When being ‘captured’ is not a dirty word

The hive of activity surrounding the radical transformation of the South African financial services sector ushered in certain stringent supervisory measures for regulatory oversight of the insurance market. Such recent activity includes a focus on the regulation of the conduct of insurance business by cell captives, in particular, in the third-party cell captive insurance space.

30 Mar 2020 3 min read Corporate & Commercial Insurance Alert Article

Regulation of cell structures have mainly been secured through the imposition of conditions of licence and indirectly through contractual cell arrangements put in place by the participants in the cell. In effect, in the past, the authorities had less involvement in the regulation of cell captive insurance business.

The express legislative earmarking of cell captive insurance business as a segment of the insurance market that requires specific regulatory oversight, the legislative recognition of the need to segregate business within the cell and the subtle hints that the regulator wishes to formally regulate the content within cell agreements signals a step approach towards the alignment of South Africa’s regulation of cells to that applicable in jurisdictions which formally entrench protection or segregation of cells.

The lack of focused formal regulation of cell captives and its associated arrangements has seen a proliferation of various cells and, in certain instances, the establishment of hybrid cell captive structures such as a single parent company/group non-controlled foreign cell captive structure which has been brought into the regulatory net through the Insurance Act 18 of 2017.

While cell captive insurance business has been fingered as an economic enabler due to its inherent ‘rent-a-licence’ advantages that also arguably breathed life into the micro-insurance industry, a careful balance has to be struck to protect the interests of the various stakeholders.

It comes as no surprise that the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) are keen to complete its claw back of some lost ground by using the twin peaks of regulation to properly capture the cell captive industry within their regulatory oversight, respectively.

While the reaches of the twin peaks are currently clouded due to the uncertainty concerning the FSCA’s and PA’s policy position on the implementation of the relevant law, the soon to be released revised draft conduct standard to follow on from the Draft Conduct Standard of 2018 will hopefully be fully responsive to the various concerns raised by the industry. There are other matters that have seemingly been shelved for the moment and which stakeholders are grappling with; short of handing back their cell captive licences or doing a premature nose-dive for a micro-insurance licence.

Clarity is yet to be provided by the FSCA in relation to certain key features of cell structures including the delineation of the scope and extent of first party vs third party risks, equity participation by cell owners in the context of preference share structures underpinning the cell structure and on-boarding procedures for foreign based cell captives.

Schedule 3 to the Insurance Act, 2017 makes provision for a transitional period of two years from 1 July 2018 to end of June 2020 for compliance with the provisions thereof. However, news via the insurance grapevine has it that the FSCA intends to grant an additional grace period to affected persons within which compliance ought to be achieved.

In the interim, we suggest that cell captive insurers and cell owners continue with their review of existing cell structures, including from a business, commercial and/or regulatory (including actuarial, legal, accounting and tax) perspective in order to be nimble enough to meet any future regulatory imposed deadline.

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