Funeral policy provider fights to 'own' its clients as underwriter exploits legal loophole

Multisure Corporation in Gqeberha took its underwriter, KGA Life, based in Stellenbosch, Western Cape, to court when KGA Life cited new legislation – the changes to the Policyholder Protection Rules under the new Insurance Act – for refusing to relinquish Multisures book of mainly Sassa clients, which Multisure wanted to transfer to another underwriter, African Unity Life (AUL).

Multisure chief executive, 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.”

The two parties locked horns in the Eastern Cape High Court in October last year in a matter heard by Judge Irma Schoeman.

This week the court found in favour of Multisure, ordering KGA Life to cancel its underwriting agreement with Multisure and allow it to transfer its book of about 8 000 clients to AUL.

However, after the judgment was handed down, KGA Life lodged an application for leave to appeal the ruling.

While he welcomed the judgment, Goodford was alarmed at KGA‘s application to appeal. He said: “All KGA’s clients, including funeral parlours, whose policies the company underwrite, should be very concerned by this latest move by KGA Life, as it shows the extent to which this company is willing to go to claim ownership of the clients who belong to intermediaries.”

It is not the first time that KGA Life has been accused of failing to release intermediaries‘ books. Sean Russell, owner of E&S Russell Funeral Directors in Komani, said he received similar treatment when he wanted to move to AUL. The matter went to arbitration and Russell’s firm won its case.

In 2017, four intermediaries sued KGA Life, which had tried to prevent them from terminating their underwriting agreements. The firm lost the case in the Cape Town High Court and had a punitive cost order awarded against it.

Impractical regulations

At the heart of the matter are new regulations governing the insurance industry. Over the last several years, the financial sector regulators have put in place new laws and rules intended to protect consumers from unscrupulous operators, particularly in the funeral policy sector.

The Insurance Act of 2017, which largely replaces the old Short-term Insurance and Long-term Insurance Acts, makes a clearer distinction between short-term insurance and long-term insurance (in the past, some products blurred the lines between the two), and provides for a class of smaller insurers or brokerages, known as microinsurers.

The Act also more clearly distinguishes between individual cover (whereby each individual is covered separately according to his or her individual risk profile) and group cover (whereby a group of people are covered according to the overall risk profile of the group).

Group cover is designed for a group setting such as a trade union, professional body, or among the employees of a company, but in the past this was extended to groups of clients with the same type of policy, such as a funeral policy, on a brokerages books.

The new regulations forced underwriters to convert group scheme funeral policies to individual ones in certain circumstances. They could no longer operate group scheme funeral policies that did not fall under a retirement fund, autonomous body or employer.

Existing group scheme policies that did not meet the new definition had to be converted to individual policies by July 1, 2021.

The regulations also require that all policyholders be treated as individuals insofar as being informed of changes in cover. This has huge implications, for insurers now have to ensure that they communicate with each member directly before entering into a policy, during the policy contract, and on termination of the policy.

The trouble is that many microinsurers, particularly those in the townships selling funeral policies, besides having not being properly informed of the regulatory changes, do not have the capacity to communicate with each individual policyholder in order to get their consent to, for example, change underwriters.

Underwriters can exploit this, as KGA Life has done, leaving microinsurers relatively powerless.

To this end, the National Funeral Association of South Africa (NFASA), representing South African funeral directors that also act as insurance intermediaries, led a protest march in Pretoria late last year. It accused the Financial Sector Conduct Authority (FSCA) of favouring insurers over intermediaries.

“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. “Currently, I dont 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 – we are now no longer the owners of our businesses.”

NFASA and the Funeral Federation of SA, supported by many other funeral associations representing thousands of funeral parlours, held a meeting with the FSCA on February 18 in Pretoria. At the meeting the parties demanded that the current definition of “group” as set out in Schedule 2 of the Insurance Act be changed to again include funeral parlours and other SME businesses such as Multisure, as was the case up to 2018.

Although approached for comment, the FSCA had not responded by the time this article was published.

Rudi Botha, head of legal and compliance at KGA Life, confirmed the ruling and his firms appeal application. “We confirm that the High Court of the Eastern Cape Local Division, in Gqeberha, granted some of the relief sought by Multisure Corporation … in or about September 2021, on Tuesday March 15. KGA Life has in the interim successfully applied for leave to appeal the order, with leave to appeal the matter to the Supreme Court of Appeal being granted this morning [Thursday, March 17],” he said.