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South Africa: Scandal Involving Over US$100m In Misappropriated Premiums Hits Insurers

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More than 40 insurers, including major players, have lost around ZAR1.5bn ($106m) in insurance premiums due to misappropriation by an intermediary.

The regulator, the Financial Sector Conduct Authority (FSCA), describes the action by the intermediary Insure Group Managers (IGM) as “tantamount to a misappropriation of the premiums collected”, according to a report by Daily Maverick.

Industry body Financial Intermediaries Association of Southern Africa (FIA) labels the conduct “illegal”.

IGM, which collected insurance premiums from customers, was meant to pay the premiums to the insurance companies; instead, it secretly invested the funds in very illiquid, high-risk and ultimately loss-making assets.

These “investments” included a mining rehabilitation plant in Gauteng, a deepwater port in Mozambique, a property portfolio in KwaZulu-Natal, and a stake in an asset management company. IGM also used the cash to build its own business, by financing brokers and intermediaries.

The earliest “misappropriation” of premium money at IGM seems to go back as far as 2012, one insider suggests. In September 2018, after IGM’s shoddy investment decisions led to a cash crunch, it was placed under “voluntary curatorship”, with Pieter Bezuidenhout appointed as the curator.

While Mr Bezuidenhout’s investigation so far indicates no evidence that there was any intention to steal the money, the indication is that IGM’s directors – Charl Cilliers and Diane Burns – wanted to make larger profits for personal gain by secretly “misappropriating” the premiums before paying them over. Cilliers and Burns were at all times the “directing minds”, says the FSCA.

As a result, the FSCA has debarred both Cilliers and Burns for five years – a decision they both intend to appeal in July.

Premiums rolled over

To cover up its actions, IGM began using the premiums collected for future months to pay the premiums due for the previous month.

The regulator says the practice of “rolling over” premiums – in which a particular month’s premiums are used to pay the previous month’s debt – is unlawful. This is because it’s only sustainable if the money coming in exceeds the amount that has to flow out to clients; it leaves no cushion, should anything go wrong.

Mr Brandon Topham, the head of enforcement at the FSCA, and Ms Lizelle van der Merwe, CEO of FIA, say IGM’s scheme amounted to “illegal” conduct, involved a “misappropriation” of the premium money, and created a possible “systemic risk” to the wider industry.

While the law ensures the policyholders won’t suffer the loss from the illegal action, about 45 insurers are forced to take the hit.

Insurers, however, say that the loss would not affect impact their solvency, liquidity, or ability to pay out claims. However, some acknowledge they may never get the money back.

Some insurers owed money by IGM chose to convert a portion of this debt to equity – a total of ZAR300m – hoping the curator would claw back enough money for them to recover something.

Source MEIR

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