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Microinsurance readiness assessment
OAC Burial Society
Final report
Authors: Nigel Bowman and Christine Hougaard
Date: 11 July 2012
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Table of Contents
1. Introduction .............................................................................................................................. 3
2. The Old Apostolic Church ........................................................................................................... 3
3. The OAC Burial Society............................................................................................................... 4
4. Compliance strategies ................................................................................................................ 5
4.1. Microinsurance license and transformation to a co-operative ................................................ 5
4.2. Fully underwritten ................................................................................................................. 8
4.3. Multiple co-operatives ........................................................................................................... 9
5. Modelling the financial impact ................................................................................................... 9
5.1. OAC Burial Society membership ........................................................................................... 10
5.2. Contribution rates ................................................................................................................ 10
5.3. Operating expenses ............................................................................................................. 11
5.4. Benefits paid ........................................................................................................................ 12
5.5. Reserves and surplus ........................................................................................................... 13
5.6. Capital requirements ........................................................................................................... 15
6. Policy lessons for microinsurance framework........................................................................... 18
7. Appendix 1: Impact assessment ............................................................................................... 21
8. Appendix 2: FAIS registration requirements ............................................................................. 72
9. Appendix 3: Expected financial position under each compliance strategy ................................ 74
9.1. Base scenario ....................................................................................................................... 74
9.2. Alternative 1: microinsurance license ................................................................................... 75
9.3. Alternative 2: fully underwritten .......................................................................................... 76
9.4. Alternative 3: multiple co-operatives ................................................................................... 77
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1. Introduction
On 28 July 2011, the South African National Treasury published a Policy Document1 outlining
detailed proposals for a microinsurance regulatory framework for South Africa. It will form the basis
for draft legislation, which is intended for 2012, for tabling to parliament in 2013. Implementation is
likely to follow in 2013/14. The proposals in the Policy Document provide a detailed overview of the
direction that microinsurance legislation is likely to take, though the exact requirements are not yet
cast in stone.
The Policy Document follows from an earlier Discussion Document on the Future of Microinsurance
Regulation published in 2008. In developing the final Policy Document, National Treasury consulted
widely with various stakeholders and a number of stakeholders, including The Old Apostolic Church
and the OAC Burial Society, made formal submissions on the 2008 Discussion Document.
As part of its ongoing support to microinsurance development in South Africa, FinMark Trust has
funded this “microinsurance readiness assessment” on the OAC Burial Society as a potential
candidate for the new microinsurance licence proposed in the 2011 Policy Document. This
assessment is intended to inform both the OAC Burial Society’s compliance strategy as well as the
finalisation of the regulation.
Section 2 of this document briefly introduces the Old Apostolic Church itself, while section 3
introduces the OAC Burial Society. Section 4 outlines three alternative strategies for complying with
the proposed microinsurance regulation and summarises the main impacts of each strategy. A more
detailed line-by-line analysis of the potential impacts under each strategy is provided in Appendix 1.
In section 5 we provide estimates of the financial impact of each alternative compliance strategy by
considering various key financial components of the OAC Burial Society over a 5-year period such as
contribution rates, operating expenses, benefits paid and accumulated surplus. Appendix 3 provides
more detail relating to the expected financial position of the OAC Burial Society under each
alternative strategy including key business ratios and indicators.
Finally section 6 considers the potential policy lessons that emerge from this readiness assessment.
2. The Old Apostolic Church
The Old Apostolic Church is a Christian community that has its roots in Germany, but is now centred
in South Africa. It is estimated to have around 2 million members in Africa and 30 000 in Europe.
Congregations can be found in South Africa, Swaziland, Namibia, Zimbabwe, Mozambique,
Botswana, Zambia, Malawi, USA, Canada, British Isles, Netherlands, Belgium, Australia, New Zealand
and the United Arab Emirates.
The OAC has a strong hierarchical organisational structure. The highest decision-making body of the
OAC is the Conference of Apostles, comprising all Apostles from across the world. The Conference of
Apostles meets annually with all actions and decisions being guided by the OAC’s constitution. The
Church in South Africa is managed by the Apostolate, consisting of all South African Apostles. The
1 The Policy Document, titled “The South African Microinsurance Regulatory Framework” can be found at
http://www.treasury.gov.za/publications/other/MicroinsuranceRegulatoryFramework/default.aspx . We have
not included an overview of its contents in this report.
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South African church province is divided into six districts for administrative purposes: Free State,
Gauteng, Northern District, Western Cape, Eastern Cape and KwaZulu-Natal. Each district is
managed by a Forum of Apostles, consisting of all Apostles from that district. Each district is further
split into smaller geographic areas for administrative purposes, known as Overseerships. Three
church officials are jointly responsible for an Overseership: an Overseer, who is responsible for the
administration within the Overseership, an Evangelist and a Prophet. Each Overseership is made up
of Elderships (generally groupings of suburbs), with each Eldership usually having three or four
Congregations under its control.
3. The OAC Burial Society
The OAC Burial Society was formed in 1977 with the purpose of providing a dignified funeral service
to those OAC members who could not afford such a service. It currently has approximately 70,000
principal members and about 240,000 members in total. Membership of the Burial Society is
voluntary, but restricted to sealed OAC members only.
Family funeral benefits up to R7,500 for a monthly contribution of R22.00. The Burial Society is
incorporated as a friendly society, with a Central Society and six Affiliated Societies, one for each
district. Each of the Central and Affiliated Societies are separate legal entities, with each registered
as a Friendly Society. The Burial Society Rules make provision for profits in one Affiliated Society to
be transferred to another Affiliated Society in the event of it making a loss (Rule 21). According to
the schedule of benefits contained in the Rules of the Burial Society, members are entitled to a
funeral service on death that consists of a specified set of services, the cost of which may not exceed
R7,500 per funeral, of which R5,250 is towards funeral expenses (including removal of the body,
preparation of legal documentation, all arrangements related to the funeral, the preparation of the
mortal remains, the use of a private room for viewing of the body, transport of the body to the
church and cemetery/crematorium, a hearse, the service of a trained funeral official and attendants
and the preparation of the grave, including provision of artificial mats, etc). In addition, up to R2,250
is allocated towards grave/cremation fees, transport costs and the publication of a notice of death in
a newspaper. Services are provided exclusively by undertakers under contract with or as appointed
by the executive committee of the Burial Society and no option of a cash payout is provided. The
OAC negotiates a service package on behalf of members at a price that is usually substantially below
the market price charged by undertakers. Any costs over and above that covered by the Burial
Society benefit are for the member or their family’s own account. The current contribution rate is
R22.00 per month per principal member, irrespective of the number of eligible dependants who are
also covered on the policy.
The Burial Society has strong governance and financial controls in place. Governance of each
Affiliated Society is exercised via an executive committee, consisting of a minimum of four members
who are all appointed by the Forum of Apostles of the district in which the Affiliate society operates.
The chairman of each Affiliate society executive committee, who is assigned by the Apostolate,
serves on the board of management of the central society. The central society board of management
includes an additional independent member who is also appointed by the Apostolate and serves as
the chairman of the board. The Burial Society has a total staff complement of 20 to 25, with a
significant amount of the work performed on a voluntary basis without remuneration by church
members. Financial statements are audited on an annual basis and submitted to the FSB. There have
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been no recent qualified audit reports. An actuarial valuation is performed every five years, as
required by the Friendly Societies Act, or more regularly if benefits or contributions are changed.
The Burial Society’s operations are controlled by the Burial Society Rules, which cover the executive
structures, appointment of the executive members, their powers and regular meetings; the
appointment of an actuary and an auditor; a fidelity guarantee protecting the Burial Society against
losses due to dishonesty or fraud; the creation of separate bank accounts, how funds may be
invested and the maintenance of appropriate accounting systems; membership requirements and
rights; contribution rates and payment rules; financial management, particularly in the event an
Affiliated Society incurs a loss, and 5-yearly actuarial investigations; claims and claim procedures;
dispute resolution; rule amendments; arrangements for dissolution; annual and special general
meeting arrangements; and a schedule of the benefits provided.
The Burial Society is a large, financially sound operation. It is active in 2,068 congregations across the
country. According to the 2010 financial statements, contributions were R15.3m, expenses were
restricted to 22.1% of contributions and the operating surplus was R4.2m. Recent claims ratios vary
between 72% and 81%, which implies good value to members. Any surplus arising is accumulated
within the Burial Society. The accumulated surplus at the end of 2010 was R48.4m, which is 4.4
times the benefits paid during 2010. The Burial Society is financially very sound.
4. Compliance strategies
The Policy Document proposes that the existing exemption from registration as a long-term insurer
for Friendly Societies underwriting assistance business2, under which the Burial Society operates, be
removed and that the friendly society institutional form falls away in favour of the co-operatives
framework. This will have major implications on both the Burial Society’s institutional form and on
the licensing requirements in order for the Burial Society to continue offering funeral benefits to its
members. This report considers three alternative strategies for compliance with the proposed
microinsurance regulatory framework, namely acquiring a microinsurance licence, obtaining
underwriting from a licensed insurer or splitting up into smaller co-operatives. Each strategy is
assessed in detail against the proposals contained in the Policy Document with the results shown in
Appendix 1. This section provides a summary of each compliance strategy and its main implications
for the Burial Society.
4.1. Microinsurance license and transformation to a co-operative
The Policy Document holds that either companies or co-operatives may obtain a microinsurance
licence and sets various prudential and market conduct requirements for microinsurance licence
holders. Under this compliance strategy each Affiliated Society therefore converts to a primary co-
operative with the Central Society converting to a secondary co-operative and the secondary co-
operative applies for registration as a microinsurer, as envisaged under the proposed
microinsurance regulatory framework. That means that, in addition to the provisions of the
2 This exemption is contained in section 7(2)(b) of the Long-term Insurance Act, 52 of 1998, provided the
benefits do not exceed a prescribed maximum amount, currently set at R7,500. In return, friendly societies
need only perform an actuarial valuation every five years and submit annual audited returns to the registrar.
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forthcoming microinsurance legislation, the Burial Society will be subject to the Co-operatives Act,
14 of 2005.
Under this compliance strategy, there are two groups of impacts: (i) that of converting to a co-
operative; and (ii) that of obtaining a microinsurance licence. We summarise the salient impacts in
this section. More details and additional areas of impact are explored in Appendix 1.
Converting to a co-operative
At first glance, there are many similarities between co-operatives and friendly societies (as regulated
under the Friendly Societies Act of 1956): both sets of legislation require a member-owned
organisational structure where members may vote at an annual general meeting. Whereas friendly
societies operate by rules, all co-operatives are required to have a constitution. The two documents
serve a similar purpose. Nevertheless, conversion to a co-operative will have a number of
implications for the Burial Society:
Member elected board of management. The current practice is for board members to be appointed
by the Apostolate (for the Central Society board) or the district Forum of Apostles (for the Affiliated
Societies’ executive committees). This practice is in conflict with the Co-operatives Act, which
requires board members to be elected by members of the co-operative. This impact is common
across all three alternative compliance strategies (if the friendly society form falls away, all three
compliance strategies will entail conversion to a co-operative). A potential solution could have the
Apostolate propose the board, with voting by members to elect the board.
Amendment of constitution by special resolution. The Co-operatives Act requires that constitutional
amendments be made only by special resolution at the AGM or extraordinary general meetings. This
is likely to have a significant operational impact for the Burial Society since the board of
management of the Central Society may alter or rescind any rule or make any additional rule,
provided that any change that affects the contribution rate or benefits shall be supported by a
report by the actuary. Any Rule changes must also be approved by the Apostolate as the final
decision-making body. The requirement of the Co-operatives Act is regarded by the Burial Society as
a deviation from the church’s principle that all rules pertaining to members of the church (including
the Burial Society) will be scrutinized by the Apostolate and if not acceptable, it will not be accepted.
This impact is common across all three alternative compliance strategies.
Tax impacts likely to be small. There are a number of potential tax impacts resulting from the
required change in institutional form, none of which are expected to be significant. The Policy
Document proposes that transition arrangements be put in place to limit the tax liability when
changing institutional form, which we trust will happen in practice. The on-going corporations tax
liability is expected to be small because the non-profit motive of the Burial Society is likely to ensure
that any surplus arising will be small. The situation with respect to VAT will not change unless the
proposal that life microinsurance business is exempt is reversed.
Obtaining a microinsurance licence
Microinsurance reserving and capital requirements easily met. The Policy Document proposes that
microinsurers must hold a minimum amount in reserves to cover policy liabilities and an additional
amount of capital to cover adverse experience. The results of the financial model (see Section 5 for
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more details) show that both the reserving and capital requirements will easily be covered by the
accumulated surplus of the Burial Society. The microinsurance framework will restrict investments to
short-term, liquid assets. This requirement will not impact the Burial Society since it already
complies.
Opportunity to increase funeral cover or offer additional types of cover. Current legislation has
restricted the Burial Society to offering funeral benefits only, and subject to a cap of R7,500. The
proposed microinsurance regulation increases the cap to R50,000 (for death events) which provides
the opportunity to increase funeral cover if the need arises. It also provides the opportunity to the
Burial Society to consider introducing other types of cover if there is a need amongst its members
(e.g. life cover not linked to funeral expenses only, hospitalisation cover such as hospital cash
benefits or various short-term insurance types of cover).
On the flip side, the Burial Society is concerned that increased benefit limits can open the door to
funeral service providers to increase their prices as experienced when the Friendly Society limit was
increased from R5,000 to R7,500.
Longer grace periods have a substantial impact on benefits paid. The Policy Document proposes that
grace periods be extended up to 6 months depending on how long a policy has been in-force. In
practice, this will increase the number of members qualifying for cover by approximately 10% (those
members that currently have between 3 and 6 premiums outstanding and have been members of
the Burial Society long enough to qualify) which will, in turn, increase benefits paid by approximately
10% or roughly R1.5m per year. It is important to note that this increase in benefits paid is actually a
benefit improvement to members and not just a cost to the Burial Society.
FAIS compliance costs are significant. The FAIS Act requires anyone that provides advice or
intermediary services, as defined in the FAIS Act, to be registered as a financial services provider and
comply with the provisions of the FAIS framework. The Burial Society is of the opinion that the FAIS
Act does not apply to them and has therefore not registered. Consultation with the regulator and
industry experts has led us to believe that the Burial Society’s opinion is incorrect and it should in
fact be registered3. FAIS registration will have far reaching impacts and be particularly costly. By far
the largest element of cost will be the compliance officer function. It is estimated that it will cost
roughly R5m per annum to outsource the function4 (at an “impossibly low” rate, to quote a service
provider consulted). Alternatively, to perform the compliance function internally is expected to cost
between R3m and R4m per annum5, but this requires suitably qualified candidates to be either
identified within the Burial Society or, more likely, appointed. The main driver behind the high cost is
the fact that all branches (congregations in the Burial Society’s case) need to be visited at least
3 It is important to note that the view expressed in this report that the Burial Society should be registered
under the FAIS Act is not based on a formal legal opinion and that the Burial Society disagrees with this view. 4 Based on an assumed cost of R200 per month per congregation where the Burial Society is active (2,068)
quoted by a provider of outsourced compliance officer services. 5 Assuming four compliance officers will be appointed, implying each compliance officer will visit 500
congregations each year, at an annual salary of R500,000 per compliance officer. Travel costs are assumed to
add between 50% and 100% of the direct salary costs. These assumptions are based on discussions with
professional compliance officer service providers who suggested that an in-house compliance function would
be more cost effective that to outsource it.
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annually, of which there are 2,068 spread across the country, some in remote areas. It is the high
number of congregations and their geographic spread that gives rise to the high cost.
The annual FAIS ombud fee and levies for key individuals and representatives also represent
significant costs of approximately R500,000 and R550,000 per annum respectively. These two costs
are directly linked to the number of key individuals and representatives. We conservatively expect
roughly 2,000 key individuals and representatives will need to be registered (one representative for
each congregation). This number could well be substantially higher (over 6,000) if all church officials
that have a member facing role for the Burial Society are considered representatives. Total FAIS
related costs are expected to almost double the current total operating expenses from R5m to R10m
per year. The fit and proper requirements under the proposed market conduct regulation are
unlikely to prove difficult to meet. However, it is important to note that this observation is based on
the assumption that the microinsurance fit and proper requirements will be as for sub-category 1.1
Long-term Category A (assistance business) since these requirements have not yet been determined.
The FAIS related costs will be increased further if the microinsurance fit and proper requirements
are more onerous.
