Demarcation regulations and the resulting impact
Demarcation regulations and the resulting impact
The objective of the demarcation regulations is to clearly separate health insurance products from medical schemes. Regulators deem this demarcation to be necessary as health insurance products, are considered to be a threat to medical schemes. Furthermore, health insurance products are seen to not necessarily contribute to the social welfare and solidarity principles instilled in the manner in which medical schemes operate. The proposed regulations aim to change existing practices applied by insurers to their health insurance products so that similar principles, to those of medical schemes, are applied to the health insurance environment.
According to the regulators, health insurers are targeting healthy and young individuals, extracting these from the medical schemes’ risk pool. The removal of these members tips the scale towards an older and less healthy average member remaining in the medical schemes thereby diminishing the benefits of cross-subsidisation which normally improve their affordability.
Supporters of the current state hold the view that the target market for health insurance products is in fact those in society who are not able to afford traditional medical aid cover. It is therefore an un-serviced market targeted by health insurance providers. The proportion of the general South African population who enjoy medical aid cover is particularly low which supports this view.
The first draft demarcation regulations were published in March 2012. The proposals in these draft regulations were not well received by the public, mainly due to the prohibition of gap cover and hospital cash plans.
An important aspect of the demarcation regulation puzzle was pieced together with the enactment of the Financial Services Laws General Amendment Act, No. 45 of 2013 (the Act) which amended the definition of “business of a medical scheme”. The Act came into effect in February 2014, however not in its entirety, as the amendment of the definition of “business of a medical scheme” was deferred until the effective date of the demarcation regulations. The amendment widens the definition of “business as a medical scheme” to not only include medical schemes.
The second draft demarcation regulations were released for public comment in April 2014 with a comment period which closes on 31 July 2014. These draft regulations recognise the role which health insurance has to play in the market. In particular, it catered for gap cover and hospital cash plan policies, provided they are appropriately designed and marketed.
The proposed regulations identifies certain types of contracts, including but not limited to gap cover and hospital cash plans, which are allowed to be underwritten under the short and long-term insurance acts, thus carving health insurance policies, which meet the definition of a “business of a medical scheme” out the medical schemes act. It also prescribes benefits for each of these categories and the criteria to be met to fall within these categories.
The prescribed benefits under the demarcation regulations for lump sum or income replacement policy benefits payable on a health event are limited to a maximum aggregate of R3 000 per day per person.
In respect of medical expense shortfall cover (short-term), the benefit is limited to an aggregate of R50 000 per annum per person.
It is proposed that the stated prescribed benefit escalates annually by the Consumer Price Index (CPI) annual inflation rate published by Statistics South Africa.
It is however common for medical costs to increase in excess of CPI, which will cause these products to become less effective over time. The limitations on the benefits payable to policyholders, limits multiple or bundled policies being offered to policyholders by insurers and their related parties.
One cannot help to feel that it is unreasonable to expect the onus of preventing and detecting this, to rest with insurers and their related parties. Should it not be the responsibility of the brokers (intermediaries) who sell these products to the potential policyholders?
A contract which provides for any of the following scenarios is prohibited under the demarcation regulations:
- Discriminate against any person on the grounds of age, gender and other criteria (i.e. insurers are prohibited from applying normal underwriting practices to these products)
- Provide for waiting periods exceeding 6 months
- Provide that the policyholder or insured must be a member of a medical scheme (this is only allowed for medical expense shortfall contracts)
- Refuse any claim on the grounds that the life insured had experienced a health event prior to the commencement of the applicable cover
- Cancel, amend or not renew a contract as a result of health or claims experience of an insuredIndemnify a policyholder against medical expenses
- Pay benefits to a provider of a relevant health service directly
The regulations propose that the commission relating to health insurance products is limited to the maximum compensation under the Medical Schemes Act. Brokers will now need to settle for 3% of gross written premium or R71.07 per month whichever is the lesser. This will impact this section of the intermediary market immensely. One can only hope that the proposed retail distribution review regulations resolve this contentious matter.
Other regulatory requirements
The regulations prohibit the use of the words “medical” and “hospital” and require the following statement to be prominently displayed: "This is not a medical scheme and the cover is not equivalent to that of a medical scheme. This policy is not a substitute for medical scheme membership."
Some insurers currently display similar statements in their marketing material, or reference is made to the website of the insurer where such statements are displayed or the difference between health insurance and a medical scheme is explained.
The proposed regulations also provide for enhanced reporting of potential new product information to the FSB for pre-approval.
The effective date of these regulations, according to National Treasury, is anticipated to be October 2014.
It is clear that this piece of legislation may still be far away from being finalised. It will require a clear understanding of and a high appreciation for the affected industries by National Treasury to develop the final demarcation regulations.
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