SHORT TERM INSURANCE ACT

Document Sample
SHORT TERM INSURANCE ACT Powered By Docstoc
					                                                               “Working together for a skilled tomorrow”




                                Learning Materials

                 Unit Standard Title:                  Demonstrate knowledge and insight
                                                       into the Short Term Insurance Act
                                                       (No.53 of 1998) and the accompanying
                                                       regulations


                 Unit Standard No:                     10194


                 Unit Standard Credits:                2


                 NQF Level:                            4



                         Questions and Answers

                        This outcomes-based learning material was
                                        developed by
                                 Diagonal Broker Network
                                       and reviewed by
                                         Ben Tonkin
                        with funding from INSETA in October 2003.

                            The material is generic in nature.
             Its purpose is to serve as a guide for the further development
                 and customization of company-specific, learner-specific
                      and situation-specific learning interventions.


                                                Disclaimer:
    Whilst every effort has been made to ensure that the learning material is accurate, INSETA takes no
responsibility for any loss or damage suffered by any person as a result of the reliance upon the information
                                              contained herein.




Page 1
Unit Standard 10194                                           Questions and Answers


Demonstrate knowledge and insight into the Short Term Insurance Act (No
53 of 1998) and the accompanying regulations.


Questions and Answers


Specific Outcome 1:
Explain the purpose of the Short Term Insurance Act (53 of
1998.)


1.1    The reason for the Short Term Insurance Act is explained in terms of
       the need for legislation in insurance.

Question 1:


Think about this...    Why is it necessary to have Short Term Insurance
                       legislation?

                       Answer:

                       1.    To regulate the short term industry.
                       2.    To ensure that insurers remain solvent and are
                             able to discharge their duties to the public, and
                             also ensure that the insured public is protected. It
                             also spells out the legal requirements of brokers
                             and other intermediaries as regards to their
                             conduct and payment of premiums to insurers.
                             Insurers are required to register and strict
                             conditions are imposed on registration.
                       (Source: Learner Guide, Outcome 1.1)




Question 2:
What is contained in the Short Term Insurance Act?

Answer:
The Short Term Insurance Act contains the legislated requirements of rules and
regulations that govern the short term industry.




Page 2
Unit Standard 10194                                          Questions and Answers


Question 3:
There are many different types of insurance, which have developed over the
years. Most of them have been around for a fairly long time.
Short term insurance is ever changing and dynamic. It is essential that the industry
continuously adapts its way of doing and operating in business. Discuss this
statement within this context. Frame the change drivers that determine the need
for change.


Think about           Can you think of any technology that has been developed
this...               recently which has required that new types of cover are
                      introduced?
                      Answer:
                      In recent years, computers and computerised machinery
                      have exploded onto the market, particularly in the
                      household market. A large number of families have access
                      to the Internet; fax facilities and sophisticated computer
                      hardware and software.
                      Another area that has developed recently is space
                      technology. Space shuttles and satellites, which are
                      launched into orbit around the earth. This market has grown
                      and insurance protection is now available.
                      (Source: Own discretion)




Page 3
Unit Standard 10194                                             Questions and Answers




1.2     Terminology defined in section 1 of the Short Term Insurance Act is
       explained in own words.


Question 4:
In order to understand, why and how short term insurance is regulated by the Act,
you have to understand the following terminology (Section 1 of the Act). Explain
the following in your own words:

4.1    “Registrar” means the Registrar of short term Insurance, appointed by
       the Minister of Finance.

4.2    “representative” means a person employed –
           by or working for a short term insurer and receiving or entitled to
             receive remuneration, and
           for the purpose of rendering services as intermediary in relation to
             short term policies entered into or to be entered into by the short
             term insurer only.

4.3    “independent intermediary” means a person, other than a
       representative, who renders services as intermediary and includes a
       Lloyd’s correspondent.

4.4    “policyholder” means the person entitled to be with the policy benefits
       under a short term policy (insured).

4.5    “short term insurer” means a person registered or deemed to be
       registered as a short term insurer under the Act.

4.6    “premium” means the consideration given or to be given in return for an
       undertaking to provide policy benefits.

4.7    “risk” means a possibility that a particular event may occur during the
       period for which a short term policy is operative.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Sec I.)