As a final point on FAIS, it is important to note that it is not the proposed microinsurance regulatory
regime that will cause the increased cost. There seems to be consensus that the Burial Society
should already be complying with the requirements of the FAIS Act. All the above FAIS impacts are
therefore equally applicable to the “fully underwritten” alternative below.
4.2. Fully underwritten
Under this compliance strategy the funeral services provided by the Burial Society are fully
underwritten by a registered insurer (or microinsurer) with the Burial Society not taking on any of
the insurance risk. The OAC Burial Society will pay an insurance premium to the registered insurer
who will in turn be responsible for paying all valid death claims. We have assumed the insurance
premium payable is equal to expected claims plus a margin to cover the insurer’s expenses and
profit. The total margin is assumed to be 15%. The Burial Society is assumed to continue performing
all the current administrative functions, incurring the same level of costs as in the past.
The Policy Document proposes that the Friendly Societies Act be phased out with existing Friendly
Societies converting to co-operatives. Thus, as for the previous strategy, each Affiliated Society
converts to a primary co-operative with the Central Society converting to a secondary co-operative.
Likewise, all of the FAIS-related impacts will also apply.
The underwriter’s expense and profit margins will increase costs. The risk of providing funeral cover
under this compliance strategy is carried by the underwriter and the cost of benefits paid by the
Burial Society will be replaced by insurance premiums paid to the underwriter. The insurance
premium should be set relative to the past claims history, with additional margins added to cover
the underwriter’s expenses and to contribute to profit. The level of margin added will be determined
by negotiation with the underwriter, but 15% seems reasonable. This translates into a substantial
increase in cost in excess of R2m per year. The cost of the Burial Society applying for its own
microinsurance license will be substantially lower, which means that alternative 1 is a more
attractive option unless the Burial Society is able to negotiate substantially lower margins from
the underwriter. Note that the Burial Society is expected to continue playing an unchanged role in
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signing up members and collecting contributions under this alternative compliance strategy. No
change is therefore expected to the FAIS compliance costs.
4.3. Multiple co-operatives
The Policy Document proposes that any organisation that guarantees benefits to its members or that
exceeds the membership threshold (the proposed threshold is 2,500 members) must either obtain a
microinsurance license or be fully underwritten by an existing registered insurer. The third
compliance strategy is for the Burial Society to break up into a number of small co-operatives, each
with membership below the 2,500 membership threshold. In addition, each co-operative may not
guarantee the funeral services it provides to its members. There will then be no need to obtain a
microinsurance license or be underwritten by an existing insurer if both of these conditions are met.
Note that this alternative is a theoretical option and should not be considered in practice, since it is
in effect circumventing the intention behind the proposed microinsurance regulation. We have
included it in the readiness assessment as a means of gauging the attraction (or not) of the intended
compliance routes. That is, if this alternative turns out to be the most attractive of the three
alternatives assessed, then the proposed microinsurance regulation is unlikely to achieve its
objectives.
Affiliated Societies to split into 28 co-operatives. The 6 Affiliated Societies are required to split into at
least 28 individual co-operatives in order to ensure the proposed member threshold of 2,500 is not
exceeded (above which the organisation will be regarded as a formal microinsurance player). The
split will have major administrative implications, probably rendering this alternative impractical. For
example, each co-operative is required to have its own registered office and its own bank account,
major reorganisation will be required to split the membership, the accumulated surplus will need to
be split appropriately between the co-operatives, the registration process will be duplicated multiple
times, risks cannot be shared across societies, etc.
Multiple co-operatives increase audit costs. All 29 co-operatives (28 primary and one secondary)
must prepare audited annual financial statements for submission to the CIPC. The additional audit
costs will substantially increase operating expenses by approximately 10%.
As no guaranteed benefits will be provided under this scenario, there will technically be no
intermediary services as defined under the FAIS framework. Therefore, the FAIS Act will not be
applicable and none of the FAIS-related compliance costs will be incurred, saving approximately R5m
per annum.
5. Modelling the financial impact
We have developed a model that estimates the financial impact of each of the three compliance
strategies by projecting the Burial Society membership and its cash flows, the most significant of
which are contributions, expenses, benefits paid and investment returns. The model uses the 2010
end of year membership and accumulated surplus as the starting point and assumes each alternative
compliance strategy will be implemented with effect from 2013. The projections have been done for
a 5-year period from 2013 to 2017 and compared to the financials of the Burial Society if it were to
continue operating in its current form.
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Note that the assumptions and detailed calculations underlying the graphs provided in this section
and the financials in Appendix 3 are not included in this report but are available on request together
with the spreadsheet model used to generate the financial projections.
5.1. OAC Burial Society membership
The latest available number of principal members is 66,673 as of the end of 2010. This number is
estimated to grow marginally from year to year as illustrated in figure 1, despite a slow decline in
membership over the recent years. We expect the decreasing membership trend to reverse because
the rate at which members have been leaving is reducing quicker than the rate at which members
are joining, causing an expected net gain of members in the future.
Figure 1: Projected principal membership for the OAC Burial Society (2011 to 2017)
5.2. Contribution rates
The current contribution rate is R22.00 per month per principal member. We have assumed the
contribution rate will continue unchanged until an operating loss is projected (for the base scenario
where the Burial Society continues operating in its current form). The first loss is expected to occur
in 2015. From this year on we have assumed the contribution rate will be increased such that no
operating losses are made in any year. This effectively means the accumulated surplus will not be
used to subsidise contributions over the projection period to 2017. Figure 2 below shows the
required contribution rate under the status quo such that the accumulated surplus is not utilised to
subsidise contributions.
67 074
67 478
67 884
68 292
68 703
69 116
69 532
2011 2012 2013 2014 2015 2016 2017
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Figure 2: Monthly contribution with no subsidy from the accumulated surplus
5.3. Operating expenses
Figure 3 shows a graphic comparison of the expected level of operating expenses for each of the 3
compliance scenarios relative to the expected expense levels if the status quo was to hold (i.e. the
base scenario).
Figure 3: comparison of operating expenses against status quo
Note: alternative 1 is obtaining a microinsurance licence; alternative two is the fully underwritten scenario and
alternative 3 the multiple co-operatives scenario.
22.00 22.00 22.00 22.0023.00
25.00
27.00
2011 2012 2013 2014 2015 2016 2017
0
2 000 000
4 000 000
6 000 000
8 000 000
10 000 000
12 000 000
14 000 000
16 000 000
2011 2012 2013 2014 2015 2016 2017
Base scenario
Alternative 1
Alternative 2
Alternative 3
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Alternatives 1 and 2 are expected to result in significant increases in expenses, mostly as a result of
the expected cost of compliance with the FAIS Act (FAIS related expenses make up 97% of the
increase and are estimated to be approximately R5m in 2013 increasing to R6m in 2017). It is
important to note that the need to comply with the FAIS Act is not a result of the proposed
microinsurance regulation as mentioned previously. Alternative 2 is expected to result in marginally
lower expenses than alternative 1, mostly due to saving the cost of preparing the microinsurance
returns for submission to the FSB.
The expenses associated with alternative 3 are expected to be roughly 10% higher than under the
status quo. This is mostly caused by additional audit costs since each of the 29 co-operatives will be
required to submit audited annual financial statements. However, it is likely that the full extent of
the additional costs arising from the significantly increased complexity of administering 29 co-
operatives have been captured for this alternative.
5.4. Benefits paid
Figure 4 shows a graphic comparison of the expected annual level of burial services benefits paid for
each of the three compliance scenarios relative to the expected benefits paid if the status quo was
to hold (i.e. the base scenario).
Figure 4: Comparison of total annual benefits paid against status quo
Both alternatives 1 and 2 are expected to result in an increase in benefits paid. Benefits paid under
alternative 3 are the same as for the status quo.
The increase under alternative 1 (approximately 10%) comprises two components. By far the larger
of the two components is caused by the increased length of the grace period (from 2 months up to 6
months, depending on duration the policy has been in force). This component makes up 95% of the
0
5 000 000
10 000 000
15 000 000
20 000 000
25 000 000
2011 2012 2013 2014 2015 2016 2017
Base scenario
Alternative 1
Alternative 2
Alternative 3
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increase. The remaining 5% is because the Policy Document holds that accidental deaths during the
waiting period must be paid, which are currently excluded along with natural deaths.
Alternative 2 represents a 15% increase, which is an estimate of the allowance for the underwriter’s
own expenses and profit margin. This is a subjective estimate, but appears reasonable. Note that we
have considered the cost of insurance to be equivalent to benefits paid to provide a direct
comparison of the cost of providing the burial services under the different compliance scenarios.
Strictly speaking, the cost of insurance should be considered an expense rather than benefits paid.
5.5. Reserves and surplus
Figure 5 below shows the expected operating surplus, including investment returns on the
accumulated surplus and reserves (where applicable), before tax and transfers to reserves, arising
each year. The contribution rates for alternatives 1, 2 and 3 have been set equal to that for the base
scenario. The patterns under each scenario are to be expected given the previous commentary on
expenses and benefits paid. The base scenario surplus reduces steadily until contribution rates begin
to be increased to ensure losses are not incurred. Alternatives 1 and 2 show large and increasing
losses mainly because of the FAIS compliance costs. Alternative 3 surpluses are marginally lower
than the base scenario because of the increased audit expenses.
Figure 5: Expected operating surplus or loss arising (contribution rates as for base scenario)
It has been the Burial Society’s recent practice to set contribution rates at an expected break-even
level, with no subsidy from the large accumulated surplus which has only been used to finance
experience variances (e.g. higher than expected benefit payments). This practice was assumed to
continue for the base scenario, as can be seen in figure 6 where the accumulated surplus for the
base scenario remains level just above R60m when the contribution rate begins increasing (from
2015). The amounts in this graph represent the accumulated surplus for the base scenario, the
-14 000 000
-12 000 000
-10 000 000
-8 000 000
-6 000 000
-4 000 000
-2 000 000
0
2 000 000
4 000 000
6 000 000
2011 2012 2013 2014 2015 2016 2017 Base scenario
Alternative 1
Alternative 2
Alternative 3
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accumulated surplus plus microinsurance reserves for alternative 1 and the accumulated surplus
plus reserves required by the Co-operatives Act for alternatives 2 and 3. The impact on accumulated
surplus and reserves is in line with the surpluses and losses shown previously in figure 5. Alternatives
1 and 2 require significant subsidy from accumulated reserves in order to maintain contribution
rates equal to those required under the base scenario.
Figure 6: Comparison of reserves and accumulated surplus
Figure 6 above shows the impact of each alternative compliance strategy on the accumulated
surplus. An alternative way to demonstrate the impact of each alternative is to calculate the
contribution rate required to prevent a subsidy from accumulated reserves. These contribution rates
are shown in figure 7. The contribution rates for the base scenario are the same as those shown in
Figure 2.
0
10 000 000
20 000 000
30 000 000
40 000 000
50 000 000
60 000 000
70 000 000
2011 2012 2013 2014 2015 2016 2017
Base scenario
Alternative 1
Alternative 2
Alternative 3
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Figure 7: Non-subsidised contribution rates
Alternatives 1 and 2 both require an approximate increase in the contribution rate of 25% in 2013 in
order to offset the expected additional costs.
5.6. Capital requirements
The proposed microinsurance regulatory framework requires microinsurers to hold capital,
determined by the level of contributions received in the previous year, as a buffer against adverse
experience. The required capital is subject to an absolute minimum of R3m. Figure 8 shows the
estimated required capital for the “microinsurance license” compliance strategy on two scenarios
(the other two alternative compliance strategies do not require capital to be held):
1. the base scenario contribution rates are not increased and the accumulated surplus is used
to subsidise the shortfall, or
2. contribution rates are increased such that no shortfall is expected and the accumulated
surplus is not used (i.e. contributions are set at a break-even level).
Capital is higher under the second scenario because it is based on the level of contributions received
during the year, which are increasing under the break-even contribution scenario so as not require a
subsidy from the accumulated surplus.
2011 2012 2013 2014 2015 2016 2017
Base scenario 22.00 22.00 22.00 22.00 23.00 25.00 27.00
Alternative 1 27.50 29.50 32.00 35.00 37.50
Alternative 2 28.00 30.00 32.50 35.50 38.00
Alternative 3 22.00 22.00 23.50 25.50 28.00
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
P a g e | 16
Figure 8: Estimated capital requirements
The required level of capital can easily be covered by the available accumulated surplus, even under
the scenario where contributions are left unchanged and the accumulated surplus is reduced by
subsidising contributions. The ratio of accumulated surplus to capital required remains healthy
under both scenarios, despite the significant reduction in accumulated surplus if contributions are
left unchanged, requiring a subsidy from the accumulated surplus. This is illustrated in table 1 below.
Table 1: Ratio of accumulated surplus to capital required
An alternative method of illustrating the Burial Society’s ability to cover the prescribed capital
requirements is to consider how total assets will be split between reserves, required capital and free
assets (the balance of total assets after providing for reserves and required capital). Figures 9 and 10
show the split of assets under base scenario contributions and break-even contributions
respectively.
0
500 000
1 000 000
1 500 000
2 000 000
2 500 000
3 000 000
3 500 000
4 000 000
4 500 000
5 000 000
2013 2014 2015 2016 2017
Base scenario
contributions
Break-even contributions
2013 2014 2015 2016 2017
Base scenario contributions 16.5 14.3 11.6 8.5 4.5
Break-even contributions 16.8 15.6 14.3 13.1 12.1
P a g e | 17
Figure 9: Split of total assets between reserves, required capital and free assets for the base scenario
contributions
Figure 10: Split of total assets between reserves, required capital and free assets for break-even
contributions
0
10 000 000
20 000 000
30 000 000
40 000 000
50 000 000
60 000 000
2013 2014 2015 2016 2017
Free assets
Required capital
Reserves
0
10 000 000
20 000 000
30 000 000
40 000 000
50 000 000
60 000 000
70 000 000
2013 2014 2015 2016 2017
Free assets
Required capital
Reserves
P a g e | 18
6. Policy lessons for microinsurance framework
Overall, there appear to be few areas of the proposed microinsurance regulatory framework that
will present significant barriers to the OAC Burial Society to becoming a microinsurer, the exception
being the proposed market conduct regulation (although it must be noted again that the impact
does not result from the proposed microinsurance regulation).
Requirements of FAIS Act in their current form will be a major barrier to entry. As previously
discussed, compliance with the FAIS Act requirements in their current form will increase operating
costs substantially (roughly doubling expenses from R5m to R10m). It is clear that this level of
additional expense will be a major barrier to potential microinsurers. In the Burial Society’s case, it
actually makes the “multiple co-operatives” compliance strategy very attractive despite its practical
implications. In the final analysis, the Burial Society’s major strength, namely that it penetrates
underserved markets through its wide geographic reach, is ultimately driving the cost of complying
with the FAIS Act by way of the number of branches (congregations) and required key individuals
and representatives. This is counter to the microinsurance policy objective of extending access. We
therefore recommend that these considerations be taken into account in determining the FAIS levy
structure and compliance officer requirements applicable to microinsurance.
A potentially simple solution to the high annual FAIS levies (both for fee based on the number of key
individuals and representatives and the ombud fee) would be to cap the levies, either in terms of an
absolute amount or as a percentage of annual premium income. The solution to reducing the costs
of the compliance officer function is less obvious and will probably require a reduced scope of
functions (e.g. visiting a representative sample of branches during a year rather than all branches).
A potentially very informative exercise would be to survey recently joined members of the Burial
Society to assess the effectiveness of the current non-compliant sales and intermediation processes.
The results could be used to inform fit and proper and conduct requirements for microinsurance
business.
Impact of market conduct regulation highly dependent on fit and proper requirements. The major
impact of the proposed market conduct regulation lies in the cost relating to the compliance officer
function and fees and levies, while the impact of the fit and proper requirements are expected to be
low both in terms of cost and practical implications. However, it is critical to note that this view is
based on two assumptions: (i) that fit and proper requirements will be the same as for sub-category
1.1 Long-term Category A (assistance business), and (ii) that few key individuals (only 7) will need to
be registered. If the fit and proper standards are raised for microinsurance, there will likely be
significant practical and cost implications. For example, it would probably be very difficult for
representatives to write a regulatory exam because of their geographic spread.
