What is microinsurance? And how does it differ from regular insurance which has existed, in various different forms, for thousands of years? Microinsurance can be described as the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved. It is generally intended for persons who have been ignored by mainstream commercial and social insurance schemes – it is for persons who have previously not had access to appropriate financial products.
Microinsurance forms part of the broader insurance market, distinguished by its particular focus on the low-income market, which translates into distinct means of product design and distribution.
Regular insurance products tend to only cater for individuals with fixed income. This is where microinsurance can step in and focus on cover to individuals working in the informal economy who may not have access to regular commercial insurance or social protection benefits, as microinsurance products include both life and non-life insurance. Whilst it is generally easier to offer insurance to persons with predictable income than to an informal worker who has irregular cash flows, it is the latter, however, which represents the microinsurance frontier.
Along with the notion of providing financial products to those who were previously excluded, reforms that promote financial inclusion are increasingly at the forefront of the international development agenda for policymakers and development institutions. In response to this South Africa has recently introduced large overhauls of the policy and framework of the financial services industry. This includes the development of the microinsurance regulatory framework which has occurred against the backdrop of a host of wider regulatory reforms which include Solvency Assessment and Management, Treating Customers Fairly, the Insurance Bill as well as the Twin Peaks regulatory reforms.
The South African insurance industry is highly regulated and is primarily governed by the Long-term Insurance Act 52 of 1998 (“LTIA”), the Short-term Insurance Act 53 of 1998 (“STIA”), and the Financial Advisory and Intermediary Services Act 37 of 2002 (“FAIS”).
An important recent development in the South African insurance industry is the introduction of the Insurance Bill (the “Bill”). The Bill establishes a consolidated legal framework for the prudential supervision of the insurance sector which is consistent with international standards for insurance regulation and supervision.
The Bill largely deals with the regulatory gaps which were identified by the World Bank’s Financial Sector Assessment Program evaluation of South Africa, and seeks to promote the maintenance of a fair, safe and stable insurance market by establishing a legal framework for insurers. The Bill essentially entrenches the principle of proportionality which means that regulatory requirements will be applied in a manner which is proportionate to the nature, scale and complexity of the risks that are inherent in the business of an insurer – this approach has been followed so that requirements imposed on small and medium sized insurers are not too onerous.
The Bill will give a voice to microinsurance and will ensure that the microinsurance framework is cemented in the South African financial services industry. With this in mind, the proposed microinsurance regime will need to achieve certain policy objectives which the LTIA and STIA are not capable of achieving.
The introduction of the microinsurance framework will bring about a change in the way that many insurers operate. The new microinsurance regulatory framework will focus on the formalisation of unregulated players in the microinsurance industry. While this will see an increase in the number of competitors that existing insurers will face, it will also level the playing field for legitimate players, equalise compliance requirements and costs, and clamp down on those who wish to remain outside of the regulatory net.