Page 4
Unit Standard 10194                                             Questions and Answers




1.3    The concept of short term insurance is explained with reference to
       the different classes of business defined in the Short Term Insurance
       Act.


Question 5:
Explain what the concept “short term insurance business” means.

Answer:
“short term insurance business” means the business of providing or
undertaking to provide policy benefits under short term policies.
(Source: Source: Government Gazette; No.19277. 23 Sept. 1998. Sec I, no. xIv.)

Question 6:
What are the different classes of business defined in the Short Term Insurance
Act?

Answer:
   Commercial
   Business or Industrial
   Personal lines (domestic policy-short term).

Question 7:
Explain what the following types of short term policies mean:

7.1 “Accident and health policy”
      Answer:
      Means a contract in terms of which a person, in return for a premium,
      undertakes to provide policy benefits if a –
          Disability event;
          Health event; or
          Death event.


7.2 “Motor policy”
     Answer:
      Means a contract in terms of which a person, in return for a premium,
      undertakes to provide policy benefits if an event, contemplated in the
      contract as a risk relating to the possession, use or ownership of a motor
      vehicle, occurs; and includes a reinsurance policy in respect of such a risk.




Page 5
Unit Standard 10194                                             Questions and Answers


7.3 “Transportation policy”
     Answer:
     Means a contract in terms of which a person, in return for a premium,
     undertakes to provide policy benefits if an event, contemplated in the
     contract as a risk relating to the possession, use or ownership of a vessel,
     aircraft or other craft or for the conveyance of persons or goods by air,
     space, land or water, or to the storage, treatment or handling of goods so
     conveyed or to be so conveyed, occurs; and includes a reinsurance policy in
     respect of such a risk.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Sec I.)


Question 8:

      Go home and ask your family to share with you what kind of policies they
       have.
      Ask them why they bought that particular policy.
      Categorize your feedback into the various classes of policies.




Page 6
Unit Standard 10194                                              Questions and Answers




1.4    The parties governed by the Short Term Insurance Act are
       named, and indication is given of the role of the Registrar
       in administering the Short Term Insurance Act.


Question 9:
Name the parties governed by the Short Term Insurance Act.

Answer:
      The Registrar
      Insurers
      Intermediaries (e.g. brokers)
      Policyholders (insured)
      Representatives
      Any other entity that may involve himself in the process.



Question 10:
Describe the “role of the Registrar” in administering the Short Term Insurance
Act.

Answer:
The Registrars duties are wide ranging, and the Registrar must ensure that
insurers comply with the following:
      submission of statements and accounts;
      statement of liabilities;
      statement of assets;
      solvency margin regulations;
      separation of asset;
      commission rates for intermediaries.
   (1) The Registrar shall submit to the Minister a report on the Registrar’s
       activities under this Act during each year ending 31 December, and shall
       furnish any additional information relating to anything done by the
       Registrar under this Act that the Minister may require.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part I, Sec 2.)




Page 7
Unit Standard 10194                                              Questions and Answers




1.5    The consequences of non-compliance with the Short Term
       Insurance Act for a short term insurance organisation are
       named, and an indication is given of the recourse that a
       client has to the Registrar in cases of non-compliance.

Question 11:
What are the consequences for a short term insurance organisation for non-
compliance to the Short term Insurance Act (with reference to the Act)?

Answer:
The consequences of non-compliance by any offender are defined in Sect 64 of
the Act as follows:

          the offender shall be guilty of an offence
          and shall be liable on conviction to a fine of up to R1 00 000,
           depending on the category of offence as well as the type of offender.
          imprisonment not exceeding one year
          or both such fine and imprisonment
          the non-compliance with the administrative return requirements as they
           relate to returns shall be to the value R 1000 per day for every day that
           a return remains outstanding.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part ix, Sec 64.)

Question 12:
Explained what the recourse is, in terms of the Act, that a policyholder has to the
Registrar in cases of non-compliance, to the short term insurance company?