Longer grace periods have a substantial impact on benefits paid. The grace period structure
proposed by the Policy Document has a substantially bigger cost implication (at least in the OAC’s
case) than originally anticipated. This is because there are a significant number of members who
have between 3 and 6 contributions in arrears and because most members have been members for
many years. Combining these two factors results in roughly 10% more members qualifying for cover
than is currently the case. This combination of arrear contributions and long-standing membership
could very well be encountered with other potential microinsurance licensees if they have existed
P a g e | 19
for many years. We propose that policymakers consider giving microinsurance license applicants the
option to apply the grace period retrospectively, but make it compulsory only for future members.
The grace period proposal as it currently stands may place potential microinsurers into financial
difficulty if they are not easily able to increase premiums in response to the increased benefit costs
or do not have the level of accumulated surplus that the OAC Burial Society has.
Conversion of friendly societies to co-operatives. The Friendly Societies Act provides for a friendly
society to convert to a company if it intends to apply to carry on insurance business, while the Co-
operatives Act provides for the conversion of companies, but not friendly societies, to co-operatives.
The transition from friendly society to co-operative could be simplified if the Co-operatives Act was
to be amended to allow such a conversion as for companies and could be one of the mechanisms
used to encourage friendly societies to transform into microinsurers. For example, it would remove
the need of the existing friendly societies to be dissolved according to the Burial Society Rules.
Transition arrangements are important to limit the potential tax liability to members. A potentially
significant tax burden on members may well arise out of the conversion from friendly societies to co-
operatives if the friendly societies need to be wound up as part of the transition process. In the
event of being wound up, the accumulated surplus would need to be distributed to members
according to the Burial Society Rules. Any distribution would be taxed at a level depending on the
form of the distribution and, if taxable in the hands of the members, on the members’ individual
levels of income. An average tax rate as low as 10% would give rise to a total tax burden of roughly
R5m. This underlines the importance of following through with the Policy Document’s proposals to
provide transitional arrangements that are tax neutral.
Model constitution for microinsurance co-operatives. Since co-operatives are likely to be the
institutional form of choice for microinsurance license holders, the Companies and Intellectual
Property Commission (CIPC) should consider developing a model constitution for microinsurers as
they have for other specific co-operatives such as agricultural, housing and financial services
(deposits and loans) co-operatives.
Institutional, prudential and product regulation generally well designed. Our detailed impact analysis
shows fairly low impact from the institutional, prudential and product regulation provisions
contained in the Policy Document, which implies these provisions have been well thought through
and designed.
Impact on other friendly societies likely to be different. It is important to consider to what extent the
lessons emerging from this assessment are likely to be applicable to other friendly societies. We
expressed the view earlier that the OAC Burial Society is well managed and financially sound. This is
out of the OAC’s own choice rather than due to existing regulation6 and is largely responsible for the
fact that there are likely to be few impacts by the proposed microinsurance regulation. Other
friendly societies may not have similarly high levels of governance and financial controls and are not
as financially sound, which means that the impact of the proposed regulation will be greater. For
example, other friendly societies are likely to have significantly lower levels of accumulated surplus.
6 For example, the Burial Society has chosen to include a section in its Rules that requires an actuarial valuation
in the event that any one of the Affiliated Societies produces a loss or if the contribution rate or benefits are
changed. The Friendly Societies Act requires an actuarial valuation only every five years.
P a g e | 20
Depending on the actual level, they may have difficulty in meeting the prudential requirements.
However, the potentially significant impact of market conduct regulation will be similar for all
potential microinsurance license holders that have a large and geographically spread distribution
infrastructure.
Treatment of existing members must be carefully considered. The funeral services offered by the
Burial Society fit quite well with the proposed microinsurance product standards and there are no
significant product related impacts besides the longer grace period, even for existing members.
Other potential microinsurance license holders may not be in such a fortunate position with existing
products having to change substantially. It will be important to consider the extent to which the
proposed product standards should be applied to existing policyholders. On one extreme, a potential
solution is to make compliance with product standards optional for existing policies. But this could
give rise to significant prudential risk (e.g. via cash back benefits or products with long term
guaranteed benefits), which is contrary to one of the objectives underlying the product standards,
linking to the proposed reduced prudential regulation. On the other extreme all existing policies
could be forced to comply with the proposed product standards, with potentially significant impacts
on existing policies. For example, if a funeral product provides regular cash back benefits, there
should be substantial reserves to meet future benefit payments. The cash back benefit will be
removed to comply with the proposed product standards and, to be fair, the reserves should be
distributed to those who would have been entitled to the benefit. Such a process would have
substantial practical implications. We unfortunately cannot recommend a solution because we do
not have data on the prevalence of non-compliant products in other potential microinsurance
license applicants.
P a g e | 21
7. Appendix 1: Impact assessment
The impact assessment matrix below is structured according to each of the main aspects covered in the microinsurance Policy Document. The policy framework
provisions, the OAC Burial Society’s current status in that regard, as well as the implications of the microinsurance licence alternative are discussed for each of the main
aspects of the Policy Document. In the interest of space utilisation, the expected impact of alternatives 2 and 3 are included in a separate matrix that follows after the
one below.
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
1. Institutional regulation
a. Institutional forms Organisations that provide guaranteed
benefits to members or have membership
in excess of 2,500 lives will be required to
register as a microinsurer or be
underwritten. The institutional forms
permitted to register as a microinsurer are
public and private companies and co-
operatives.
The Burial Society consists of a Central
Society and 6 Affiliated Societies. The
Central Society and the Affiliated Societies
are each registered as a Friendly Society
with the FSB as per the Friendly Societies
Act of 1956 and, as such, are exempt from
registration under the Long-term
Insurance Act7.
Each Affiliated Society must convert to a
primary co-operative and the Central
Society to a secondary co-operative. This
implies the Rules of the Burial Society will
need to be reviewed and changed to
comply with the Co-operatives Act and
adopted as the constitution of the newly
formed co-operatives.
b. Corporate governance
• Board of directors Corporate microinsurers must have a
board consisting of at least 4 directors, of
which at least 2 should be non-executive.
At least 1 of the non-executive directors
must be independent8.
In the case of co-operative microinsurers,
Rule 3 of the Burial Society Rules deals
with the Board of Management of the
Central Society and with the Executive
Committee for each Affiliated Society.
The Board consists of the chairman from
each of the Executive Committees of the 6
Affiliated Societies and an independent
The Burial Society’s existing management
structures fit well with those required for a
co-operative. However, the fact that
directors must be member elected may
pose a problem to the OAC. The Co-
operatives Act provides, as one of its core
principles, that decision making takes
7 Section 7(2)(b) of the Long-term Insurance Act 52 of 1998 exempts registered Friendly Societies that offer benefits not exceeding the prescribed maximum from registration as long-
term insurers. 8 Section 14(1)(dd) of the Co-operatives Act 14 of 2005 requires all directors to themselves be members of the co-operative. This contradiction between the Co-operatives Act and the
Policy Document must be resolved during the legislation drafting process.
P a g e | 22
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
the board must be elected in accordance
with the constitution of the co-operative
and in compliance with the Co-operatives
Act (i.e. by the members at an Annual
General Meeting9).
Annual General Meetings must be held
within 6 months of the end of the
preceding financial year10
.
member who will also be the chairman of
the Board. The chairman of the Board is
appointed by the Apostolate.
All resolutions of the Board pertaining to
policy, contributions, regulations and the
Burial Society Rules must be approved by
the Apostolate.
Each Executive Committee consists of at
least 4 members appointed by the Forum
of Apostles from the District of the Church
in which the Affiliated Society operates,
with the chairman being the member
assigned to the Board by the Apostolate.
Each member serves for a maximum term
of 4 years, but may be reappointed.
Overarching governance is provided by the
constitution of the church.
place on a strictly democratic basis (e.g.
section 27(2) states that “the highest
decision-making structure of a co-
operative is a general meeting of
members”). This principle is in conflict with
the current situation where Rules can be
amended by the Board of Management of
the Central Society, whose members are
appointed by the Apostolate, rather than
being elected by the Burial Society
members.
Rule 27.1 of the OAC Burial Society must
be amended to reflect that the Annual
General Meeting must be held within 6
months of the end of the previous financial
year.
• Record keeping The Co-operatives Act (S.20) requires each
co-operative to have a registered office
stipulated in its constitution. Furthermore,
under S.21 each co-operative must keep
records at its offices for at least 5 years
after the end of the financial year to which
such records relate, of:
• its constitution
• minutes of AGMs and board meetings
The Central Society and each Affiliated
Society has a registered office.
Membership and accounting records are
currently maintained and are adequate to
produce audited annual financial
statements. The Burial Society Rules are
maintained and any changes are recorded.
Minutes of all AGMs and Board of
The existing registered offices can be
recorded as such in the respective
constitutions.
The newly formed co-operatives will have
to ensure the required records relating to
directors are maintained. Current record
keeping meets the remaining
requirements.
9 Section 29(2)(d) of the Co-operatives Act 14 of 2005.
10 Section 29(1)(b) of the Co-operatives Act 14 of 2005.
P a g e | 23
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
• a list of members and a register of
directors and their interests where
relevant to the business of the co-
operative
• adequate accounting records including
those reflecting transactions between
the co-operative and its members.
Management meetings are recorded and
kept.
• Public officer All microinsurers must appoint a public
officer to ensure compliance with the
microinsurance regulatory framework.
The Burial Society has a principal officer,
appointed by the Apostolate, as required
by the Friendly Societies Act. The Friendly
Societies Act stipulates only that the
principal officer must be resident in South
Africa and not be a minor11
.
Main implication: appoint a public officer
for the microinsurer. This will simply be a
case of appointing the current principal
officer and completing and submitting the
standard personal questionnaire, provided
the principal officer meets the fit and
proper requirements below (which he
does).
• Fit and proper The Policy Document proposes that all
directors, executive managers and public
officers should be fit and proper and
should fill in a standard personal
questionnaire that will be the same as that
for long-term and short-term insurers.
The institutional form adopted by a
microinsurer (i.e. co-operative or public or
private company) may have different fit
and proper requirements. The more
onerous set of requirements must be
complied with.
The Co-operatives Act (S.33) does not
Rule 3 of the Burial Society Rules requires
members of the Board of Management of
the Central Society and members of the
Executive Committees of the Affiliated
Societies to comply with fit and proper
requirements that exceed those required
by the Policy Document and the Co-
operatives Act.
The Burial Society should have no
problems complying with the fit and
proper requirements since most of the
newly elected co-operative directors, the
executive managers and the public officer
should be existing members of the Board
of Management and Executive
Committees. Where this is not the case,
such individuals will need to meet the fit
and proper requirements as per section 33
of the Co-operatives Act.
All newly elected directors, the executive
managers and the public officer will need
11
Sections 10(2) and 16 respectively of the Friendly Societies Act, 25 of 1956.
P a g e | 24
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
place specific fit and proper requirements
on directors, but states that nobody of
unsound mind, no unrehabilitated
insolvent and no person convicted of any
offence involving dishonesty in connection
with the formation or management of a
co-operative or other corporate entity may
be elected a director.
All that is required for co-operative
registration is for the names and certified
copies of IDs of directors to be submitted.
to complete the standard personal
questionnaire.
• Annual audit All microinsurers will be required to
undergo an annual audit. The Co-
operatives Act also requires an audit of a
co-operative’s annual financial statements,
which must be considered for approval at
an annual general meeting of the co-
operative12.
Each Affiliated Society and the Central
Society are submitted to an annual audit
by an external auditor. The audited
financial statements are tabled for
comment and approval at the AGMs and
are accessible to all members.
No implications, as there are no additional
requirements over and above current
practice.
• Submissions to
FSB
Audited annual and unaudited quarterly
returns are to be submitted to the FSB.
Audited annual financial statements of the
Affiliated Societies and the Central Society
are submitted to the FSB. Additionally, any
changes to the Burial Society Rules are
submitted to the FSB, together with a
report from the Society’s actuary. A 5-
yearly valuation will be submitted if not
already performed as part of a rule
change.
Unaudited quarterly returns will need to
be submitted in addition to the current
practice of submitting audited annual
returns. It is likely that the Burial Society
will make use of their auditors to submit
the quarterly returns, resulting in an
estimated 50% increase to audit fees. The
increase in audit fees could be saved if this
function is performed internally.
• Annual levy It is assumed that the annual FSB levy for The Burial Society currently pays a fee to The annual levy payable to the FSB of
12
Sections 47 and 48(2) of the Co-operatives Act 14 of 2005 respectively.
P a g e | 25
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
MI is likely to be set close to that of the
current levy for assistance business
providers, namely R8,000 per annum plus
0.00886% of liabilities under unmatured
policies13
. According to the CIPC,
registered co-operatives will be required
to pay an annual levy together with the
submission of annual returns. The
proposed annual levy is R495 if turnover is
less than R1m, otherwise it is R2,750.
the FSB when rule changes are submitted.
No annual levy is payable.
R8,000 plus 0.00886% of liabilities is a new
cost since friendly societies are exempt
from this levy14
, but will be minimal in
absolute terms (R8,300 per annum). In
addition, an annual levy of R2,750 per
primary co-operative will be payable on
submission of returns to the CIPC (total
cost of R16,500).
2. Prudential regulation
a. Licensing requirements
for microinsurers
Organisations that provide guaranteed
benefits to members or have membership
in excess of 2,500 lives must be licensed to
perform microinsurance business. The
licensing options are:
1. Fully underwritten by an existing
insurer or microinsurer.
2. Purchase a cell captive insurance
license.
3. Register own microinsurance license
under the proposed microinsurance
regulation.
4. Register own full insurance license
under either the Long-term
Insurance Act or the Short-term
Insurance Act.
The Burial Society is exempt from licensing
under the Long-term Insurance Act as a
registered Friendly Society that offers
benefits within the maximum prescribed
level.
Current business planning is limited to the
drawing up of an annual budget.
The chosen compliance route for
alternative 1 is for the Burial Society to
register its own microinsurance license.
This will require:
• A change of name to include the
word “microinsurance” or a
derivative thereof.
• Submission of the standard
application.
• Submission of the constitution of the
secondary co-operative (which will
be the holder of the microinsurance
license).
• Drawing up a business plan with 5-
year financial projections. The
financial model created during this
impact assessment can be used to
13
As per section 9 of the Board Notice 101 published in the Government Gazette number 34322 on 27 May 2011. 14
As per section 7 of the Board Notice 101 published in the Government Gazette number 34322 on 27 May 2011.
P a g e | 26
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
The licensing requirements for a
microinsurer will include:
• The registered name must include
the word “microinsurance” or a
derivate thereof.
• Submission of the standard
application form for a
microinsurance license.
• Memorandum and articles of
association for a company or
constitution for a co-operative and
the official registration documents.
• A business plan with 5-year financial
projections.
• A personal questionnaire to be
completed by members of the
board, executive management and
the public officer to ensure they are
fit and proper.
• An application for approval of the
appointed auditors.
generate the financial projections. It
will be advisable to use the Burial
Society’s actuary to draw up the
business plan. The estimated cost of
drawing up the business plan is
R10,000.
b. Registration
requirements for co-
operatives under the
Co-operatives Act and
according to the
templates provided by
the Companies and
Intellectual Property
Commission (CIPC)
The registration requirements for co-
operatives are contained in Chapter 2 of
the Co-operatives Act. In addition, the CIPC
website contains detailed requirements,
explanation of steps and template forms
for co-operative registration:
Fees:
• A registration fee of R215 applies per
The OAC Burial Fund was originally
registered in 1977. In 2001 it was
deregistered and replaced by the OAC
Burial Society, consisting of a Central
Society and 6 Affiliated Societies, all
registered as friendly societies.
Documents to be submitted to the FSB on
an annual basis are prescribed in the
Registration fees:
The OAC would want to register 6 primary
co-operatives (the Affiliated Societies),
plus one secondary co-operative (the
Central Society), bringing total registration
fees to R1,505. Additional fees for
amendments to the constitution will be
incurred from time to time, but will be
P a g e | 27
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
co-operative.
• It costs R17.50 per section up to a
maximum of R245 to amend the
constitution as filed with the CIPC.
“Founder members” must submit the
application and form the co-operative.
Registration process:
Fill out and submit the standard
registration form15
. The CIPC website sets
out detailed registration procedures16. It
explains, amongst other things, the format
and contents of the formation meeting
that should be held to elect board
members, how to decide on a name and
draw up an initial business plan before the
co-operative is formed.
The following must be submitted with the
application form:
1. Two copies of the signed
constitution17
.
2. Application for approval of auditor18
.
