With the expected, 1 July 2017, extinction of the Section 45, Regulation 4, guarantee requirement for credit intermediaries looming large, the question is, what now? For many years credit intermediaries’ financial statements have been subjected to the underwriting rules of Intermediaries Guarantee Facility Limited (IGF) in order to obtain the required statutory Section 45 guarantee – credit intermediaries are required by law to hold a Section 45 guarantee calculated as the resultant of multiplying last year’s short term premiums collected, net of VAT and Commission, by 30%.
Currently only IGF and a registered Commercial bank in the RSA may issue a Section 45 guarantee to a credit intermediary. The underwriting process that the credit intermediary is subjected to is not a bad thing – there was a time a few years back when this process helped to lift the financial strength of short term insurance credit intermediaries across the board as financial strength and earnings are linked to the quantum of the guarantee that may be issued to the intermediary. If either financial strength or earnings are insufficient, collateral security is requested by IGF in order to be in a position to issue the requisite guarantee.
With short term insurers able to claim from the fund following non-payment of the short term premiums by the intermediary, it is the short term insurers that will shortly be pressed to pro-actively apply enhanced credit management techniques in order to achieve the same level of comfort as before.
A further concern expressed by several insurers in the industry is the mismatch of the current maximum guarantee issued under Section 45 i.e. R100 million and the amounts collected monthly, by of the larger intermediaries and collection agents, resulting in a massive exposure to the whole industry.
For more information contact Charles Hitchcock on Charles@saia.co.za