Answer:
Anyone who may lodge a written complaint to the intermediary concerned and, if
such complaint is not resolved to his satisfaction, to the registrar of Short term
insurance.
The Registrar will then order the intermediary to provide a comprehensive report
on the complaint within a specified time.
If the Registrar finds that a breach has taken place, he may, after informing the
intermediary concerned of his findings, and giving the intermediary a reasonable
opportunity to respond, order corrective steps to be taken within a specified time.
The Registrar may also take any steps in connection with the breach, which are
available in law.
An intermediary who contravenes or fails to comply with the provisions of the
Rules will be guilty of an offence and, on conviction, is liable to:
      a fine not exceeding R100 000, or
      to imprisonment for a period not exceeding one year, or
      to both fine and imprisonment,
(Source: Government Gazette; No.19277. 23 Sept. 1998. Sec 65.)



Page 8
Unit Standard 10194                                                 Questions and Answers



                              Self-Assessment Questions

                                      Sample solutions

Specific Outcome 1:
Explain the purpose of the Short Term Insurance Act
Indicate with an (x) whether the following statements are True or False

Multiple True / false Questions
Indicate with an (x) whether the following statements are True or False


1.A       The Short Term Insurance Act is:                                     True    False
 1        52 of 1998                                                                    X
 2        25 of 1956                                                                    X
 3        24 of 1956                                                                    X
 4        53 of 1998                                                            X



1.B       Which of the following statements are true about insurance?          True    False
 1        insurance has become stagnant and is no longer developing                     X
 2        insurance develops everyday because of changes in technology and
          business methods, as well as changes in legislation                   X
 3        insurance does not meet the needs of its consumers.                           X



1.C       What is the primary function of insurance?                           True   False
 1        to transfer risk                                                      X
 2        to avoid risk                                                                 X
 3        to reduce risk                                                                X
 4        to identify risk                                                              X



Paragraph Type of Questions

1.D Name two Acts that govern the insurance industry.



          The “Long Term Insurance Act (Act 52 of 1998)”;
          The “Short Term Insurance Act (Act 53 of 1998)”


      (Any other Act list in Learner Guide Specific Outcome 1.)




Page 9
Unit Standard 10194                                                   Questions and Answers




1.E List 3 types of insurance policies and explain what they are about.
1. “Motor policy”

     Means a contract in terms of which a person, in return for a premium, undertakes to
     provide policy benefits if an event, contemplated in the contract as a risk relating to the
     possession, use or ownership of a motor vehicle, occurs; and includes a reinsurance policy
     in respect of such a risk.

2.    “Accident and health policy”
     Means a contract in terms of which a person, in return for a premium, undertakes to
     provide policy benefits if a: disability event; health event; or death event.


3. “Guarantee policy”
     Means a contract in terms of which a person or company in return for a premium receives
     policy benefits if an event contemplated in the policy as a risk relating to the failure of a
     person to discharge an obligation, occurs; and includes a reinsurance policy in respect of
     such a risk.
     (This is the only manner in which a short-term insurer can provide security.)


     (Any other policy list in Learner Guide 1.3)




1.F Name the parties governed by the Short Term Insurance Act.


        The Registrar
        Insurers

        Intermediaries (e.g. brokers)

        Policyholders (insured)
        Representatives

        Any other entity that may involve himself in the process.




Page 10
Unit Standard 10194                                               Questions and Answers




Specific Outcome 2:
Explain the basic requirements of the Short Term Insurance Act
as they apply to insurers.


2.1    The requirements for registration as an insurer are listed as
       prescribed in the Short Term Insurance Act.

Question 13:
What are the requirements for the registration as an insurer?

Answer:
No person shall carry on any kind of short term insurance business, unless that
person –
    is registered or deemed to be registered as a short term insurer, and is
      authorised to carry on the kind of short term insurance business
      concerned, under this Act; or
    is authorised under Section 56 to do so, and carries on that business in
      accordance with this Act
    Section 56 prescribes the provisions relating to Lloyd’s underwriters.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part I, Sec 7. Part VIII, Sec 56.)




Page 11
Unit Standard 10194                                              Questions and Answers




2.2    Returns that an insurer is required to submit to the Registrar are
       identified, and an indication is given of the consequences of non-
       compliance.

Question 14:
List all the returns that an insurer, including Lloyd’s representatives, is required to
submit to the Registrar.