Friendly Societies Act. Currently the
Affiliated Societies and the Central Society
submit annual audited financial
statements (in the format as prescribed in
the regulations to the Friendly Societies
Act), annual auditor’s reports and an
actuarial valuation every 5 years or in the
cases as prescribed. If a rule change
involves an increase in contributions, the
application for the rule change must be
accompanied by an actuarial valuation.
The Burial Society operates according to a
detailed set of rules as per the
requirements of the Friendly Societies Act,
covering:
1. Name, objectives and registered office
2. Definitions
3. Management
4. Meetings of board and executive
committee
5. Board’s discretion
6. Principal executive officer and staff
7. Actuary and auditor
minimal.
To identify founder members, it would be
best if the members of the Friendly Society
agree that the Executive Committees of
each Affiliated Society will be the Founder
Members of the co-operative and will have
Power of Attorney to sign all documents
on behalf of the members of the society,
to register the co-operative. The Friendly
Society members will also have to agree on
transferring or selling all the assets and
liabilities of the society to the new co-
operative and that all the existing
members of the society will become
members of the new co-operative after
registration.
Registration process:
The registration form is straightforward
with no information required that the
Burial Society would not be in a position to
furnish.
15
The standard registration form can be found at http://www.cipc.co.za/Coops_files/CR1.pdf. 16
http://www.cipc.co.za/Coops_RegProcedure.aspx 17
The CIPC has proposed using the model constitution for primary non-specific co-operatives, which can be found at
http://www.cipc.co.za/Coops_files/2_PRIMARY_NON_SPECIFIC_COOPERATIVE.pdf. Since co-operatives are likely to be the institutional form of choice for microinsurance license holders,
the CIPC should develop a model constitution for microinsurers as they have for other specific co-operatives such as agricultural, housing and financial services (deposits and loans) co-
operatives. 18
The application form can be found at http://www.cipc.co.za/Coops_files/CR4.pdf.
P a g e | 28
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
3. Proof of payment of the prescribed
fee.
4. Certified copies of ID documents of
founder members.
5. Business plan.
It is preferable to reserve a name for the
co-operative prior to application for
registration19
. It costs R50 to register a
name. The name of a co-operative must
include the words “co-operative” or “co-
op” and the word “limited” or the
abbreviation “Ltd” must be included as the
last word of its name unless its
constitution does not limit the liability of
its members20
.
At least one general meeting must be held
prior to the application for registration at
which the constitution is adopted and the
first directors elected21.
The dti aims to process applications within
one week, but if there are backlogs it can
take up to 6 weeks.
After registration, a co-operative must
8. Signing of documents
9. Indemnification
10. Fidelity guarantee
11. Banking account
12. Investments
13. Books of account
14. Expenses
15. Admission to membership
16. Information to be provided by
members
17. Member’s right to documents
18. Resignation
19. Contributions
20. Arrear contributions
21. Financial management
22. Actuarial investigations
23. Claims and claim procedure
24. Disputes
25. Amendment of rules
26. Dissolution
27. AGM
28. Special general meeting
29. Transfer of members
Executive committees of the Affiliated
Societies meet regularly (from as
frequently as twice per month to at least
Formation meeting:
Presumably, the MI regime will be
designed so that existing friendly societies
transforming into co-operatives do not
need to go through this process. However,
a general meeting is required to elect a
board of directors from the founder
members, even if it means all founder
members are elected, (i.e. executive
committees of Affiliated Societies become
boards of directors for the new co-
operatives) and adopt the constitution
prior to registration as a co-operative. The
first annual general meeting after the
publication of the MI legislation could be
used for this purpose.
Constitution:
The provisions of the model constitution
overlaps to a large extent with that of the
Burial Society’s rules and, where
necessary, aspects of the model
constitution can be amended to align with
their rules as long as the provisions of S.14
of the Co-operatives Act regarding the
rules are met – which is the case according
to our reading of the Burial Society Rules
19
The form can be found at http://www.cipc.co.za/Coops_files/CR5.pdf. 20
Sections 10(2) and (3) of the Co-operatives Act 14 of 2005. 21
Sections 6(3) of the Co-operatives Act 14 of 2005.
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submit:
• Names of board members or
changes in board members to be
registered through form CR222. It
only requires names, ID numbers
(and copy of ID) and address, no fit
and proper declaration.
• Annual financial statements and
auditor’s report, along with form
CR7 on lodgement of financial
statements23
.
A full list of all relevant documents is
available at:
http://www.cipc.co.za/Coops_Forms.aspx
once every 2 months). Board meetings of
the Central Society are held twice a year.
and Section 14 of the Co-operatives Act.
The following areas of the model
constitution for primary non-specific co-
operatives would either need amendment
or the Burial Society’s Rules would need to
be amended to comply:
12. Issue of shares and minimum
shareholding: The Burial Society does not
have any shares, so this part would not
apply and can be deleted from the model
constitution.
13. Certificates of shares and loans: Not
applicable. Delete from model
constitution. The same will apply to any
mention of member shares and loans
throughout the model constitution. It is
sufficient that members pay an application
fee and annual contributions.
19.Withdrawal of membership: The Burial
Society terminates membership when
people leave the church. This is not
explicitly catered for in the model
constitution for primary co-operatives, but
could be included by the OAC in the
constitution submitted to the CIPC.
22
The form can be found at http://www.cipc.co.za/Coops_files/CR2.pdf 23
The form can be found at http://www.cipc.co.za/Coops_files/CR7.pdf.
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26. Board of directors: Rule 3 of the Burial
Society Rules will need to be changed to
reflect that directors must be elected at
the AGM.
30. Nomination of directors and voting for
directors: This section requires further
changes to Rule 3 of the Burial Society
Rules for candidate directors to be
nominated openly at the AGM.
35. Conditions and processes for the
appointment of the chairperson, vice-
chairperson and acting chairperson of the
board: This section requires the directors
to elect the chairperson, who is currently
appointed by the Apostolate.
46. Quorums: The model constitution
requires that a quorum is at least 20
members plus 1% for co-operatives that
have more than 200 members. For a co-
operative with for example 10,000
members, that would entail a minimum
quorum of 120. Yet Rule 27.4 of the Burial
Society stipulates a quorum of only 15
members for the AGM. The rule must be
aligned to the model constitution. The
Burial Society does not expect the quorum
requirement to present any challenges
since AGMs tend to be very well attended
by members.
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The requirements for secondary co-
operatives are also not problematic: a
quorum at the general meeting of 2
members is sufficient if the co-operative
has fewer than 10 members, which is the
case for the Central Society.
66. Amendment of constitution: may only
be made by special resolution at the AGM
or extraordinary general meetings. This is
likely to have a significant operational
impact for the Burial Society, as Rule 25.1
currently allows the Board to alter or
rescind any rule or make any additional
rule, provided that any change that affects
the contribution rate or benefits shall be
supported by a report by the actuary. Any
Rule changes must also currently be
approved by the Apostolate as the final
decision-making body. This requirement is
regarded by the Burial Society as a
deviation from the church’s principle that
all rules pertaining to members of the
church (including the Burial Society) will be
scrutinized by the Apostolate and if not
acceptable, it will either not be accepted
or it will be changed24
.
24
The OAC has expressly requested that the new legislation include a provision that the Minister may grant exemptions from certain provisions, such as the election of directors by the
AGM and the making and changing of a constitution by a resolution passed at the AGM – the reason being that the Burial Society has been operating for quite a number of years to the
satisfaction of the FSB and the Burial Society is of the opinion that it is a significant player in the market.
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The drafting of the new constitutions is
unlikely to have a material impact on costs
since the work will be performed on a
voluntary basis without remuneration.
Approval of auditor:
Should be merely an administrative
process, as the Burial Society already has
an auditor and will also have an auditor
approved as part of the MI licensing
process.
Registration of name:
Straightforward process, nominal fee,
should not have any implication for the
Burial Society.
Business plan:
The Co-operatives Act requirements
should be amended so that the MI licence
business plan will automatically qualify the
candidate for co-operative registration.
Submission of annual financial
statements:
The Burial Society already compiles and
submits annual financial statements,
therefore submitting them to the Co-
operatives Registrar as well should
represent limited additional cost.
c. Capital and reserving
• Reserving The reserves that a microinsurer must hold Reserves consist purely of accumulated Reserving requirements will be small (in
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requirements for
microinsurers
will be calculated according to prescribed
formulae and consist of:
• Unearned premium reserve
• Outstanding claims reserve
• Incurred but not reported reserve
• Unexpired risk provision
surpluses.
The Burial Society has good prudential
management. It has accumulated
substantial surplus and Rule 21.1 of the
Burial Society Rules explicitly requires the
Burial Society’s actuary to carry out an
investigation if any Affiliated Society
experiences a net negative cash flow in
any financial year. These two factors
contribute greatly to a financially sound
operation.
the order of R3m) relative to the existing
accumulated surplus (R48.4m as at the end
of 2010) and therefore easily met.
• Reserving
requirements
under the Co-
operatives Act
Section 3(1)(e) of the Co-operatives Act
requires 5% of surplus to be set aside as a
reserve fund, which is not divisible
amongst the members.
Section 63 of the model constitution for a
primary non-specific co-operative requires
a further amount to be set aside as a
General Reserve Fund, which shall not be
less than the amount determined by the
Board.
The Co-operatives Act would need to be
amended so that co-operatives licensed as
microinsurers need only adhere to the
reserving requirements stipulated in the
microinsurance legislation. The financial
projections performed have assumed this
is the case.
• Capital adequacy The capital required of a microinsurer is
calculated as 15% of the net written
premium over the previous 12 months (or
the prior 12-month period if higher),
subject to a minimum absolute amount of
R3 million. However, microinsurers will be
permitted to build capital up to the
minimum required level over a 3-year
period starting from the enactment date of
the proposed microinsurance regulation,
subject to a minimum amount of R1.5
million at start-up.
The accumulated surpluses are used to
cover adverse experience and any
unexpected shocks.
The minimum capital requirement of R3m
is expected to apply. Given the high level
of accumulated surplus, the Burial Society
will have no problem meeting the capital
adequacy requirement and the transitional
arrangements will not apply.
• Investments All reserves and capital adequacy
requirements must be invested in cash-like
The OAC Burial Society invests its assets in
compliance with Regulation 29 of the
The current investment approach will in all
likelihood comply with the proposed
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liquid assets. Free assets (in excess of
reserves and capital adequacy
requirements) may be invested in other
asset classes following approval by the
regulator.
Friendly Societies Act. 95% of all assets are
invested in 12-month fixed deposits, with
the remaining 5% of assets invested in
savings accounts and call accounts (1 to 32
day notice periods). All investments are
held at the big 5 South African banks. The
maturity dates of the fixed deposits are
staggered so as to provide regular liquidity.
investment requirements for
microinsurers. Free assets are expected to
be in excess of R40m, which could allow a
more aggressive investment policy to be
followed on approval by the regulator.
d. Actuarial assessment Actuarial sign-off of the total premium is
required for new products and for any
premium changes.
Any changes to the Burial Society Rules
that impact the contribution rate or
benefits must be submitted to the FSB for
approval together with a report from the
actuary.
According to the MI regime, the Burial
Society would no longer need a fixed 5-
yearly actuarial valuation, only actuarial
sign-off on price changes. This implies a
cost saving estimated to be between
R8,000 and R16,000 every five years.
e. Distribution of profit:
microinsurance
provisions
The board of a microinsurer must sign off
on the distribution of dividends.
Rule 22.5 of the Burial Society Rules
prohibits any surplus to be paid to the
church. Any surplus arising is accumulated
within the Burial Society.
Compliance with the requirements
regarding distribution of surplus should be
a formality. Distribution of profit or
dividends will not apply to the Burial
Society, as all surpluses are simply used to
improve benefits provided and/or reduce
contributions or are accumulated. It would
not seem from the way that the model
constitution is set out that co-operatives
are compelled to distribute dividends.
Rather, the provisions aim to ensure that
surplus, where distributed, is only
distributed in the last instance after all
interests of the co-operative have been
met.
f. Distribution of surplus:
Co-operatives provisions
Section 63 (Surplus) of the model
constitution for primary non-specific co-
operatives states that the amount of
surplus available for distribution to
members shall be used to pay interest, not
exceeding 15%, to members on their
shares or to pay bonuses to members.
g. Share capital: Co-
operatives Act
Section 40 of the Co-operatives Act
provides for all members to contribute
The Burial Society does not have any share
capital. Its reserves are built up through
The provision in S.41 of the Co-operatives
Act that membership shares may be issued
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provisions capital (entrance and / or membership
fees are sufficient) and section 41 states
that the constitution may provide that
membership shares be issued to members.
monthly premiums/contributions and
admission fees. Its convictions as a faith-
based organisation require that it cannot
issue share capital. Rather, it is a
membership-based organisation that
operates for members’ benefit without the
aim of generating a surplus.
would override the inclusion of a clause on
membership shares in the model
constitution and the Burial Society will not
be compelled to issue membership shares.
3. Product regulation
a. Product categories
• Medical schemes
business
Microinsurers will not be permitted to
conduct the business of a medical scheme
as defined in the Medical Schemes Act,
131 of 1998.
The Burial Society provides only funeral
benefits (burial services) to its members.
No impact
• Risk only Microinsurers may only provide risk
benefits with no surrender values, cash
back benefits or savings elements.
The Burial Society provides only funeral
benefits (burial services) to its members.
No impact
• Sum assured basis All microinsurance policy benefits should
be defined on a first loss or sum assured
basis rather than on an indemnity basis.
The funeral benefits provided are defined
in terms of specific burial services that are
covered up to specified maxima and are
not offered on an indemnity basis.
No impact
b. Product features
• Benefit caps The following benefit caps will be applied
to each product category:
• R50,000 per life per insurer for
death events.
• R100,000 per person per insurer
for asset insurance.
• R50,000 per person per insurer for
all other events.
Benefit payments may be made in
instalments provided the present value of
The maximum funeral benefit provided is
capped at R7,500 per life under the
Friendly Societies regime. The actual cost
to the Burial Society for paying the service
provider may be lower, depending on
services rendered and price negotiated,
therefore the benefit to members is stated
in terms of a maximum value of R7,500.
Positive impact: the Burial Society will
have leeway to increase benefits in line
with market realities and needs of
members. At the same time, the fact that
the ceiling of R50,000 is set well above the
typical cost of a funeral should serve to
decouple the cost charged by undertakers
from the limit for funeral insurance
benefits.
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the instalments does not exceed the above
caps. While this is not yet on their agenda, the
new framework gives the Burial Society
the option to consider adding additional
benefits such as health trigger related
benefits (e.g. hospitalisation).
• Contract term Microinsurance policies should have a
contract term of up to but not exceeding
12 months. To facilitate uninterrupted
cover, microinsurance policies should be
automatically renewable at the end of the
contract term without the need for a new
policy document or a new waiting period,
provided the policyholder continues to pay
the premium.
The Burial Society Rules and the abridged
rules appearing on the application form
make no mention of a “contract term” as
such. Membership continues for life
provided contributions are paid as
required, while a member may resign
his/her membership voluntarily.
However, the method of managing the
Burial Society complies with the intention
behind the limited contract term provision:
the Board of Management may alter the
Burial Society Rules, including contribution
rates and benefit levels, provided a change
to either the contribution rates or benefit
levels is supported by a report from the
actuary. The adequacy of the contribution
rate is assessed regularly.
No significant impact expected.
• Waiting period Waiting periods are restricted to a
maximum period of 6 months for death or
disability due to natural causes for lives
younger than 65 at entry. Waiting periods
may be longer than 6 months for lives
older than 65 at entry. No waiting period
should apply to accidental deaths and
disabilities.
A 3-month waiting period for both natural
and accident deaths is applied. The waiting
period commences on the 1st
Sunday of
the month following the date on which the
application for membership is signed (i.e.
the membership commencement date).
Burial Society members can feasibly cancel
The current exclusion for accidental deaths
during the 3-month waiting period must
be removed. This will marginally increase
the cost of claims by the accidental deaths
that occur during the waiting period. The
claims assessment process will need
modification to differentiate between
accidental and natural deaths during the
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Should a policyholder cancel a policy with
one insurer in favour of a policy providing
similar cover with another insurer and
there is uninterrupted cover, the new
insurer must request the previous insurer
to issue a certificate to it, upon which the
new insurer may not impose a waiting
period.
cover with the OAC and take out similar
cover with another insurer, or new Burial
Society members can cancel existing cover
to take up OAC cover. However, the Burial
Society does not currently waive the 3-
month waiting period, except where
dependant members transfer to main
membership, provided premiums are up to
date (e.g. where a child reaches the
maximum age and becomes a main
member in their own right). The Burial
Society does not issue certificates to
leaving members.
waiting period. The cost of any required
changes are expected to be insignificant.
