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Life Industry
Wednesday, October 1, 2008
At last!!!

The new Regulations on Commission and Early Termination Values were gazetted on 5th September 2008 in terms of the Long-term Insurance Act. They are to be implemented on 1 st January next year, and life insurers acknowledge that they will be “working towards an incredibly tight deadline.”

The regulations only apply to savings type policies, such as endowments and retirement annuities. Pure risk policies, including whole life and disability, the current commission structure will continue to apply.
Currently all commission is paid to intermediaries at the beginning of the first and second policy years. But in terms of the new regulations, only half of the commission due to the intermediary will be paid upfront, while the other half will be paid over the term of the policy, in accordance with a table of rates. This should encourage ongoing service and better broker to client relationships. Intermediaries will receive a maximum commission of 5% on endowment and retirement annuity fund policy premiums, split into a 2.5% upfront component and a 2.5% ongoing service commission, payable monthly.
The upfront commission portion will be discounted at 6% per annum.
Gerhard Joubert, CEO of the LOA, says the new regulations will go a far in achieving a fair balance between upfront and as-and-when commission. “We believe that the new model is fair to the intermediary while at the same time ensuring the sustainability of the industry, and above all, ensuring that policyholders receive a better deal.”
The life insurance industry realised a number of years ago that the contractual savings environment had changed to one marked by increased job mobility, uncertainty of income and shorter-term investment time horizons. As a result early termination values started to matter more than ever before and the industry had to seek ways of improving them.

The LOA’s first attempt at finding a solution was Discussion Paper on Cost and Commission, released in June 2005. The paper set out proposals on how to ensure a balanced relationship between upfront costs and early termination values.
Explains Joubert, “This paper represented a watershed for the life industry. It indicated that product providers acknowledged change was required, and it stirred up extensive and often very heated debate. But it did serve as a basis for very constructive engagements with intermediary bodies, Government and other stakeholders.”

The example in the table illustrates the maximum allowable commission payable for a R500 a month retirement annuity fund policy with a 15 year term under the current legislation compared to the new framework that takes effect from 1st January 2009.

Regulations on Early Termination Values

Joubert says the regulations on Early Termination Values provide for a maximum reduction in fund values of 15% for both endowment policies that are made paid-up or surrendered and retirement annuity fund policies that are made paid-up or transferred to another fund.
In terms of the new regulations this percentage must be reduced with every year that the policy is in force until no early termination charge applies. The regulations state that in the case of policies with a term of five to 10 years, fund values may not be reduced once a policy has been in force for five years. Where a policy term is longer than 10 years, the fund values may only be reduced if an early termination takes place within the first 10 years.
The same maximum termination charge rules apply to term reductions. In the case of premium reductions, a proportion of the early termination charge may be applied (for example, if a policy’s premium is reduced by a third, the maximum charge is a third of what would have been applied to a paid-up).

Administration charge

In addition to the termination charge, insurers may levy an administration charge of not more than R300.
This means that as from 1st January next year, policyholders will always receive at least 85% of their policy fund value on early termination or, if other contractual changes are made, less the R300 administration charge.
Currently, RA fund policies and endowments that are made paid-up (premiums are stopped) or where the premiums or term of the policy are reduced receive at least 70% of the fund value. An RA fund member who decides to retire early receives at least 70% of the fund value. Endowments that are surrendered receive at least 60% of the fund value.

Copyright © Insurance Times and Investments® Vol:21.9 1st October, 2008
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