Answer:
 Every registered short term insurer must, within 4 months of the end of his
financial year, send in the prescribed format, copies of the statements and
accounts to the Registrar, which are:
     a revenue account in respect of each class of business conducted;
     a profit and loss account in respect of his business as a whole, including
       business other than insurance business – e.g. investment income;
     a balance sheet showing the company’s financial position at the end of the
       financial year;
     copies of the statements prepared in accordance with the Companies Act
       1973, within 14 days of their presentation to the shareholders.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part IV, Sec 35 and Part XIII, Sec
58.)

Question 15:

Wrap your mind            What are the consequences (penalties) for
around this one…          failure by insurers to furnish the Registrar with
                          the returns as specified in the Act?

                          Answer:
                          If the Registrar does not receive information he
                          requested within a certain period from a person,
                          he can impose a fine (tine) of up to R1 000 for
                          every day that the information is still outstanding,
                          irrespective of any criminal proceedings
                          instituted.
                          (Source: Government Gazette; No.19277. 23 Sept. 1998.
                          Part IX, Sec 66.)




Page 12
 Unit Standard 10194                                             Questions and Answers




2.3       The concept of solvency margin is explained in terms of approved
          assets over liabilities.

 Question 16:
 Having determined what the solvency margin is, one should also now know what
 an asset and a liability is and where would be the best place to find details
 thereof.
 Provide a definition of both an asset and a liability and also name the documents
 that one could use to obtain this financial information.

 Answer:
 An asset is any item, tangible or intangible, which belongs to the organisation
 concerned.

 A liability shows the financing or capital structure of the enterprise as at a
 specific date. Liabilities are usually divided into two criteria namely, the term for
 which the funds have been made available and secondly the source of the funds.

 In terms Sect 32 of the Act however, a liability shall also include, the amount,
 which the insurer estimates, will become payable in respect of claims incurred
 reported but not yet paid reduced by the amount of reinsurance on those claims.
 Unearned premiums, contingency reserves and unexpired risk provisions should
 also be made as specified in the Act.

 The details of assets and liabilities are found on a number of financial statements,
 the balance sheet, income and expenditure statements are however the primary
 sources of this information.

 The Act provides specific reference to assets in Schedule 1 section 29.
 (Source: Government Gazette; No.19277. 23 Sept. 1998. Part IV, Sec 29.)

 Question 17:
 The following is a list of items that could be found on an insurers balance sheet.
 In the space provided alongside each item, you are to indicate whether the item
 is an asset or a liability.

              Item                      Asset                        Liability
       Land and buildings  Land and buildings            Mortgage
       Mortgage
       Stock               Stock                         HP agreements outstanding
       Investments
                            Investments                   Taxes payable
     Hire Purchase
        agreements
                            Motor vehicles                Unearned premiums
        outstanding
     Motor vehicles                                      Potential claims
     Taxes payable
     Unearned premiums
     Potential claims
 (Source: Government Gazette; No.19277. 23 Sept. 1998. Schedule 1, Sec 29, p 80.)



 Page 13
        Unit Standard 10194                                             Questions and Answers




        2.4    The requirements imposed on Lloyd’s are compared to those that
               apply to any other insurance organisation in terms of registration
               and operations.


   Question 18:
   Compare the requirements imposed on Lloyd’s to those that apply to any other
   insurance organisation in terms of registration and operations.

                   Lloyd’s                            Other insurance organisation

The requirements relating to                    The requirements relating to registration
registration and operations pertaining to       and operations pertaining to other short
Lloyd’s are contained in Section 56 of          term insurers are contained in Part II
the Act and are:                                Section 7 of the Act.

         General provisions
         Appointment of a Lloyd’s
          representative.
         Returns to the Registrar
         Claims against Lloyd’s
          underwriters
         Security to be furnished by and
          on behalf Lloyd’s underwriters.
         Payment of certain claims
          against Lloyd’s underwriters.
         Imposition of prohibition on
          activities of Lloyd’s underwriters.
         Application of other provisions
          of Act to Lloyd’s.



        (Source: Government Gazette; No.19277. 23 Sept. 1998. Part II, Sec 7.)




        Page 14
Unit Standard 10194                                              Questions and Answers



                          Self-Assessment Questions

                                   Sample solutions

Specific Outcome 2:
Explain the basic requirements of the Short Term Insurance Act as they
apply to insurers.