The Burial Society will need to put a
process in place to waive the waiting
period for members with previous cover
that can prove uninterrupted cover and to
issue certificates of cover for members
who transfer to alternative insurers. We
expect such cases to be very few and any
additional costs insignificant, although
they cannot be quantified at this stage.
• Pre-existing
conditions
exclusion
No exclusions for pre-existing conditions
are allowed, but standard suicide
exclusions are.
The Burial Society Rules do not contain
exclusions for pre-existing conditions or for
suicide.
No impact.
• Grace periods The following grace periods are proposed:
• At a minimum, cover is to continue for
1 month from the premium due date.
The outstanding premium may be paid
anytime during that month without
compromising cover. If the premium is
not paid within the month of grace,
cover will cease after that month.
• For policies that have been in force
(including all renewal periods) for one
year or more, the grace period will be
extended by one month for each
completed twelve month period that
the policy has been in force with no
reduction in cover. The maximum grace
A 2-month grace period is applied.
Outstanding premiums are not deducted
from the claim amount during the grace
period.
Membership of the Burial Society lapses
after 6 missed monthly premiums. Lapsed
members may reinstate cover subject to
payment of the readmission fee and the
maximum entry age limit of 55.
Claims are not paid if death happens after
the 2-month grace period has expired, but
members can restart cover before the
membership lapses (after 6 missed
Burial Society management is open to the
principle of longer grace periods for
longer-standing members, with
outstanding premiums being deducted
from the benefit. The different grace
period structure will require changes to
the administration system which
automatically cancels membership at the
end of the grace period. No additional cost
will be incurred since the system is
developed in-house on a voluntary basis.
The longer grace periods will result in
some of the currently inactive members
(those with 3 to 6 monthly contributions
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period for a policy will be six months.
Claims submitted during the grace period
may be reduced by outstanding premiums
including interest.
premiums) by paying all outstanding
premiums.
outstanding) qualifying for cover
depending on how long they have been
members, whereas currently they will not
qualify. The additional cost is estimated to
be in the order of R1.5m per year, which
represents a significant increase in the cost
of claims.
Moving to such a system would require an
amendment to Rule 20 of the Burial
Society, which can be implemented
alongside other changes required to move
to the new regime.
c. Group policies
• Selective non-
renewal
Where policies are underwritten on a
group basis, insurers should not be
permitted to selectively cancel (i.e. refuse
to renew) individual policies within the
group.
The Burial Society Rules only permit cover
to be cancelled on an individual member
basis where the Burial Society member is
no longer an active member of the church
(i.e. no longer complies with the
membership criteria). Thus, no selective
non-renewals are permitted.
No impact.
• Rating factors Where group underwriting is applied, no
price discrimination will be allowed
between individuals within a group other
than on the basis of age at entry or level
of cover.
The Burial Society charges the same
premium amount across all members and
all 6 Affiliated Societies, independent of
age or any other rating factor.
No impact.
d. Other provisions
• Notification of Microinsurers will be required to give Current practice is for the Board of Since the AGM will move to within 6
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Current status/position of the OAC Alternative 1: microinsurance license &
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premium changes policyholders three months’ notice of
proposed price changes.
Management of the Central Society to
agree contribution changes. Notification of
premium changes is provided at three
levels following notice of the contribution
change at the AGM (which usually happens
in the 2nd
weekend of October). The
contribution change takes effect in January
of the following year.
• The Burial Society treasurer for each
congregation delivers a written notice
of the premium change to all Burial
Society members in that
congregation.
• The same premium change notice is
placed on each church’s notice board.
• Premium changes are announced
during church services following the
AGM.
months of the end of the previous financial
year end25
, sufficient notice of contribution
changes will be provided.
• Binder agreements The binder agreement provisions in the LT
and ST Acts (section 49A of the LT Act and
section 48A of the ST Act), as well as the
provisions in the binder regulations of
2011, will apply to microinsurers.
The Burial Society has no binder
agreements in place.
No impact.
• Right to monetary
benefit
Where microinsurance benefits are
offered in-kind, the policyholder must be
given the option, when claiming, of
receiving a monetary benefit equal to the
stated value of the in-kind benefit had it
been provided. The amounts of the
The Burial Society Rules provide for a
benefit that consists of specified funeral
services up to a maximum value of R7,500.
The funeral services are procured by the
Burial Society from a list of approved
providers and consist of a stipulated set of
There will be a “principles” impact in that
the Burial Society strongly believes in
providing a service rather than a cash
benefit that may be used by beneficiaries
for other purposes or may lead to disputes
between beneficiaries.
25
Required by section 29(1)(b) of the Co-operatives Act, 14 of 2005.
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monetary benefit option and the in-kind
benefit must be clearly disclosed when the
policy is entered into, although the
policyholder may exercise the right to
make the choice at the claims stage. The
insurer must revise the value of the
monetary benefit over time to ensure that
it keeps track with changes in the value of
the benefit-in-kind.
services. No option of claiming a monetary
benefit is provided (Rule 23.4 explicitly
prohibits cash payments in lieu of the
funeral services).
The value of the funeral services is
frequently less than the maximum value of
R7,500. Differences in cost depend on
whether the deceased is buried or
cremated and wide variations on the cost
of grave sites (the price of a grave site can
vary widely by municipality).
Because the monetary benefit will be
equal to the cost of the in-kind benefit,
there will be no additional cost to offering
the right to a monetary benefit26
.
• Claim payments
within 48 hours
All valid microinsurance claims should be
paid within a period of 48 hours after the
insurer received all the requisite
documentation, with the qualification that
claims may be paid in instalments if this
was provided for in the contract.
In the event of a death of a Burial Society
member, the family will notify the priest of
their congregation who notifies the
Affiliated Society’s administrative office. As
the Burial Society reimburses the
undertakers directly, they do not apply any
maximum claim processing time rule.
The OAC Burial Society is of the opinion
the 48-hour claim payment period is
unlikely to pose a problem.
• Submission to FSB Microinsurers will be required to submit all
new microinsurance products to the
Registrar for review at least 60 calendar
days before launching the products. This
will entail submitting an example of the
proposed policy document as well as a
summary of policy features including the
risk events covered, benefit level, risk rate,
Any change to the monthly premium is
reviewed by the Burial Society’s actuary,
whose report is submitted to the FSB
together with the proposed rule change
for approval. No new products or material
changes are planned.
No expected impact as product offering is
static.
26
This assumes the current practice of providing a funeral service up to a specified maximum value will continue. In practice the policy document will need to clearly state that the actual
value of funeral services may be less than the maximum value and define the standard of funeral services to be provided. Quotes would still need to be sourced for a claim where the
monetary value is chosen in order to establish the monetary value to be paid.
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premium (with the required actuarial sign-
off on pricing) and commission structure
and level. The product review will take
place on a file and use basis.
4. Market conduct The Financial Advisory and Intermediary
Services Act, 37 of 2002 (the FAIS Act) and
the subordinate legislation issued in terms
of it, shall apply to the provision of
microinsurance whenever intermediary
services or advice is provided. However, a
special dispensation will be created for
microinsurance within the FAIS framework
with regards to:
• Registration of the financial service
provider (FSP), its key individuals (KIs)
and representatives (where not a sole
proprietor27). The FAIS framework does
not prescribe a ratio for number of
representatives to key individuals. The
FSP can motivate the ratio that they
choose: they must be able to
demonstrate that they have the
structures to manage and oversee the
provision of advice and/or
intermediary services.
• the Fit and Proper Determination for
FSPs, key individuals and
representatives;
The Burial Society is not registered under
the FAIS Act as it is of the opinion that
neither advice nor intermediary services
are provided to the Burial Society
members. According to FSB consultation
and consultations with industry experts,
this is in contravention of the FAIS Act
requirements – the moment you collect
premiums and pay claims, you are
rendering an intermediary service.
FAIS registration and ongoing compliance
is likely to be one of the biggest areas of
impact of moving to the microinsurance
regime, although it must be noted that it is
not the microinsurance regime that has
caused the need to comply with the FAIS
Act. The Burial Society is currently
contravening the FAIS Act by not being
registered (the Burial Society disagrees
with this view).
The impact assessment below is based on
the requirements for Category 1.1 Long-
term insurance (assistance business),
based on our assumption that the
microinsurance requirements will be
similar. The market conduct work group is
still deliberating on the exact
requirements.
27
Note: as the OAC will not be a sole proprietor FSP, but one with key individuals and representatives, no description is provided of the requirements applicable to sole proprietor FSPs
below.
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• the FAIS Code of Conduct applicable to
microinsurance providers; and
• the financial soundness of the
intermediaries dealing with
microinsurance.
a. Registration and annual
requirements
Registration fees and steps:
• The application steps and procedures
are explained on the FSB website28
.
• Application entails submission of 15
application forms (including on KIs,
reps, approval of compliance officer,
financial soundness, operational
capability, etc). Appendix 2 contains an
overview of each form, as well as the
likely implications for the Burial Society
of each.
• Application should be submitted with
proof of payment of registration fees,
namely:
o R1,690 per FSP
o R250 for approval of auditor
o R1,060 for approval of the
compliance officer
o R935 per KI
o No registration fee for
The Burial Society is not registered under
the FAIS Act.
Registration:
FSP registration: The burial society would
need to register as FSP as it does not
represent any other financial service
provider. The FSB provides workshops on
registration and can help through the
registration procedure.
KI and representative registration: there is
substantial uncertainty about who will be
regarded as key individuals and
representatives. In the best case, the
Burial Society treasurers operating at
congregation level will be regarded as
representatives with the key individual
function being performed by an official
from each of the 6 Affiliate Societies and 1
from the Central Society. The OAC has
2,195 Burial Society treasurers who, in this
28
FAIS application steps and procedures can be found at http://www.fsb.co.za/.
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representatives
• The FSB provides an excel spreadsheet
template for submitting
representatives on their website.
Ongoing requirements:
• Appoint a compliance officer and
submit annual compliance report
• Submit annual financial statements
• Annual levy based on number of KIs
and reps (Note: friendly society
benefits are currently exempt from
annual levies, but it is unlikely that MI
will be. We have assumed the
assistance business levies will apply for
the purposes of impact assessment):
o Annual levy for FSPs providing
only assistance benefits is
calculated as a base amount of
R2,741 plus A x R250, where A
= number of KIs plus number
of reps minus KIs who are also
reps.
o Annual ombud fee: R625 + A x
R234, where A is the same as
above.
• Any change in profile, including
scenario, will be regarded as reps. There
will be 7 KIs29
.
In the worst case scenario, each
congregation will have 3 representatives
(the priest, congregational treasurer and
Burial Society treasurer could possibly all
be regarded as performing “client facing”
functions) and all overseers will be
regarded as key individuals. This scenario
will result in 6,204 reps (the Burial Society
operates in 2,068 congregations) and 299
KIs.
The minimum requirements to be met
(under the best case scenario) will be30
:
• Meeting FSP registration requirements
and paying corresponding registration
and annual fees of R1,690 per FSP,
plus, R250 for approval of auditor,
R1,060 for approval of compliance
officer: total R3,000
• Registering 6 Affiliated Society key
individuals and 1 central key individual
at a cost of R935 per KI: total cost
R6,545, plus associated costs of
ensuring that they meet the fit and
29
Note that this scenario implies that each key individual will be responsible for just over 300 representatives, which is impractical. A more realistic scenario would assume more than 7
key individuals. 30
All fees have been taken from Board Notice 101 as published in Government Gazette 34322 of 27 May 2011
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changes in KIs and reps, must be
submitted to the FSB within 15 days of
such change.
proper requirements (see below)
• Registering at least one representative
per congregation, probably the Burial
Society treasurer who currently
appears to perform intermediary
services (e.g. signing up new members
and collecting premiums) – no
registration fees. The information
required for the representative
register is not onerous (requires ID
number, address, details of
experience, etc), but would take time
to fill out for a large number of reps.
Ongoing requirements31
:
The fact that the OAC Burial Society will
have to pay annual levies is likely to have a
significant impact:
• Annual FSP levy (for FSPs providing
only assistance benefits): R8,000 plus
0.00886% of liabilities (this is the levy
that was mentioned above under the
institutional regulation section).
• Annual levy based on number of KIs
and reps: approximately R550,000
under the best case scenario and
R1.6m under the worst case scenario.
The financial modelling in this report
assumes the best case scenario.
31
FSB Board Notice 101 of 2011.
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• Annual ombud fee: approximately
R500,000 under the best case scenario
and R1.5m under the worst case
scenario. The financial modelling in
this report assumes the best case
scenario.
• Appointment of compliance officer and
compiling of compliance report. It is
likely that an external compliance
officer will need to be appointed, since
the fit and proper requirements are
onerous (broadly speaking, a law or
commerce degree, 3 years experience
in a risk management / compliance
position and 1 year’s experience in
financial services). An “impossibly low”
monthly outsource cost is estimated to
be R200 per branch (congregation in
the Burial Society’s case). With 2,068
congregations in which the OAC Burial
Society operates, the total monthly
cost will be R413,600, giving an annual
cost of outsourcing the compliance
officer function in the order of R5m.
The alternative is to appoint internal
compliance officers. A compliance
officer is required to visit each branch
(i.e. congregation) at least once a year.
Optimistically assuming a compliance
officer can visit 500 congregations per
year, the Burial Society would require
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Microinsurance policy framework
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Current status/position of the OAC Alternative 1: microinsurance license &
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4 compliance officers at an annual
salary of about R500,000. Adding
travel costs will probably bring the
total cost for the compliance officer
function to between R3m and R4m per
annum. We have assumed the annual
cost of the compliance officer function
will be R3.5m for the financial
modelling. Completion of compliance
reports is not particularly onerous.
• Submission of AFS: limited additional
impact, as already undergoing annual
audit and submitting AFS.
• Reporting on change in profile: this is
likely to have administrative impact for
the Burial Society, as volunteers
operating at congregation level may
rotate/change fairly regularly, implying
changes to the representatives
register. However, the Burial Society
has indicated that turnover of its
treasurers is low (estimated to be in
the order of 2% or 3% per annum) due
to the selection criteria applied
(stability and living in the same area
for some time). Therefore the
additional reporting requirement is
unlikely to be onerous.
b. Fit and proper Fit and proper requirements comprise:
1. Experience requirements
2. Qualification requirements
No fit and proper requirements are applied
currently.
FAIS registration will entail meeting a
substantial number of fit and proper
requirements, implying administration and
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Current status/position of the OAC Alternative 1: microinsurance license &
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3. Regulatory exams
4. Continuous professional development
requirements
A distinction is made between the
requirements for advice and/or
intermediary services provided by KIs and
representatives, respectively. Each type of
fit and proper requirement is unpacked
below.
compliance costs. However, as the Burial
Society is likely to have fairly few KIs
(assuming that each of the 6 primary co-
operatives will have only one KI as well as
one for the secondary co-operative) and
the requirements for reps are relatively
low, it’s unlikely that the fit and proper
requirements will pose an insurmountable
or overly costly barrier.
• Experience KIs and reps:
• 6 months experience when providing
advice and intermediary services
• 2 months if only intermediary services
• Representatives who are providing
intermediary services under
supervision are exempt from the
experience requirement as experience
is built up under supervision
The Burial Society is not registered under
the FAIS Act as the Burial Society is of the
opinion that neither advice nor
intermediary services are provided to the
Burial Society members.
Experience requirements are unlikely to
have implications for the Burial Society (2
months experience required if only
providing intermediary services and
representatives under supervision are
exempt).
• Qualifications KIs for Cat 1.1 A:
• Must be in possession of a recognised
qualification when evaluated against
the prescribed qualifying criteria.
Recognised qualifications must be at
NQF2 level (Grade 8 equivalent) or a
recognised skills programme of 30
credits at NQF2 level.
• List of accepted qualifications is
published in Annex 2 of BN105 of
2008.
• For qualification or credits to be
The Burial Society currently applies no
minimum qualification requirements for
individuals who would be classified as key
individuals or representatives in the event
that either advice or intermediary services
were provided (e.g. priests, church
treasurers and management of the
Affiliated Societies).
We expect the KIs that the Burial Society
will register will already have recognised
NQF 2 level qualification. In practice, the
Burial Society will have to appoint KIs that
already meet fit and proper qualification
criteria because the qualification criteria
must be met at the time of appointment.
