The following is an extract from the FSCA’s statement explains the need for, the expected impact of, and the intended operation of the conduct standard on third-party cell captive insurance business.
Enhancements to the regulatory framework for third-party cell captive insurance business have been under consideration since 2009 and culminated in the publication of Conduct Standard 2 of 2022 in October.
Specific risks were identified in the third-party cell captive insurance industry that led to the publication of a conduct standard.
Business model risks increasing the likelihood of unfair outcomes for customers
The following risks were highlighted in the position paper as particularly prominent in third-party cell captive insurers’ business models:
- Lack of appropriate governance and oversight by the cell captive insurer over the business operated in the cell structures, which results in a lack of meaningful monitoring of the delivery of fair outcomes to policyholders.
- Lack of oversight by the insurer over new product development, which is likely to result in an increase in inappropriate or low-value products, exacerbated by a proliferation of cell structures.
- Shortage of skills and resources in some cell captive insurers to administer products sold through the cell structures, coupled with a lack of knowledge and understanding of the intimate workings of the business operated within the cell structure (“rent-a-licence” type models).
- Unnecessarily complex complaints and escalation procedures within certain cell structures, particularly where the cell owner is a bank or another large institution.
Conflict-of-interest risks
A cell owner in a third-party cell captive arrangement qualifies for financial incentives (in the form of dividends and other similar means) if the cell structure is profitable.
Where the cell owner also plays an integral part in the decision-making process relating to the conducting of insurance business in the cell structure, including the distribution of the insurance products, such financial incentives can give rise to significant conflicts of interest as the “profit motive” could significantly drive and influence the cell owner’s decision-making process, which can materialise in several ways.
- Mis-selling and biased advice;
- Risk of unfair decision-making related to claims and other management;
- Risk of inappropriate motivation to a non-mandated intermediary (NMI) to move a book of business; and
- Possible regulatory arbitrage.
Summary of the conduct standard
- Enhanced governance and oversight requirements to mitigate the specific risks that have been identified as particularly prominent in third-party cell captive insurance models.
- Additional disclosure requirements on cell captive insurers to disclose to the potential policyholder, before it enters into a policy, details about the nature of the relationship between the cell captive insurer and the cell owner and the fees from this relationship. The conduct standard further proposes a specific disclosure obligation in respect of all remuneration arrangements (including profit share and dividends) between the cell owner and the cell captive insurer in relation to the policy, where the cell owner is a NMI.
- Reporting requirements relating to the notification of any new third-party cell arrangements to aid in the effective monitoring of all cell arrangements with the purpose of ensuring compliance with the conduct standard by cell captive insurers in the interest of ensuring the consistent delivery of fair outcomes for policyholders. In addition, the reporting requirements will be extended to require notification prior to the termination of a cell structure agreement to monitor the impact that such a termination could have on policyholders. It is, therefore, stipulated that all cell captive insurers must, at least 30 days before entering into any cell structure or at least 60 days before terminating a cell structure, notify the FCSA in writing, in the form and manner prescribed, of the proposed arrangement to be entered into or the termination thereof.
- Limitations on who may be a cell owner in order to address risks inherent in third-party cell captive arrangements that impede fair outcomes for policyholders where the cell owner is an NMI or an associate of an NMI:
Impact of the conduct standard
The conduct standard is likely to lead to improved outcomes for policyholders due to the absence of conflicted or biased advice by NMI cell owners, which will only be able to sell and earn commission on policies that are written in the cell structure for which they are the cell owner, and act only as agents of the cell captive insurer that underwrites that cell. This, coupled with the enhanced disclosure requirements, will ensure that policyholders will not be led to believe that they are receiving independent advice, and will understand that the NMI cell owner only offers products underwritten in a cell structure of which it is the cell owner and that the cell owner stands to benefit from the profitability of the products being sold.
It is the view of the FSCA that the benefits to and enhanced protection of policyholders outweigh the possible impact on these existing cell captive arrangements that will no longer be allowed to offer products underwritten by other insurers or outside of the cell arrangement.
Click here to download the full supporting statement.