Multiple True / False Questions
Indicate with an (x) whether the following statements are True or False


2.A The solvency margin of a company is                                    True    False
 1    The amount by which the premiums for years exceed the claims                     X
 2    The trading profit of the year                                                   X
 3    The amount of cash on hand                                                       X
 4    The difference between its assets and its liabilities                            X
 5    None of the above                                                      X


2.B A short term insurers annual statement of liabilities must             True     False
      include
 1    an amount in respect of goodwill                                             X
 2    the Rand value of claims outstanding                                   X
 3    an estimate of claims incurred but not reported                        X
 4    estimated liability for taxation                                       X

2.C   The following items will be listed on an insurers balance sheet      True    False
      as assets:
 1    stock                                                                  X
 2    potential claims                                                                 X
 3    motor vehicles                                                         X
 4    investments                                                            X

2.D   The following items will be listed on an insurers balance sheet      True    False
      as liabilities:
 1    potential claims                                                       X
 2    taxes payable                                                          X
 3    land and buildings                                                               X
 4    investments                                                                      X

2.E   The following statements apply to a Lloyds insurer:                  True    False
 1    Lloyd’s brokers act like normal brokers but they are also able to      X
      place insurance at Lloyd’s of London.
 2    Lloyd’s operates on a worldwide basis.                                 X
 3    Lloyd’s representatives only operate in London                                   X
 4    A Lloyd’s representative does not have to comply with the S.A Act.               X




Page 15
Unit Standard 10194                                       Questions and Answers


Paragraph Type of Questions


2.F    Name the requirements for marketing short term products.



      have to be registered or deemed to be registered as a short term
       insurer.
      authorised to carry on that kind of business.
      have to carry on business in accordance with the Act.




2.G    Explain the word “curatorship”.



A qualified person who will look after the interest of policyholders and
shareholders until a decision is made regarding the future of the company.)




Page 16
Unit Standard 10194                                       Questions and Answers




Specific Outcome 3:
Explain how the Short Term Insurance Act controls
intermediaries.


3.1    The way in which commission and certain fees are regulated is
       explained with reference to the Short Term Insurance Act.

Question 19:
What does the concept “commission” in the short term insurance industry mean?

Answer:
The term “commission” means the fee, which is paid to a representative and
intermediaries in lieu of the business that is generated by the representative.
Commission is therefore the representative’s and intermediaries earnings for the
insurance business that he generates.

Question 20:
Explain how commission and certain fees are regulated in the Short Term
Insurance industry.

Answer:
The Act stipulates the maximum commission payable to intermediaries (sec 48 of
Regulations). These are as follows:
    Motor policy, maximum commission – 12,5% of the premium payable
      under the policy
    Non-motor maximum commission – 20%
    Collective policies written through Lloyd’s – 20%
    Any other policy written through Lloyd’s – 25%

These rates are payable on the annual premium and are payable only when the
premium has been paid to the insurer, expect in that the broker may deduct his
commission and pay the insurer the net difference between the two.

(Source: Regulations: Sec 48, of the Act)




Page 17
Unit Standard 10194                                           Questions and Answers




3.2    Limitations on business practices in terms of placing business with
       insurers are described with reference to case studies and Short Term
       Insurance Act.

Question 21:
Group Work: Case Study.

Pointers:
    Learners shall obtain maximum benefit if this case study is attempted as
      group work.
    This case study is aimed at getting the learner to understand and apply the
      principles of the sections in the Act relating to the conditions of
      registration, application for registration and the circumstances under which
      the Registrar may prohibit short term insurers from carrying on business.
    Learners are advised to read the case study, then to study the relevant
      sections in the Act. Learners should then participate in a group discussion
      sharing ideas and understanding.
    A member of the group must then be appointed as a scribe who shall
      submit the answers.

Joe Profit could not believe his good fortune as the numbers appeared on the late
night show. He always knew that he would win the lottery. He immediately
decided that he would revive his short-term loan business that he had managed
from his room at the university where he had studied. He also decided that he
would use the money to set up a short term insurance company. He knew
immediately that he would name it maximum risk. His lottery winnings would only
just cover the establishment of an office and the recruitment of some clerks to run
the business. Joe contacted his long lost friend, Peter Crooked, who immediately
agreed that for a small fee he would cover all the business that Joe could not
cover as some sort of reinsurance.