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recognised, they must be verified by
INSETA.
Representatives for Cat 1.1 A:
• Must have proven ability to read and
write in English and perform basic
calculations, or must have an ABET
level 1 or Grade 3 equivalent
education. It is up to the KI managing
a representative to satisfy him/herself
of the representative’s ability (e.g. by
completing an English application
form and calculating a simple
premium).
• Regulatory exam KIs:
• If MI requirements are designed to be
similar to that for Cat. 1.1 A, would
need to pass level 1&2.
• Current requirements for tasks,
knowledge and skills criteria to be
tested in regulatory exams are set out
in BN105 of 2008:
o The purpose32 of the regulatory
exam level 1 is to ensure that all
key individuals and
representatives fully
understand their regulatory
role, and the accountability and
responsibility they have in
No individuals who would be classified as
key individuals or representatives in the
event that either advice or intermediary
services were provided (e.g. priests, church
treasurers and management of the
Affiliated Societies) have sat the regulatory
examinations.
All KIs would need to pass level 1&2
examinations before they can be approved
as KIs and, depending on where the MI
requirements are set, representatives may
have to complete level 1 examinations.
However, we have assumed the regulatory
exam requirements will be in line with
those for Category 1.1. reps (i.e. no
requirement to write regulatory exams). In
any case, it would be highly impractical for
all representatives to sit a regulatory exam
due to their geographic spread. According
to the FSB’s website, it costs R900 (incl.
VAT) per person to take a regulatory exam.
It is estimated that the cost of preparing
32
Quoted directly from FAIS note on background and information on the regulatory examinations available from www.fsb.co.za.
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Current status/position of the OAC Alternative 1: microinsurance license &
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terms of this role. For example,
it requires providers to know
and understand the General
Code of Conduct that, inter alia,
requires providers to furnish
clients with adequate and
correct information.
o The regulatory level 2 exams
are product specific. A person’s
experience in dealing with the
relevant financial product may
assist him/her in successfully
completing these examinations.
In addition, if a person has a
“specifically” recognised
qualification, then such
qualification can exempt that
person from having to write the
level 2 regulatory examination.
• The FSB realises the need to be
pragmatic in determining the exact
requirements for MI and that a
written exam may not be the best
indicator of whether the person is
competent to fulfil the functions
required.
for the regulatory exams is in the order of
R1,000 to R2,500 per delegate. This gives a
total estimated cost for preparing and
writing the regulatory exams of R40,600
(assuming the best case scenario number
of KIs).
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Representatives:
• Cat 1.1 A: not required to write
regulatory exams.33
Regulatory exams can be taken from any
of the four approved examination bodies
whose details and exam registration steps
are provided on the FSB website.
• Continuous
professional
development
(CPD)
KIs:
• 15 hours of continuous professional
development (CPD) over a three-year
cycle.
• The FSB FAIS department stressed in
consultation that this can be quite
flexibly designed to entail business and
other training of relevance to the Burial
Society and can be conducted in-house.
A fee of R300 is applicable for
recognition by the FSB of a CPD
programme.
Representatives:
• No continuing professional
development requirement applies.
There are currently no accredited CPD
providers (the FSB has recently published
the draft Determination of Continuous
Professional Development Requirements).
However, estimates for obtaining
externally provided CPD range between
R250 and R350 per hour. This gives an
estimated CPD cost per KI of between
R3,750 and R5,250 per 3-year cycle.
c. Code of conduct A dedicated FAIS Code of Conduct will be
developed for microinsurance FSPs, key
individuals and representatives that will
No current compliance. See below for impacts regarding suitability
analysis and record of advice respectively.
33
Under BN106 of 2008 Cat1.19 reps did not need to meet any exam requirements, but this was amended through BN 60 of 2010. However, the FSB has indicated that Category 1.1
representatives do not need to write any regulatory exams.
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cover all aspects in the General Code of
Conduct34
, but will be tailored to the
specific characteristics of microinsurance
where Part VII, Furnishing of Advice, is
concerned.
The FAIS work group is currently engaging
with the issue of what basic advice
scripted questions and record of advice
could entail for MI.
The main aspects of Code of Conduct that
will be tailored to microinsurance are:
• Suitability analysis
• Record of advice
• Suitability analysis An authorised financial services provider
(key individual or representative) who
provides advice must perform a
streamlined suitability analysis before
providing the advice. The format of the
streamlined suitability analysis is yet to be
finalised.
The Burial Society is of the opinion that
neither its employees nor any church
officials provide advice. A suitability
analysis is therefore not performed before
members join the Burial Society.
The process for enrolling new members is
as follows:
• all new church members hold a financial
discussion with an appointed official of
their local congregation (usually the
priest);
• existing church members have the same
financial conversation with the church
official on an annual basis;
It is difficult to determine the impact
before the streamlined format for MI is
established. However, it is likely that it will
entail a fairly simple template that the
person signing up a new member would
need to fill out and keep on record. This
will cause some additional administrative
burden, but probably not beyond what
Burial Society systems can handle.
34
See Board Notice 80 of 2003 (General Code of Conduct for Authorised Financial Services Providers and Representatives) issued by the Financial Services Board.
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• the official will ask a limited number of
financial questions during the
conversation. Example questions
include whether the church member
has a will, whether they have funeral
insurance and, if they own property,
where the documentation is held;
• where the member’s financial situation
is not in order, the official will explain
where the member could obtain the
required services;
• if the member does not have funeral
insurance, the official will explain the
funeral services offered by the Burial
Society and the cost of membership;
• if the church member opts to join the
Burial Society, they will be referred to
the congregation’s Burial Society
treasurer who helps fill out the
membership application form and takes
payment of the application fee and the
first monthly premium.
• Record of advice An authorised financial services provider
(key individual or representative) who
provides advice must maintain a record of
the advice furnished. The microinsurance
policy document proposes reduced
requirements for the record of advice,
with the exact requirements yet to be
finalised.
As indicated above, the Burial Society is of
the opinion that neither its employees nor
any church officials provide advice. A
record of advice is therefore not
maintained.
As with the suitability analysis, a simplified
record of advice requirement is expected
not to have a significant impact.
d. Financial soundness of
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intermediary
• Separate bank
account
Microinsurance intermediaries must hold a
separate bank account for insurance
monies. For example, if the intermediary is
a funeral parlour, funeral and insurance
business monies should not be mixed.
Monthly contributions are paid to the
Burial Society treasurer of the local
congregation at church gatherings. The
treasurer then deposits the contributions
into the Affiliated Society’s bank account.
No impact.
• Issue receipts The microinsurance intermediary must
issue the policyholder with some kind of
storable receipt, be it in printed or
electronic format, as soon as a premium
payment has been made.
The Burial Society treasurer immediately
issues a paper receipt on payment of
contributions.
Each congregation’s cash book is sent to
the Affiliated Society’s district office for
reconciliation against the bank account.
No impact.
• Submit financial
statements
A microinsurance intermediary with an
annual premium income in excess of R1
million, will be required to submit audited
annual financial statements to the
Registrar.
The Burial Society does not have a
separate entity that collects contributions
on its behalf.
Not applicable.
e. Commission
• Commission levels Commission on microinsurance products
will not be capped, although the proposed
commission levels must be disclosed as
part of the file and use process.
The Burial Society does not pay
commission.
Not applicable.
• Structure The regulatory framework proposes that
commission be paid as a level percentage
of each premium paid, with a once-off
policy initiation fee up to a proposed
maximum amount of R200.
The Burial Society does not pay
commission.
Not applicable.
• Embedded
consumer credit
insurance
Commission on all “embedded” insurance
policies, where access to credit is made
subject to the purchase of an insurance
The Burial Society has no embedded
insurance products.
Not applicable.
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policy sold through the credit provider, will
remain capped at the existing rates as
contained in the Regulations passed under
Section 72 of the Long-term Insurance Act,
52 of 1998 and as amended in
Government Notice R952 in Government
Gazette 31395 of 2008.
f. Disclosure requirements
• Plain language Microinsurance policy documents should
be in plain language, avoid uncertainty or
confusion and not be misleading. The
disclosure requirements in this regard as
contained in Part VI of the FAIS Code of
Conduct for all authorised FSPs other than
direct marketers, and in Part III of
respectively the Short-term and Long-term
Policyholder Protection Rules for direct
Marketers will apply. These rules require:
• PPR: factually correct, plain language
information that will avoid uncertainty
or confusion and not be misleading
and must be adequate and
appropriate, taking into account the
level of knowledge of the policyholder.
Disclosure in writing must be in clear
and readable print size, spacing and
format. Any amounts, sums, values or
fees referred to must be stated in
specific monetary terms (or its basis of
calculation must be clearly stated).
The policy terms and conditions are
contained in the Burial Society Rules. Each
applicant for membership of the Burial
Society receives a copy of the application
form and an abridged version of the Rules.
The copy of the application form and
abridged Rules is retained by the member
and serves as the certificate of
membership.
The abridged Rules need to be redrafted to
comply with the plain language
requirements, but no significant impact is
expected.
No significant impact is expected from the
PPR and Code of Conduct plain language
requirements.
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• FAIS Code of Conduct: “must provide a
reasonable and appropriate general
explanation of the nature and material
terms of the relevant contract or
transaction to a client, and generally
make full and frank disclosure of any
information that would reasonably be
expected to enable the client to make
an informed decision”.
• Summary Each microinsurance policy document
must contain a policy summary, in English,
of no more than one page. This should
form the first page of the policy document
and be in a clear and readable print size,
spacing and format. It must clearly state
the name of the microinsurer and that it is
registered with the FSB as a
microinsurance provider. In addition, it
should state the following six questions
and the answers to each:
• What am I covered for?
• What are the exclusions (if any)?
• How much are my premiums and
where do I pay them?
• What will happen if I do not pay my
premium?
• When, where and how can I claim and
what documents will be required?
• When and where can I complain? This
The abridged Burial Society Rules provided
to members covers only membership
criteria, admission rules, contribution
requirements, the definition of
dependants eligible for cover and the
benefits provided.
The practice of providing the member with
a copy of the application form and
abridged Rules can continue. However, the
abridged Rules will need to be redrafted to
include the name of the registered
microinsurer, to state that it is registered
with the FSB and to contain the prescribed
six questions and answers. This is expected
to result in a once-off cost of R109,750 to
redesign and reprint a new application
form book for each Burial Society
treasurer.
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should state both the microinsurer’s
and the Ombudsman’s contact details.
• Treating
Customers Fairly
requirements
Microinsurance will be subject to the
Treating Customers Fairly regime once
finalised.
Not applicable. The Treating Customers Fairly regime is
still in the process of being developed. We
therefore cannot yet assess the potential
impact.
• Contact for
complaints
All microinsurance policy documents
should clearly state the contact details or
client care number of the microinsurer for
the purpose of lodging a complaint and
shall also set out the procedure for lodging
a complaint. In addition, the policy
documents should also state the contact
details of a dedicated ombudsman’s office
and the procedures for making a
complaint, should the insurer be unable to
resolve the matter.
The copy of the application for
membership that is retained by the
applicant contains the Affiliated Society’s
physical address and contact details.
The application form or policy summary
needs to include the procedure to follow
for lodging a complaint and the
ombudsman’s details when it is redesigned
and printed.
• Duty of disclosure The duty of disclosure on the policyholder
will be limited to questions pertinently
asked by the insurer. The insurer or
intermediary must keep a record of the
questions asked.
No health or underwriting related
questions are asked of applicants.
No impact.
g. Group schemes
administered by 3rd
party
• Acceptance
confirmation
The individual persons paying premiums
under the group scheme policy will be
deemed by law to be the policyholders,
rather than the administrator or any other
entity on behalf of the individual
policyholders. The individual policyholders
Administration of the Burial Society is
performed by the Burial Society itself. This
section therefore does not apply.
Not applicable.
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should therefore receive confirmation
from the insurer of the fact that they are a
policyholder and of the policy
requirements and benefits.
• Right to cancel The individual policyholders will have the
right to cancel their cover at any time.
• Licensing
requirements
The administrator must be licensed as a
FSP in terms of the FAIS Act or must be a
representative of the insurer within the
terms of that Act.
h. Other provisions
• Client care system Every microinsurer shall maintain a client
care system through which clients can
lodge complaints and receive redress.
The Burial Society has a help desk where
members can lodge a complaint. The
complaint is logged in a complaints
register. Response to the complainant is
via written letter, telephonically or in
person.
No impact.
• Acceptance
confirmation
New policyholders must receive
confirmation from the insurer that he/she
is a policyholder within thirty days of
paying the first premium or signing up for
the insurance policy.
A copy of the application, with the
abridged Burial Society Rules printed on
the rear, signed by the applicant is left
with the policyholder at the time of
application.
On acceptance of an application for
membership, the new member will receive
confirmation of acceptance in the form of
an envelope with a sticker that provides
details of the member’s cover (e.g. who is
covered and entry date). The envelope is
intended for the safekeeping of receipts
for monthly contributions paid. The
Furnishing of confirmation whether the
application has been accepted or rejected
cannot always be given in 30 days –
logistical problems may prevent that. As
part of the Burial Society’s efforts to keep
overheads like postage low, documents
are normally distributed to congregations
by hand. The documents (such as the
confirmation of membership) will only
reach the new member after the first
Sunday of the month following the
commencement of cover, unless it is
posted directly to the member. In the case
of rural areas, there are no postal
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acceptance confirmation envelope is
handed to the principal member on the
first Sunday of the month following the
commencement of cover (which will be
the first Sunday of the previous month).
deliveries and many members living in
Tribal Areas do not have a street address.
Postage may vary from Affiliate to Affiliate
and if registered post is used, the total cost
for 2010 could have been as high as R111
230 (7 176 new applications and renewals
x R15.50 for each individual letter).
• Missed premium
confirmation
If a premium is skipped, the fact that the
premium is in arrears should be
communicated to the client.
Monthly status reports are generated by
each Affiliated Society district office and
provided to the Burial Society treasurer at
the local congregation level. The treasurer
will then discuss missed premiums
individually with each member who is in
arrears.
No impact as the Burial Society is already
compliant.
5. Taxation35
a. Transition of
institutional form
Section 65 of the Co-operatives Act
exempts transfers of property from
transfer duty, stamp duty, or other fees in
the event of an amalgamation, division,
conversion or transfer of a co-operative,
but is silent on transitions to a co-
operative from other institutional forms.
However, the Policy Document proposes
transition arrangements “to ensure the
change in institutional form bears no tax
consequence”. We have assumed this will
be the case in practice.
The Burial Society has a substantial value
of assets invested in cash and money
market instruments (the accumulated
surplus at the end of 2010 was R48.4m).
There will be no impact provided changes
in institutional form bear no tax
consequence as proposed in the Policy
Document. A capital gains tax would only
be relevant in the event that this
transitional arrangement did not apply and
if assets were invested in instruments that
give rise to a capital gain (e.g. equities or
fixed property).
Members may incur a tax liability if the
accumulated surplus must be distributed
to members because of the change in
institutional form. This is covered in more
35
This discussion draws on an opinion sourced from a tax accountant.
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detail below.
b. On-going taxation
• Corporations tax Co-operatives are taxed at normal income
tax rates (28% of taxable income) and the
normal income tax inclusions and
exemptions apply. The Income Tax Act
provides for reduced income tax on small
business corporations, where the gross
annual income does not exceed R14m for
the tax year.
Investment returns on assets will be taxed
either as income (e.g. interest) or capital
gains (e.g. the gains on equities).
The Income Tax Act considers friendly
societies to be “benefit funds”, which are
exempt from income tax.
The newly formed co-operatives will be
liable for income tax at 28% of their
taxable income. However, it is the Burial
Society’s policy to keep contribution rates
as low as possible, resulting in relatively
small surplus arising. Thus the income tax
liability will generally be very small.
The bulk of investment returns will be in
the form of interest, which will form part
of the taxable income of the co-operatives.
• Dividends tax Surplus distributed in the form of
dividends is subject to dividends tax,
currently at a rate of 15% of the amount of
dividend distributed.
Any bonuses distributed to members are
not regarded as dividends. Bonuses are
deductible from taxable income, but will
be taxed in the hands of members.
Any surplus arising is not distributed, but
rather retained by the Burial Society as
security against future adverse experience.
No impact, because it is the Burial
Society’s policy not to distribute any
surplus.
