It is said that the proposed microinsurance framework aims to address the specific challenges of improving access to insurance and consumer protection for lower income families in South Africa. While informal insurance, or risk pooling, remains one of the largest single financial services in the country, insurance cover obtained through a registered insurer has a penetration rate of only some 25%.

A discussion paper was previously released for public comment in 2008, supported by a period for written comments, and a final round of public engagement was held in 2010. The current policy document incorporates the comments received, and sets forth the government’s subsequent policy proposals.

While there is also, it is said, an imperative for more available savings products for lower income families, consideration of an alternative regulatory framework for those products will be deferred to a later date – the focus of the current proposals is on a framework for risk-only products.

The taxation of microinsurance products, as defined in the document, will be re-structured. For example, as friendly societies are currently tax exempt while cooperatives are not, a suggested requirement for a friendly society undertaking microinsurance business to become a regulated cooperative will have a tax impact.

The winding down of a friendly society and the transfer of its assets into a newly-formed cooperative would in the normal course of business trigger a tax event, and transition arrangements will be required. In addition, the taxation of distributions to members, and of investment income, will require specification.

The impact of income and capital gains taxes on microinsurers is important, as the surplus earned by the microinsurer through premiums, that is transferred to reserves in order to meet the additional prudential regulatory requirements, should not be taxed during a three year transition phase. Taxing transfers of the surplus to reserves could significantly weaken a new microinsurer’s ability to build up its reserves over time, undermining prudential regulatory compliance and member protection.

The National Treasury has therefore stressed that it is committed to ensuring that the tax treatment of a microinsurer does not undermine its ability to meet its reserve requirements. Surplus transferred to regulatory reserves would not be subject to income tax over the transition period, or until minimum capital and regulatory reserve requirements are met, whichever is the sooner.

It is also pointed out that long-term insurance products are exempted from value-added tax, while short-term products are not. To ensure a level playing field, it is expected that this same tax treatment will apply for these products written under a microinsurance licence.

With the above tax changes in mind, the National Treasury has recognised that existing entities offering insurance products without being registered as insurers may be reluctant to formalise into the proposed microinsurance regulatory regime, for fear of triggering significant tax penalties. The National Treasury is therefore exploring ways to support improved tax compliance for currently unregistered market participants, to specifically include microinsurance co-operatives in a way that will minimise tax penalties possibly triggered for previous noncompliance.

However, while entities that formalise from both a regulatory and tax perspective will be considered more favourably, those that fail to do so will face coordinated tax investigation, with no leniency granted for non-compliance.

Draft legislation is intended to be released for comment as part of the parliamentary process in 2012, for tabling to parliament in 2013. Implementation is likely to follow in 2013/14.