As he sat in his chair building castles in the air, he calculated that if he could find
round about 100 people that would pay him about R 500 per month he could
quite easily cover any claim that they would submit to him. He also calculated
that he could quite easily draw a salary from these premiums that he was
receiving.

Joe actually managed to find the 100 people that he had set an objective for.
However upon arriving at the office two months after setting up business he
found a very important looking person waiting for him. He was surprised to learn
that this person was an inspector from the Registrars office. The inspector
advised Mr. Profit that he was there to do an audit.

The inspector upon realising that Joe did not appear to be above board,
proceeded to lock Joe’s offices prohibiting Joe from entering the premises.




Page 18
Unit Standard 10194                                              Questions and Answers


Required

   1. What do you think the findings of the audit will be?
   2. What do you think the inspector will recommend be done to Joe?
   3. What steps should Joe have followed before he decided to set up his short
      term insurance business?
   4. What are the steps that the Registrar should take before he may prohibit
      an insurer from doing business?

Answer:
1. The findings will show that Joe had not complied with Sections 9, 10 and 15 of
   the Act. These sections relate to application for registration, conditions of
   registration and limitation on business. The audit shall also then show that Joe
   had contravened the Act and was guilty of an offence.

   The findings will also show that Joe was not a public company nor was he
   carrying on short term business as his main objective. The audit will also find
   that Joe does not have financial resources that are adequate. It is obvious
   that the inspector shall not find any proof of registration or any compliance to
   the rules in the Act relating thereto.

2. The inspector will insist that Joe’s operation must be closed down and he shall
   issue a prohibition notice in this regard. He will refer to the sections as
   specified in point 1, and that Joe was in contravention of the Act. He may also
   suggest that Joe be prosecuted accordingly.

3. Joe should have applied to the Registrar for registration in terms of Section 7
   of the Act.

4. Section 12 of the Act determines that the Registrar may prohibit an insurer to
   do business if a short term insurer:

      has not furnished all information that is material to the application.
      has furnished information that is false.
      has failed to comply with a material condition of the Act.
      has failed to comply with a material provision of the Act.
      has failed to comply within the period specified to remedy the
       contravention.
      cannot comply with Section 9 of the Act.

   It should be noted that the insurer would normally have 30 days within which
   to comply with these requirements.

   It should also be noted that once the insurer has complied with the
   requirements that the Registrar may withdraw the prohibition notice.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part III, Sec 15.)




Page 19
Unit Standard 10194                                          Questions and Answers




3.3    The concept of a Lloyd’s binder is explained and the criterion used
       by Lloyd’s to enter into an underwriting relationship with an
       intermediary is described with reference to specialist classes of
       business.


Question 22:
Explain in your own words what you understand under the concept of a Lloyd’s
binder.

Answer:
No intermediary can accept any kind of consideration from a short-term insurer
unless the terms and conditions for the rendering of services are stipulated in an
agreement between the parties.

The agreement should contain specifics of the kind of policies that can be
entered into, the premiums to be charged, the wording and maximum benefits
offered. If the intermediary has authority to settle and pay claims, all such powers
and circumstances must also be fully disclosed. The agreement should also
stipulate that the name of the short-term insurer and the existence of such an
agreement should be disclosed to the prospective policyholder.

An intermediary is prohibited from doing business with another independent
intermediary if they have some interest in the other, is a creditor or debtor of the
first, or is within the second degree of consanguinity or affinity. These conditions
are imposed to prevent fraudulent actions by or undue pressure on an
intermediary.

It is worth the while to note that even if an intermediary failed to act in accordance
with the agreement entered into, the short-term insurer shall still be liable for any
such policy issued. The short-term insurer therefore has to be very careful in
selecting an intermediary who in the end could cause a lot of problems for it.


Question 23:
Group work: Discuss the criterion that should be used by Lloyd’s to enter into an
underwriting relationship with an intermediary (with reference to the Act).

Answer:
The criterion is prescribed by law and specifically in Section 57 of the Short term
Insurance Act.