• VAT Co-operatives are subject to the same
requirements under the VAT Act as
companies and will be required to register
for VAT if their turnover exceeds the VAT
threshold of R1m, unless they provide a
service that falls under one of the VAT
exempt sections. The Policy Document
proposes that the current exemption for
Friendly societies are exempt from VAT. The Policy Document proposes that
microinsurers writing only life
microinsurance business be exempt from
VAT. It is therefore likely that the Burial
Society will not be required to register for
VAT and there will be no change in the tax
liability with respect to VAT.
P a g e | 60
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
long-term microinsurance premiums is
retained, while short-term microinsurance
premiums continue to be subject to VAT.
6. Existing members The Policy Document does not explicitly
address how existing members /
policyholders should be treated in the
transition to the new microinsurance
regime. Potential impacts could arise from,
amongst other things, a change in
institutional form requiring the existing
legal entity to be wound up and replaced
by another entity, or existing products not
meeting the proposed microinsurance
product requirements.
The burial services provided by the Burial
Society generally comply with the
proposed product requirements, but the
existing friendly societies will need to be
transformed into alternative institutional
forms.
The existing friendly societies will change
institutional form to co-operatives. Existing
legislation makes no allowance for friendly
societies to convert to co-operatives36
.
Thus, as legislation stands, the friendly
societies will need to dissolve (Rule 26 of
the Burial Society rules provide for
dissolution of the Central and Affiliate
Societies), which could have a number of
implications, including:
• The accumulated surplus will be
distributed to existing members if it
cannot be transferred to the newly
created co-operatives. This may have
tax implications for members, the
level of which will depend upon the
form in which the accumulated
surplus is distributed and on the
financial circumstances of individual
members (if taxed as personal
income).
• Existing members should be issued
with new contracts of insurance /
certificates of cover in the name of
the newly formed co-operatives
36
Section 38A of the Friendly Societies Act, 25 of 1956, provides for a friendly society to convert to a company if it intends to apply to carry on insurance business. Sections 64 and 66 of
the Co-operatives Act, 14 of 2005, provides for the conversion of companies to co-operatives but not friendly societies.
P a g e | 61
Microinsurance policy framework
compliance requirements
Current status/position of the OAC Alternative 1: microinsurance license &
transformation to a co-operative
unless the members can be
“migrated” to the newly formed co-
operatives (i.e. grandfathering). This
in itself may have substantial practical
implications if existing members are
difficult to find and potential cost
implications.
It is strongly advised that the
microinsurance regulatory framework be
drafted to incorporate the necessary
transition arrangements to avoid the tax
and other implications from dissolution
of friendly societies, as it would place an
unnecessary burden on friendly societies.
The microinsurance product
requirements will have no impact other
than the increased benefit payments
arising from the longer grace periods
that has already been mentioned.
P a g e | 62
The following table is a continuation of the previous table and shows the expected impacts under alternatives 2 and 3. The items listed in the first column are the same
as those contained in the previous table for alternative 1.
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
1. Institutional regulation
a. Institutional forms The Policy Document proposes that all Friendly Societies
providing insurance benefits falling within the microinsurance
definition should convert to an alternative institutional form, in all
likelihood a co-operative, since the Friendly Society institutional
form will be phased out. This applies irrespective of whether the
newly formed co-operative will obtain a microinsurance license
itself or will be fully underwritten by an existing licensed insurer.
Thus, as for alternative 1, each Affiliated Society must convert to
a primary co-operative and the Central Society to a secondary co-
operative. This implies the Rules of the Burial Society will need to
be reviewed and changed to comply with the Co-operatives Act
and adopted as the constitution of the newly formed co-
operatives.
The Central Society will convert to a secondary co-operative,
while the 6 Affiliated Societies will split into smaller co-operatives,
each having a membership below 2,500. With approximately
70,000 principal members, the Affiliated Societies will need to
split into at least 28 individual co-operatives. Each co-operative
will need to adopt the amended Burial Society Rules as their
constitution. The split will have major administrative implications,
probably rendering this alternative impractical. For example, each
co-operative is required to have its own registered office and its
own bank account. Major reorganisation will be required to split
the membership. The accumulated surplus will need to be split
appropriately between the co-operatives.
b. Corporate governance
• Board of directors As for alternative 1, directors must be elected by members at a
general meeting and Rule 27.1 of the Burial Society must be
amended to reflect that the Annual General Meeting must be
held within 6 months of the end of the previous financial year.
The microinsurance specific requirements will not apply (i.e.
minimum of 4 board members, 2 of which must be non-executive
and 1 independent).
As for alternative 1, directors must be elected by members at a
general meeting and Rule 27.1 of the Burial Society must be
amended to reflect that the Annual General Meeting must be
held within 6 months of the end of the previous financial year.
The microinsurance specific requirements will not apply (i.e.
minimum of 4 board members, 2 of which must be non-executive
and 1 independent).
• Record keeping As for alternative 1. As for alternative 1, although each co-operative will need a
registered office and the administrative burden of maintaining
the required records will increase substantially due to the roughly
fivefold increase in the number of co-operatives. These additional
indirect costs have not been included in the financial model.
P a g e | 63
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
• Public officer No need to appoint a public officer. No need to appoint a public officer.
• Fit and proper Each co-operative will require a board of directors consisting of
the number of persons as the co-operative’s constitution
requires. Each director will need to meet the fit and proper
requirements as per section 33 of the Co-operatives Act and their
names and certified copies of their IDs must be submitted with
the application for registration of the co-operative.
Each co-operative will require a board of directors consisting of
the number of persons as the co-operative’s constitution
requires. Each director will need to meet the fit and proper
requirements as per section 33 of the Co-operatives Act and their
names and certified copies of their IDs must be submitted with
the application for registration of the co-operative. Once again,
the administrative burden will be increased, but there is nothing
overly onerous in these requirements. These additional indirect
costs have not been included in the financial model.
• Annual audit As for alternative 1, each co-operative will need to prepare
audited annual financial statements to be approved at the Annual
General Meeting which is part of the current process. There will
therefore be no impact.
Each of the 29 co-operatives will need to prepare audited annual
financial statements to be approved at the Annual General
Meetings, unless exemption is obtained under section 55 of the
Co-operatives Act. This is likely to increase audit costs five-fold in
comparison to alternatives 1 and 2.
• Submissions to
FSB
No requirement to submit microinsurance returns to the FSB. No requirement to submit microinsurance returns to the FSB.
• Annual levy No need to pay an annual levy to the FSB as the levy only applies
to a microinsurance license holder.
However, the co-operatives levy must still be paid with the
submission of annual returns. The cost will be the same as for
alternative 1 (i.e. R2,750 per primary co-operative, giving a total
cost of R16,500).
No need to pay the annual FSB levy as the levy only applies to a
microinsurance license holder.
However, each registered co-operative will be required to pay the
stipulated annual levy on submission of the annual returns. Since
the membership of each co-operative will be less than 2,500, the
annual turnover of each co-operative will not exceed the R1m
threshold giving a lower annual levy of R495 per primary co-
operative (i.e. R13,860).
2. Prudential regulation
a. Licensing requirements
for microinsurers
No need to apply for a microinsurance license. No need to apply for a microinsurance license.
b. Registration
requirements for co-
Impact will be the same as for alternative 1. The impact will largely be the same as for alternative 1, except
that 28 separate primary co-operatives will need to be registered
P a g e | 64
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
operatives under the
Co-operatives Act and
according to the
templates provided by
the Companies and
Intellectual Property
Commission (CIPC)
in place of the 6 Affiliated Societies in order to ensure the
membership of any co-operative does not exceed the 2,500 level
above which the co-operative must register its insurance business
or be fully underwritten by a registered insurer. A secondary co-
operative must also be registered.
Registration fees: The total cost of all the registrations will be
R6,235. The cost of future amendments to the constitution will be
roughly five times higher than under alternative 1.
Existing Executive Committee members cannot simply become
the founder members as for alternative 1. Founder members for
each co-operative will have to be agreed at a general meeting
prior to submitting the application for registration.
Registration process: as for alternative 1, but repeated for each
primary co-operative.
Formation meeting: as for alternative 1, but repeated for each
primary co-operative.
Constitution changes will be as for alternative 1, noting that each
registered co-operative will require a constitution.
Approval of auditor: each co-operative must appoint an auditor
to be approved by the CIPC.
Registration of name: this is a straightforward process requiring
only a nominal fee and should not have any implication for the
Burial Society.
Business plan: will need to develop for each co-operative. Since
P a g e | 65
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
there will be no application for an MI license under this
alternative, there will be no MI business plan that the co-
operatives can use. The business plans for each co-operative will
have to be drawn up from scratch. We have assumed the
business plans will be drawn up by the Board of each co-operative
at no additional cost to the Burial Society.
Submission of annual financial statements. The Burial Society
already compiles and submits annual financial statements.
Therefore submitting to the Co-operatives Registrar as well
should represent limited additional cost, other than the increased
audit costs already highlighted and the indirect costs related to
the additional administrative work relating to the multiple co-
operatives.
c. Capital and reserving
• Reserving
requirements for
microinsurers
There will be no legal requirement to hold any insurance reserves. There will be no legal requirement to hold any insurance reserves.
• Reserving
requirements
under the Co-
operatives Act
Section 3(1)(e) of the Co-operatives Act requires 5% of surplus to
be set aside as a reserve fund, which is not divisible amongst
members. Surplus is expected to remain relatively small because
of the non-profit objective of the Burial Society and this
requirement will have a marginal impact.
Additional reserve requirements must be determined by the
Board of the co-operative. We have assumed there will be no
additional reserves required by the Board.
Section 3(1)(e) of the Co-operatives Act requires 5% of surplus to
be set aside as a reserve fund, which is not divisible amongst
members. Surplus is expected to remain relatively small since
contributions are generally set at a break-even level because of
the non-profit objective of the Burial Society and this requirement
will have a marginal impact.
Additional reserve requirements must be determined by the
Board of the co-operative. We have assumed there will be no
additional reserves required by the Board.
• Capital adequacy Capital adequacy requirements do not apply. Capital adequacy requirements do not apply.
• Investments Investments must be made in compliance with the co-operative’s
constitution. Rule 12 of the Burial Society Rules, covering
Investments must be made in compliance with the co-operative’s
constitution. Rule 12 of the Burial Society Rules, covering
P a g e | 66
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
investments, will be adequate. Therefore, there will be no impact. investments, will be adequate. Therefore, there will be no impact.
d. Actuarial assessment There is no requirement for actuarial sign-off of premiums since
pricing is performed by the underwriter. This represents a cost
saving relative to alternative 1.
There is no need for actuarial sign-off of premiums. This
represents a cost saving relative to alternative 1.
e. Distribution of profit:
microinsurance
provisions
Not applicable. Not applicable.
f. Distribution of surplus:
Co-operatives provisions
The approach of the Burial Society to not distribute surplus to
members or the church (not permitted by the Burial Society
Rules) is likely to continue indefinitely. Any surplus arising will
probably continue to be accumulated within the Burial Society.
However, surplus is likely to be significantly reduced because any
underwriting profit or loss will be for the underwriter’s account.
Thus, there is likely to be little or no impact.
The approach of the Burial Society to not distribute surplus to
members or the church (not permitted by the Burial Society
Rules) is likely to continue indefinitely. Any surplus arising will
probably continue to be accumulated within the Burial Society.
There is likely to be little or no impact.
g. Share capital: Co-
operatives Act
provisions
As for alternative 1, the new co-operatives will not be compelled
to issue membership shares.
As for alternative 1, the new co-operatives will not be compelled
to issue membership shares.
3. Product regulation
a. Product categories
• Medical schemes
business
No impact. No impact.
• Risk only No impact. No impact.
• Sum assured basis No impact. No impact.
b. Product features
• Benefit caps As for alternative 1, the Burial Society could increase benefit
amounts and / or provide additional types of benefits. Their
ability to do this will depend upon the willingness of an
underwriter to underwrite the increased risks and / or additional
types of benefits on satisfactory terms. Different underwriters
could be used to underwrite different benefits.
As for alternative 1, the Burial Society could increase benefit
amounts and / or provide additional types of benefits, provided
the benefits are not guaranteed and that a co-operative’s
membership does not exceed the prescribed limit (proposed to
be 2,500 members).
P a g e | 67
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
• Contract term Not applicable because funeral benefits are underwritten by
another entity, whose responsibility it is to comply with
applicable regulation.
Not applicable because microinsurance provisions do not apply.
However, funeral benefits may not be guaranteed.
• Waiting period The microinsurance restrictions do not apply, unless the
underwriter is a registered microinsurer. However, the Burial
Society waiting period rules will follow those of the underwriter.
We have assumed that the current waiting period rules will be
retained by the underwriter. Any changes in the waiting period
rules should be reflected in a change to the insurance premium
payable by the Burial Society.
No changes required because microinsurance provisions do not
apply.
• Pre-existing
conditions
exclusion
Pre-existing conditions exclusions will follow those of the
underwriter. We have assumed no change for the purposes of the
financial projections.
No impact.
• Grace periods Grace period rules will follow those of the underwriter. We have
assumed that the current grace period rules will be retained by
the underwriter. Any changes in the rules should be reflected in a
change to the insurance premium payable by the Burial Society.
No impact.
c. Group policies
• Selective non-
renewal
No applicable unless the underwriter is a registered microinsurer,
in which case the onus of compliance lies with the underwriter.
No impact.
• Rating factors The rating factors used will be as negotiated with the
underwriter.
No impact.
d. Other provisions
• Notification of
premium changes
Notification of premium changes will be as agreed with the
underwriter, but assumed to follow current practice since the
Burial Society is likely to continue performing current
administrative duties.
No impact.
• Binder agreements If the burial society enters into a binder agreement with the
underwriter, it will have to abide by the various regulations in this
regard.
No impact.
P a g e | 68
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
• Right to monetary
benefit
No impact on the Burial Society since the onus of compliance lies
with the underwriter. If the underwriter expects an increase in
the average claim amount, this will be reflected in a higher
insurance premium. We have not allowed for increased claim
costs in the financial modelling.
No impact.
• Claim payments
within 48 hours
Claim payment turnaround times will be subject to the claims
process of the underwriter.
No impact.
• Submission to FSB All submission or compliance requirements rest with the
underwriter. Therefore no impact on the Burial Society.
No submissions to the FSB are required since the co-operatives
will not hold a microinsurance license.
4. Market conduct We are assuming for alternative 2 that the Burial Society will
continue performing the administrative functions it is currently
performing and the distribution model will be unchanged (i.e.
member sign-up and contribution collections will continue via the
Burial Society treasurers at congregation level). This means that
the Burial Society and its volunteer church officials will be
performing “intermediary services”, requiring registration under
the FAIS Act.
Under this alternative, the Burial Society will not fall within the
formal insurance net and will continue offering its burial services
to its members without impact by the proposed microinsurance
regulatory framework. The Burial Society will not be offering a
financial product as defined by the FAIS Act and will therefore not
be subject to FAIS registration and other requirements of the FAIS
Act.
a. Registration and annual
requirements
Registration fees and steps:
The Burial Society will be required to register as an FSP with key
individuals and representatives and will also be required to have
its compliance officer and auditors approved. As with alternative
1, we have assumed the best case scenario for performing the
financial modelling, namely that all Burial Society treasurers will
have to register as reps and that there will be 1 KI per primary co-
operative and 1 for the secondary co-operative. The worst case
scenario remains the same as for alternative 1, namely that each
congregation will register 3 representatives and all overseers will
be regarded as key individuals. The associated registration costs
will be as for alternative 1.
Ongoing requirements:
The Burial Society will not be required to register as an FSP with
key individuals and representatives and will not be required to
appoint a compliance officer. Thus there will be no impact.
P a g e | 69
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
These are again the same as for alternative 1.
b. Fit and proper All fit and proper requirements will be as for alternative 1. Fit and proper requirements are not applicable.
• Experience
• Qualifications
• Regulatory exam
• Continuous
professional
development
(CPD)
c. Code of conduct The code of conduct will apply as for alternative 1. The code of conduct is not applicable.
• Suitability analysis
• Record of advice
d. Financial soundness of
intermediary
• Separate bank
account
The existing Burial Society bank accounts can be retained to
comply with this requirement.
Not applicable.
• Issue receipts The current practice will be sufficient to comply. Not applicable.
• Submit financial
statements
The annual contributions collected by the Burial Society will be
well in excess of the R1m level, requiring audited annual financial
statements to be submitted to the registrar. There will be no
additional cost since audited financial statements are required by
the CIPC.
