levett (Pic 8) has been appointed as the Managing Director of Old Mutual Property (OMP).
Lion of Africa Denny Jansen (Pic 9) has recently been appointed to Lion of Africa Insurance, as Senior Technical Underwriter: Casualty. He will be assisting with the development of Lion’s specialist casualty unit. Mutual & Federal Mutual & Federal, has appointed Kevin Wright (Pic 10) as Chief Operating Officer. Wright brings a wealth of experience to Mutual & Federal. His role will be to drive operational efficiencies and service delivery improvements - ensuring close alignment of support functions. Wright will also be responsible for all operational and claims processing functions including IT and Administration.
Walter Marcus (Bcompt - Professional Accountant (SA)
Piracy
Ship and Cargo Owners urged to Safeguard Against Piracy By Jeffry Butt, Business Unit Head of Marine at Aon South Africa (Pty) Ltd,
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he two attempted piracy attacks along the Gulf of Aden that occurred recently, has once again highlighted the need for ship and cargo owners to safeguard both their assets and people through an effective risk management strategy.
The first in-depth global piracy report released by Aon Risk Solutions has confirmed an increase in overall piracy activity in the East African region. The report revealed a 17% year-on-year increase in attacks from 231 to 278 between 2009/10 and 2010/11. According to the report, cargo vessels are the most attacked type of vessel in this area. The most notable shift was in the Gulf of Aden, historically a piracy hotspot, to the Arabian Sea, which experienced a 267% increase in attacks. Statistics released by the International Chamber of Commerce Commercial Crime Services substantiate these figures, revealing that the total number of piracy attacks worldwide totalled 326 this year with a total of 33 hijackings. Currently pirates in Somalia alone are holding 16 vessels with 301 hostages. According to Jeffry Butt, Business Unit Head of Marine at Aon South Africa (Pty) Ltd, the report highlights the need for those operating in the marine industry to manage the risk of piracy by ensuring robust preparation and preventative measures are in place to reduce the potential exposure to liability. “Should a vessel be pirated, costs are incurred almost immediately. Prior to finalisation of ransom settlement, investigators, legal counsel, average adjusters etc. are brought in to assist with ransom negotiations, determining the value of the vessel and the cargo she carries as well as potential consequential risk to lives and the environment. “When piracy occurs, it can take up to 3 months before the pirates start with initial communications. Once it has been confirmed that a piracy has indeed occurred, the general practice thus far has been for the ship owner to declare a “General Average”. The average adjuster(s) will provide each cargo owner with an average guarantee / bond to be signed and returned. This confirms the commitment from each cargo owner that they accept responsibility to pay their proportionate share of the collective cost of the ransom being negotiated.” He says there have been instances of General Average where the proportionate share each cargo owner had to pay was equal to 60% of the value of their cargo on board the affected vessel. “For example, if a particular cargo owner had cargo to the value of R 10 million rand on board the affected vessel, his contribution will be R 6 million.” He says that in some ransom cases the average guarantee/bond that is submitted to each cargo owner for signature and return, is openended which does not stipulate the proportionate amount to be guaranteed. The cargo owner’s liability at the time of signing is therefore an unknown. Butt says that for any small business without adequate marine insurance cover in place, this kind of exposure can be potentially devastating. Further costs may also include the cost of all 3rd parties involved such as negotiators, average adjusters etc. “Although there are commodities that pose a environmental threat, especially in the case of bulk oil, piracy in general is not commodity-driven as the cargo on board often has a limited monetary value, however the ransom value can be almost limitless due to the lives that are taken hostage,” says Butt. Butt adds that consequential losses and trade disruptions are also a huge risk factor. “Negotiations can sometimes take up to seven months to finalise, leaving companies without their cargo and no sales activity. This leaves business massively exposed to profit loss risks if they are not insured.” However, he says there are solutions available in South Africa to reduce exposure to such risks. ”Some companies such as Aon South Africa (Pty) Ltd, offer crisis management in situations where lives are involved, manning vessels to deter piracy through passive means and tracking movement of a vessel and its cargo. Butt says it is essential for all ship and cargo owners to make sure that they have spoken to a specialist advisor who understands the full set of risks facing a marine business in order to provide a comprehensive risk assessment. “This will assist not only in identifying what type of cover is best-suited for the business but will also save the company from suffering significant potential losses in the event of falling victim to a piracy attack,” concludes Butt. 48