Lloyds are required to appoint, and at all times have a natural person who is a
permanent resident of South Africa as it’s representative. This person should also
have a deputy appointed on the same basis as the representative. The deputy
assumes all the responsibilities as required in the absence of the representative.

The Registrar must approve these appointments before they are effective. These
persons must be fit and proper to hold office. It is their duty to ensure that:


Page 20
Unit Standard 10194                                              Questions and Answers


      Lloyds complies with the Act.
      Lloyds complies with the requirements of the board of trustees of Lloyds
       themselves.

The representatives must also:
    have their place of business in South Africa
    notify the Registrar of the address and any change thereto of their place of
      business.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part VIII, Sec 57.)




Page 21
Unit Standard 10194                                         Questions and Answers




3.4          The way in which Lloyd’s binders are regulated is explained with
             reference to case studies and the Short Term Insurance Act.

Question 24:
Group work: Explain how Lloyd’s binders are regulated in terms of Section 48 of
the Act.

Answer:
No independent intermediary or Lloyd’s binder shall be allowed to accept any
consideration for the rendering of services as an intermediary from any short-
term insurer unless an agreement to this effect is in place.

Section 48(2) of the Short Term Insurance Act describes in full the terms and
conditions that in addition to any other term or condition should be included in an
agreement for remuneration between the short term insurer and such Lloyd’s
binder or independent intermediary.

The following compulsory important terms are to be included in such an
agreement:

      i)        the kinds of short-term policies which may so be entered into;
      ii)       the premiums or the basis for the calculation of premiums to be
                charged set out;
      iii)      the wording of the policies clearly defined;
      iv)       the maximum value of the policy benefits clearly stated;

It is important to note that if the intermediary is empowered to settle or pay
claims, that such powers be clearly stipulated in the agreement as well as the
circumstances under which it may be done.

If additional remuneration other than commission is to be received by the
intermediary, it should also be clearly set out in the agreement.

An independent intermediary, acting on behalf of a specific short-term insurer and
in terms of an agreement, must always disclosed this to a prospective
policyholder.

If the short-term insurer offers any other remuneration than commission, such
agreement cannot be entered into with more than one intermediary for any
particular kind of policy.

An independent intermediary who is entitled to remuneration other than
commission only, is prohibited from:
   i)    entering into any other short-term policy than the kind to which the
         agreement relates;
   ii)   enter into any short-term policy to which another independent
         intermediary
         a. holds shares or any interest in the former;


Page 22
Unit Standard 10194                                              Questions and Answers


            b. if the former holds shares in the latter’s business;
            c. who is a debtor or creditor of the former;
            d. who is related within the second degree of consanguinity or affinity
               to the former;
It is worth the while to note that even if an intermediary failed to act in accordance
with the agreement entered into, the short-term insurer shall still be liable for any
such policy issued. The short-term insurer therefore has to be very careful in
selecting an intermediary who in the end could cause a lot of problems for it.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part VII, Sec 48.)




Page 23
Unit Standard 10194                                              Questions and Answers




3.5    The rights and responsibilities of an intermediary in accounting to
       the insurer are explained with reference to the collection and
       payment of premiums.


Question 25:
Explain the rights and responsibilities of an intermediary in accounting to the
insurer with reference to the collection and payment of premiums as it is specified
in the Act.
Answer:
The Act deals with the collection of premiums by intermediaries in Section 45.
Details will be found in the Regulations Part 4. It provides that no intermediary
shall “receive, hold or in any other manner deal with premiums payable under a
short term policy” (not including short term reinsurance policies) and short term
insurers may not permit such dealing in premiums, unless the intermediary is
authorised to do so by the short term insurer in accordance with the Regulations.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part VII, Sec 45.)




Page 24
Unit Standard 10194                                                     Questions and Answers



                              Self-Assessment Questions

                                        Sample solutions

Specific Outcome 3:
Explain how the Short Term Insurance Act controls intermediaries.