Not applicable.
e. Commission
• Commission levels Any commission that is paid will be subject to the Long-term
Insurance Act commission regulations (assuming the underwriter
is a registered long-term insurer). The onus for compliance lies
with the insurer.
Commission is not applicable under alternative 3.
• Structure
• Embedded
consumer credit
Not applicable. Not applicable.
P a g e | 70
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
insurance
f. Disclosure requirements
• Plain language The abridged Rules need to be redrafted to comply with the plain
language requirements, but no significant impact is expected.
Not applicable.
• Summary The practice of providing the member with a copy of the
application form and abridged Rules can continue. However, the
abridged Rules will need to be redrafted to include the name of
the registered underwriter, to state that it is registered with the
FSB and to contain the prescribed six questions and answers. This
is expected to result in a once-off cost of R109,750 to redesign
and reprint a new application form book for each Burial Society
treasurer.
Not applicable.
• Treating
Customers Fairly
requirements
The Treating Customers Fairly regime is still in the process of
being developed. We therefore cannot yet assess the potential
impact.
Not applicable.
• Contact for
complaints
The application form or policy summary needs to include the
procedure to follow for lodging a complaint and the
ombudsman’s details when it is redesigned and printed.
Not applicable.
• Duty of disclosure There will be no impact provided the underwriter does not
introduce underwriting questions.
Not applicable.
g. Group schemes
administered by 3rd
party
The Burial Society will be administering the scheme on behalf of
the underwriter. The Burial Society will comply with the
requirements for group schemes provided the current
administrative practices are continued.
Not applicable.
• Acceptance
confirmation
Current practice will be adequate for compliance.
• Right to cancel Current practice will be adequate for compliance.
• Licensing
requirements
The Burial Society will be a licensed FSP as required above.
h. Other provisions
P a g e | 71
Microinsurance policy
framework
Alternative 2: fully underwritten Alternative 3: multiple co-operatives below microinsurance
threshold
• Client care system It is the underwriter’s responsibility to maintain the client care
system.
Not applicable.
• Acceptance
confirmation
The underwriter must provide the required acceptance
confirmation.
Not applicable.
• Missed premium
confirmation
Current practice is sufficient compliance. Not applicable.
5. Taxation
a. Transition of
institutional form
As for alternative 1. As for alternative 1.
b. On-going taxation
• Corporations tax As for alternative 1, the income tax liability is expected to be
small.
As for alternative 1, the income tax liability is expected to be
small.
• Dividends tax No impact, as for alternative 1. No impact, as for alternative 1.
• VAT The VAT exemption as a friendly society will fall away, but the
annual turnover of the co-operatives will be less than the VAT
threshold of R1m (income will be restricted to administration
fees). The co-operatives will therefore not need to register for
VAT and there will be no financial impact.
The VAT exemption as a friendly society will fall away. The co-
operatives will not be carrying on long-term microinsurance
business and the R1m turnover threshold will be exceeded. The
co-operatives would need to register for VAT and pay VAT on
contributions. However, VAT paid on funeral services purchased
can now be used to reduce the VAT liability, provided the service
providers are VAT registered. This could ultimately reduce costs
for the Burial Society since the VAT currently paid on funeral
services may well be higher than the future net VAT liability. We
have assumed no impact due to VAT in the financial projections.
6. Existing members The impacts of the change in institutional form will be the same
as for alternative 1.
The microinsurance product requirements are not applicable
under this alternative, but existing members will be impacted by
any changes in the underwriter’s policy terms and conditions
relative to the current terms and conditions.
The impacts of the change in institutional form will be the same
as for alternative 1.
The microinsurance product requirements are not applicable
under this alternative, and existing members’ policy terms and
conditions will not be impacted.
P a g e | 72
8. Appendix 2: FAIS registration requirements
The following application forms need to be filled out (all available on the FSB website):
Form Requirements Burial Society implications
FSP 1 Business information of FSP Only basic information required,
should not be onerous for the
Burial Society to provide.
FSP 2 Licence categories for which applying and indicating whether
advice and/or intermediary services will be provided
Straightforward, no impact
anticipated.
FSP 3 Directors, officers & applicable shareholders: name, address,
ID, etc for each
Straightforward, no impact
anticipated.
FSP 4 Key individuals. Complete separately for each KI:
• Name, address, ID, role
• honesty and integrity questions
• list qualifications, body obtained from and date obtained
• indicate regulatory examinations passed
• employment history
• evidence of experience in oversight/management and
references for it
• experience in the relevant categories applied for and
references
Passing of regulatory exam and
making sure that each proposed KI
has relevant qualification and
experience will be prerequisite.
See discussion of fit and proper
requirements for assessment of
impact.
FSP 5 Representatives. Name, ID, address, details of the responsible
KI, category registered for, qualification and regulatory exam
details (n/a for Cat 1.1 A reps)
Limited impact expected beyond
administrative costs of completing
the paperwork.
FSP 6 Compliance officer. Name and details (separate form for
approval – see FSP13)
Straightforward, no impact
anticipated.
FSP 7 Operational ability. List of operational questions to be
completed, incl. on FICA compliance.
Various requirements for internal
control procedures and staff
training. Likely to have some cost
implications.
FICA-related procedures: as the
OAC will not be conducting long-
term insurance business and will
not be an investment-related FSP,
it will not be regarded as an
accountable institution under
Schedule one of the Financial
Intelligence Centre Act of 2001.
Therefore no FICA requirements
will apply.
FSP 8 Financial soundness. Info on history of operations, list of assets
and liabilities, whether internal control systems
The Burial Society would already
meet all requirements, so no
impact anticipated.
FSP 9 External auditor. Name and contact details Straightforward, no impact
anticipated as the Burial Society
already has an external auditor.
FSP 10 Nominee company of discretionary or administrative FSP n/a to the Burial Society
FSP 11 Forex service providers n/a to the Burial Society
FSP 12 Application for specific exemptions. If any FSP wants to apply
for exemptions from certain provisions in the Act or
subordinate legislation, they can do so with proper motivation
and completion of this form. Must also pay exemption
application fee of R4,550.
Unlikely to be applicable to the
Burial Society.
FSP 13 Compliance officer approval. Compliance officer function may
be in-house or outsourced. If in-house, need name, ID,
address, honesty and integrity questions, qualifications,
categories of financial services to be provided, employment
The cost of compliance was
estimated in the detailed impact
assessment section.
P a g e | 73
history and references.
FSP 14 Attachments, list of all completed forms and declarations.
Checklist plus template for calculation of application fees.
No additional cost or impact.
FSP 15 Hedge fund application form n/a to the Burial Society
P a g e | 74
9. Appendix 3: Expected financial position under each compliance
strategy
9.1. Base scenario
2011 2012 2013 2014 2015 2016 2017
Principle members - opening balance 66 673 67 074 67 478 67 884 68 292 68 703 69 116
Principle members - closing balance 67 074 67 478 67 884 68 292 68 703 69 116 69 532
Assumed monthly contribution rate 22.00 22.00 22.00 22.00 23.00 25.00 27.00
Contributions 16 767 649 16 868 533 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609
Operating expenses 4 104 516 4 514 967 4 966 464 5 463 111 6 009 422 6 610 364 7 271 400
Application income 397 129 399 518 401 922 404 340 425 262 465 023 505 246
Net expenses 3 707 387 4 115 450 4 564 543 5 058 771 5 584 159 6 145 341 6 766 154
Insurance premiums 0 0 0 0 0 0 0
Benefits paid 12 138 334 13 066 160 14 064 907 15 139 996 16 297 263 17 542 988 18 883 933
Surplus before investment income 921 928 -313 077 -1 659 427 -3 126 644 -3 925 910 -4 054 044 -4 317 478
Investment income 3 661 091 3 962 949 4 191 046 4 331 176 4 394 410 4 425 183 4 444 066
Operating surplus before tax 4 583 019 3 649 872 2 531 619 1 204 533 468 500 371 139 126 587
Income tax 0 0 0 0 0 0 0
Transfers to reserves* 0 0 0 0 0 0 0
Surplus after tax and transfers to reserves 4 583 019 3 649 872 2 531 619 1 204 533 468 500 371 139 126 587
Accumulated surplus - opening balance 48 400 000 52 983 019 56 632 891 59 164 509 60 369 042 60 837 542 61 208 681
Accumulated surplus - closing balance 52 983 019 56 632 891 59 164 509 60 369 042 60 837 542 61 208 681 61 335 269
Microinsurance reserves (end of year) - - - - - - -
Required capital (end of year) - - - - - - -
Co-operative reserves (end of year) - - - - - - -
Business ratios and indicators
Expense ratio (expenses/contributions) 24.5% 26.8% 29.3% 32.0% 33.5% 33.7% 34.1%
Expense ratio (expenses/benefits) 33.8% 34.6% 35.3% 36.1% 36.9% 37.7% 38.5%
Surplus before investment income (% of contributions) 5.5% -1.9% -9.8% -18.3% -21.9% -20.6% -20.2%
Ratio of benefits paid to contributions 0.7 0.8 0.8 0.9 0.9 0.9 0.9
Ratio of accumulated funds to benefits paid 4.4 4.3 4.2 4.0 3.7 3.5 3.2
Average net expenses per member 55.44 61.17 67.44 74.30 81.52 89.18 97.60
Ratio of accumulated funds to required capital - - - - - - -
* This represents the transfers to microinsurance reserves (for alternative 1) and the transfers to the reserve required by the Co-operatives
Act (alternatives 2 and 3).
Base scenario: current business
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9.2. Alternative 1: microinsurance license
2013 2014 2015 2016 2017
Principle members - opening balance 67 478 67 884 68 292 68 703 69 116
Principle members - closing balance 67 884 68 292 68 703 69 116 69 532
Assumed monthly contribution rate 22.00 22.00 23.00 25.00 27.00
Contributions 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609
Operating expenses 10 137 015 10 688 348 11 484 611 12 421 774 13 336 574
Application income 401 922 404 340 425 262 465 023 505 246
Net expenses 9 735 094 10 284 008 11 059 349 11 956 752 12 831 328
Insurance premiums 0 0 0 0 0
Benefits paid 15 444 374 16 656 909 17 964 574 19 374 827 20 895 711
Surplus before investment income -8 209 445 -9 868 794 -11 068 410 -11 697 293 -12 394 431
Investment income 3 991 165 3 393 108 2 873 568 2 240 110 1 508 168
Operating surplus before tax -4 218 279 -6 475 686 -8 194 843 -9 457 183 -10 886 262
Income tax 0 0 0 0 0
Transfers to reserves* 3 123 760 -75 151 -20 472 31 133 24 297
Surplus after tax and transfers to reserves -7 342 040 -6 400 535 -8 174 371 -9 488 316 -10 910 560
Accumulated surplus - opening balance 56 632 891 49 290 851 42 890 316 34 715 945 25 227 629
Accumulated surplus - closing balance 49 290 851 42 890 316 34 715 945 25 227 629 14 317 069
Microinsurance reserves (end of year) 3 123 760 3 282 891 3 508 637 3 802 917 4 112 434
Required capital (end of year) 3 000 000 3 000 000 3 000 000 3 000 000 3 199 891
Co-operative reserves (end of year) 0 0 0 0 0
Business ratios and indicators
Expense ratio (expenses/contributions) 59.7% 62.6% 64.0% 63.3% 62.5%
Expense ratio (expenses/benefits) 65.6% 64.2% 63.9% 64.1% 63.8%
Surplus before investment income (% of contributions) -48.4% -57.8% -61.6% -59.6% -58.1%
Ratio of benefits paid to contributions 0.91 0.98 1.00 0.99 0.98
Ratio of accumulated funds to benefits paid 3.19 2.57 1.93 1.30 0.69
Average net expenses per member 143.84 151.04 161.46 173.51 185.09
Ratio of accumulated funds to required capital 16.4 14.3 11.6 8.4 4.5
* This represents the transfers to microinsurance reserves.
Alternative 1: microinsurance license
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9.3. Alternative 2: fully underwritten
2013 2014 2015 2016 2017
Principle members - opening balance 67 478 67 884 68 292 68 703 69 116
Principle members - closing balance 67 884 68 292 68 703 69 116 69 532
Assumed monthly contribution rate 22.00 22.00 23.00 25.00 27.00
Contributions 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609
Operating expenses 10 034 977 10 578 829 11 348 982 12 273 391 13 174 157
Application income 401 922 404 340 425 262 465 023 505 246
Net expenses 9 633 055 10 174 489 10 923 719 11 808 368 12 668 911
Insurance premiums 16 174 643 17 410 996 18 741 852 20 174 436 21 716 523
Benefits paid 0 0 0 0 0
Surplus before investment income -8 837 676 -10 513 361 -11 710 059 -12 348 519 -13 052 825
Investment income 3 967 102 3 553 115 2 991 906 2 317 018 1 543 740
Operating surplus before tax -4 870 573 -6 960 246 -8 718 153 -10 031 501 -11 509 086
Income tax 0 0 0 0 0
Transfers to reserves* 0 0 0 0 0
Surplus after tax and transfers to reserves -4 870 573 -6 960 246 -8 718 153 -10 031 501 -11 509 086
Accumulated surplus - opening balance 56 632 891 51 762 317 44 802 071 36 083 918 26 052 417
Accumulated surplus - closing balance 51 762 317 44 802 071 36 083 918 26 052 417 14 543 331
Microinsurance reserves (end of year) 0 0 0 0 0
Required capital (end of year) 0 0 0 0 0
Co-operative reserves (end of year) 0 0 0 0 0
Business ratios and indicators
Expense ratio (expenses/contributions) 59.1% 62.0% 63.2% 62.5% 61.8%
Expense ratio (expenses/benefits) - - - - -
Surplus before investment income (% of contributions) -52.1% -61.6% -65.2% -62.9% -61.2%
Ratio of benefits paid to contributions - - - - -
Ratio of accumulated funds to benefits paid - - - - -
Average net expenses per member 142.33 149.43 159.48 171.36 182.75
Ratio of accumulated funds to required capital - - - - -
* This represents the transfers to the reserve required by the Co-operatives Act.
Alternative 2: fully underwritten
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9.4. Alternative 3: multiple co-operatives
2013 2014 2015 2016 2017
Principle members - opening balance 67 478 67 884 68 292 68 703 69 116
Principle members - closing balance 67 884 68 292 68 703 69 116 69 532
Assumed monthly contribution rate 22.00 22.00 23.00 25.00 27.00
2.46 0.70 -0.27 -0.50 -0.89
Contributions 16 970 023 17 072 123 17 955 512 19 634 285 21 332 609
Operating expenses 5 490 422 6 006 720 6 548 267 7 192 124 7 881 370
Application income 401 922 404 340 425 262 465 023 505 246
Net expenses 5 088 501 5 602 380 6 123 005 6 727 101 7 376 124
Insurance premiums 0 0 0 0 0
Benefits paid 14 064 907 15 139 996 16 297 263 17 542 988 18 883 933
Surplus before investment income -2 183 385 -3 670 253 -4 464 755 -4 635 803 -4 927 448
Investment income 4 190 619 4 242 168 4 244 895 4 224 151 4 184 445
Operating surplus before tax 2 007 233 571 915 -219 860 -411 653 -743 003
Income tax 562 025 160 136 0 0 0
Transfers to reserves* 100 362 28 596 0 0 0
Surplus after tax and transfers to reserves 1 344 846 383 183 -219 860 -411 653 -743 003
Accumulated surplus - opening balance 56 632 891 57 977 737 58 360 920 58 141 061 57 729 408
Accumulated surplus - closing balance 57 977 737 58 360 920 58 141 061 57 729 408 56 986 405
Microinsurance reserves (end of year) 0 0 0 0 0
Required capital (end of year) 0 0 0 0 0
Co-operative reserves (end of year) 100 362 136 485 146 721 157 725 169 554
Business ratios and indicators
Expense ratio (expenses/contributions) 32.4% 35.2% 36.5% 36.6% 36.9%
Expense ratio (expenses/benefits) 39.0% 39.7% 40.2% 41.0% 41.7%
Surplus before investment income (% of contributions) -12.9% -21.5% -24.9% -23.6% -23.1%
Ratio of benefits paid to contributions 0.83 0.89 0.91 0.89 0.89
Ratio of accumulated funds to benefits paid 4.12 3.85 3.57 3.29 3.02
Average net expenses per member 75.18 82.28 89.39 97.62 106.40
Ratio of accumulated funds to required capital - - - - -
* This represents the transfers to the reserve required by the Co-operatives Act.
Alternative 3: multiple co-operatives