Many intermediaries in the insurance industry, including funeral parlours, may have unknowingly lost control and ownership of their clients and businesses due to a legal loophole.
One such intermediary, Multisure Corporation in Gqeberha, found this out the hard way when it informed its underwriter, KGA Life, of its intention to move its insurance book – the bulk of which are Sassa clients – to African Unity Life (AUL) earlier this year.
Multisure CEO advocate Denton Goodford said KGA Life initially had no problem with its cancellation of the underwriting agreement.
“But, at the last minute, it made a complete turnaround and refused to cooperate, citing new legislation for not being able to do so.”
This led to the two parties locking horns in the Port Elizabeth High Court in October last year in a matter heard by judge Irma Schoeman. Judgement is currently awaited.
It is not the first time that the Stellenbosch-based underwriter has been accused of failing to release the books of intermediaries.
Sean Russell, owner of E&S Russell Funeral Directors in Komani, said he was on the receiving end when he wanted to move to AUL. The matter went to arbitration and Russell’s firm won its case.
In 2017, four intermediaries had to defend themselves against KGA Life, which tried to prevent them from terminating their underwriting agreements.
Multisure CEO advocate Denton Goodford believes many intermediaries in the insurance industry may have unknowingly lost control and ownership of their clients and businesses due to a legal loophole. Photo: Supplied
The firm lost the case in the Cape Town High Court and had a punitive cost order awarded against it.
Chairperson of the Funeral Federation of South Africa, John Storom, took a swipe at the industry for interpreting certain changes in the law to its advantage rather than for those who it was meant for – the clients.
“What they are doing is unethical,” Storom said of KGA Life’s actions after details of the Multisure case emerged in the national media recently.
“However, the law, as it stands, allows it. It is a loophole that underwriters misuse to hold on to clients.”
Goodford argued that KGA Life had failed to adhere to new laws – set in motion by the Financial Services Conduct Authority (FSCA) in 2018 – which forced underwriters to convert group scheme funeral policies to individual ones in certain circumstances.
It prescribes that underwriters can no longer accept group scheme funeral policies from intermediaries that are not a fund, autonomous body or employer, and that existing group scheme policies were to be converted to individual policies by July 1, 2021.
“KGA say they have no problem with us moving the book but that we have to get consent from each and every client, no matter how impossible this might be in view of the fact that many of them live in rural areas,” said Goodford.
What is clear, he added, is that KGA Life had treated Multisure’s book “like a group scheme” at all times.
“But, when it suited them, they alleged that all policies were now individual policies. However, when asked, they could not provide any proof as to when or how the policies had been converted.”
Goodford was incensed that KGA Life now expected Multisure to get individual consent from clients while it had failed to do so itself in the three years prior to the deadline set by the FSCA.
“KGA Life has ignored Rule 2A of the Policyholder Protection Rules of the Long-Term Insurance Act for three years and now, ironically, it wants to use the same rule to its advantage to hold on to our book of business.”
KGA Life argued in court and has committed itself to cancelling policies and/or agreeing that the policies be reissued by African Unity Life, Multisure’s new underwriter, if the latter’s clients provided it with a written request for cancellation.
Since November last year more than 50 clients have just done that, however, the insurer is still refusing to release their policies.
Goodford blamed the FSCA for creating the rule without proper consultation with some of the most important players in the industry – the intermediaries.
“They mainly consulted with the big insurance companies and relied on them to inform intermediaries about the change in legislation. How did they expect that to happen if it is to underwriters’ advantage not to inform intermediaries?”
Goodford believed many underwriters merely played a white-collar role yet earned “millions” because they had the insurance licences.
“We are forced into seeking underwriting from them. We do the hard work and our clients interact with us, yet they want to hold on to our clients and businesses as if it is theirs.”
With the case now out in the open, other intermediaries have stepped forward to break their silence against KGA Life. One of these confirmed that her company had been threatened by KGA Life when considering moving its book.
“You will not believe what I went through,” said the owner, who asked to remain anonymous because of fear of retribution. “I was threatened, I was often phoned late at night, and that’s how I was treated by not just KGA, but another company as well.”
“They never tell us about the loopholes, so they make us the guilty ones and bankrupt our companies.”
A former sales manager of KGA Life, who contacted Multisure and requested to remain anonymous, said it was heart-breaking to see that KGA Life were “doing it again”.
“The FSCA should close them down.”
Another former employee who did not want to be named, said KGA Life’s modus operandi clashed with her morals.
“I could not work there any longer. I hope that the FSCA will get involved and do a full audit.
“If KGA did not get their house in order in the meantime, I foresee major problems for them.”
Meanwhile, pressure is mounting on legislators to review the provisions of the Insurance Act of 2017 after the National Funeral Association of South Africa (NFASA) led a protest march in Pretoria late last year.
NFASA represents South African funeral directors, which also act as insurance intermediaries.
The organisation accuses the FSCA of favouring insurers in the way it regulates the industry instead of being impartial.
“These compliance (rules) need to work for both parties so that we can also be protected,” Mduduzi Masilela, president of NFASA, said at the public gathering.
“At the current point, I don’t see us as funeral directors being protected by the same law because it is abusing us as if we are slaves to the insurance companies.
“We are now working for the insurance companies,” he said. “We are now no longer the owners of our businesses.”
A memorandum, which raises issues such as underwriting requirements, was presented to FSCA. The body acknowledged that these needed to be investigated to ensure clients were not compromised.
“At the heart of these concerns is the structure of how the industry is regulated,” FSCA commissioner Unathi Kamlana confirmed in a statement.
“These are matters that need all role-players to come together, including policymakers, so we can find a suitable solution that does not compromise the services received by customers.”
Multisure, claiming it had irrefutable proof, has also opened a criminal case against the management of KGA Life for allegedly paying a bribe to keep the former’s book of business.
“The FSCA is unable to comment on the matter at the moment since the case is still sub judice,” FSCA communications manager Festus Masekwameng stated when approached for comment.
“The FSCA will, however, issue an update at the appropriate time.”
Kedibone Dikokwe, divisional executive for conduct of business supervision at FSCA, recognised the problems that had emerged between underwriters and funeral parlours, which also function as intermediaries.
“What has become very clear is that the relationship between these parties needs to be looked into.”
Goodford, who had informed the FSCA about the intermediaries’ plight, said the FSCA suggested that intermediaries should be aware of changes in legislation.
“They say we should object if we wish to as the suggested changes get sent out via email and posted on their website. This shows that they are out of touch with reality.
“You cannot make use of First World communication and consultation methods in a developing country such as South Africa.
“I will bet my house that 99 per cent of intermediaries in this country are not even aware of the introduction of Rule 2A and the drastic consequences it has for them.
“Why did the FSCA not use other methods to inform intermediaries of the implications of this new rule and get their input before introducing it?”
Rule 2A simply did not make sense, said Goodford.
“For example, no one knows how group scheme policies must be converted to individual policies and the FSCA has provided no guidance to insurers. They were simply instructed to convert the group schemes.
“Many insurers that did so followed what they thought were the appropriate processes and several of them are still unsure whether they did the right thing.
“Also, why is an employer with 10 employees allowed to have a group scheme while a funeral parlour, or company like Multisure with 1 000 clients, cannot have one?
“It just doesn’t make sense and no answers have ever been provided by the FSCA, which shows that they did not think it through before implementation.”
Goodford believed it would be “in everyone’s best interest” to suspend the implementation of Rule 2A retroactively to allow the FSCA to properly consult with intermediaries.
KGA Life did not respond to requests for comment.