Multiple True / False Questions
Indicate with an (x) whether the following statements are True or False


           In terms of the Insurance Act when must premiums, which have              True   False
 3.A been received be paid over by credit agents?
  1        within 30 days of receipt of the premium                                           X
  2        when ever the broker feels is suitable                                             X
  3        within 15 days of receiving them                                                   X
  4        within 15 days after closing receipts                                      X


 3.B A broker in the South African Market means:                                     True   False
  1        it is a part time intermediary who has other employment also                       X

  2        that he / she is not usually responsible for the collection of                     X
           premium
  3        that he / she does not have any duty to look after his clients
           interest                                                                           X
  4        it is a professional who works in the insurance industry as a full time    X
           intermediary



Paragraph Type Questions

 3.C       Explain the frequency with which premiums can be paid for a short term policy.

 Premium can be paid –

           Monthly- this involves a payment every month via a debit order
           Quarterly – this would involve payment 4 times per year
           Half-yearly – premium is paid twice a year
           Annually – this involves a payment once a year




Page 25
Unit Standard 10194                                       Questions and Answers




Specific Outcome 4:
Explain how the Short Term Insurance Act regulates short term
insurance policies and protects individual policyholders.


4.1    The standard duration of policy is explained with reference to Short
       Term Insurance Act.

Question 26:
What is the standard duration of a business /commercial policy?

Answer:
Short term insurance contracts are normally issued for a period of one year
(business /commercial) and are then reviewed by insurers. The contract can then
be renewed or declined or terms and conditions altered.




Page 26
Unit Standard 10194                                             Questions and Answers




4.2    Rules governing policies issued to minors are explained with
       reference to Short Term Insurance Act.

Question 27:
Explain the rules regulating policies issued to minors.

Answer:
Minors over 18 years of age may enter into and deal with policies without the
consent of the guardian.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part VII, Sec 52)




Page 27
Unit Standard 10194                                      Questions and Answers




4.3    Reasons why a personal lines policy must be issued within a
       prescribed period are explained with reference to the rights and
       responsibilities of both parties to the contract.

Question 28:
Give the reasons why a personal lines policy must be issued within a prescribed
period.

Answer:
   The person insured must be certain that the policy is what he or she wants
   When a loss happens, is there enough cover or not
   Is the policy by the insurer the policy the insured chose
   Excess
   Scope of
   Cover conditions
   exclusions




Page 28
Unit Standard 10194                                              Questions and Answers




4.4       The way in which the Short Term Insurance Act protects individual
          policyholders is explained with reference to Section 55 of the Act and
          the Policyholder Protection rules.


Question 29:
Group work: Section 55 of the Act relates to the protection of policyholders.
Discuss this protection with reference to the role that the Advisory Committee and
Registrar assume in the protection of policyholders.


Answer:
Section 55 determines that the Advisory Committee or the Registrar, after
consultation with the Advisory committee, may determine rules that ensure that
all policies are enforced and managed in terms of sound insurance practises.
They may also vary or recall any such rule. The time frames that relate to the
lapsing of any rule are part and parcel of their powers.
These rules may provide that:
         particular imports may not appear
         information must be made known
         policyholders may cancel policies under certain conditions and within
          specified periods, and the legal consequences of such
         the different arrangements applicable to the various policies
         determine and implement fines and the circumstances of such
         publish rules and variations in the Gazette relating to variations and
          rescission requirements inviting all interested persons to make written
          representations in relation to any matter within a specified period of 21
          days in this regard.

(Source: Government Gazette; No.19277. 23 Sept. 1998. Part VII, Sec 55.)




Page 29
Unit Standard 10194                                                   Questions and Answers



                              Self-Assessment Questions

                                       Sample solutions

Specific Outcome 4:
Explain how the Short Term Insurance Act regulates short term insurance
policies and protects individual policyholders.

Multiple True / False Questions
Indicate with an (x) whether the following statements are True or False


4.A       Rules regulating policies issued to minors:                              True   False

 1        According to Section 56 of the Act, a minor over 18 years of age may             X
          enter into and deal with policies without the consent of the guardian.

 2        According to Section 52 of the Act a person under the age of 18 may              X
          enter into and deal with policies without the consent of the guardian.

 3        According to Section 52 of the Act, a minor over 18 years of age may      X
          enter into and deal with policies without the consent of the guardian.



Paragraph Type Question




4. B       Briefly describe the terms by which the parties (short term insurance
           contract) agree to be bound.




          The person insured
          The risk insured against
          The amount payable by the insurer on the happening of the event insured
           against
          The amount of premium payable by the insured, and
          The period of insurance.




Page 30