This week the FSCA published a revised draft Conduct Standard setting out requirements relating to third party cell captive insurance business. According to FSCA Communication 44 OF 2020 (INS), the main objective of the draft Conduct Standard is to prescribe the requirements that cell captive insurers need to comply with in order to address certain market conduct risks.
Background
Enhancements to the regulatory framework for third-party cell captive insurance business have been under consideration for a few years.
Since 2009, the predecessor to the Financial Sector Conduct Authority (FSCA), the former Financial Services Board, has consistently raised concerns around the third-party cell captive insurance business model and particular risks that have been identified from a regulatory and a supervisory perspective.
In December 2019, the FSCA published a position paper setting out its final policy proposals for conduct requirements applicable to third party cell captive insurance business which confirmed that a revised draft Conduct Standard will be published for consultation during 2020.
Specific risks which informed the publication of a draft conduct standard
| 1. | Business model risks increasing the likelihood of unfair outcomes for customers: | |
| ● | 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-license” type models). | |
| ● | Unnecessarily complex complaints and escalation procedures within certain cell structures especially identified where the cell owner is a bank or another large institution. | |
| 2. | Conflict of interest risks
According to the FSCA a traditional insurer has requirements around governance and claims management processes which result in more independent decision-making by the claims function and more robust oversight over sales practices. “These governance and oversight processes, however, are often not implemented at a cell structure level in a suitable or acceptable manner. Supervisory experience has shown that many cell captive insurers cannot evidence the independence of the claims processes at cell structure level, especially in smaller businesses.” |
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The draft conduct standard
To mitigate these risks (see detail in Statement of Need document), the draft conduct standard proposes appropriate governance and oversight requirements on cell captive insurers as particularly prominent in third party cell captive insurance models.
According to the FSCA these governance and oversight requirements include:
| ● | A general overarching ongoing oversight requirement that places a positive obligation on cell captive insurers to have the necessary oversight over the business being operated under its license; |
| ● | A specific requirement that the escalation of complaints should be made directly to the insurer and the upkeep of a central complaints register; |
| ● | A requirement that the cell captive insurer conducts a due diligence on a cell owner and any outsourced party or binder holder prior to entering into such an arrangement or agreement; |
| ● | Setting minimum requirements for the due diligence conducted in respect of the cell owner |
| ● | Ongoing oversight and governance requirements applicable to all insurance business in cell structures to ensure among others that products from these structures result in products that are fairly priced, suitably designed and distributed and provide value to the policyholder. |
Furthermore, the draft conduct standard also proposes additional disclosure requirements, reporting requirements as well as certain limitations on who may be a cell owner.
“The draft Conduct Standard is consistent with the objective of the FSRA, and specifically the mandate of the FSCA to protect financial customers by promoting the fair treatment of financial customers (including policyholders) by financial institutions,” the FSCA confirms.
Click on the links to view the following documents:
A Statement of need expected impact and intended operation of the Conduct Standard (Annexure B)
Comments template for the draft Conduct Standard for Cell captive insurance business (Annexure C).
Do you have any questions about the regulatory development? Please forward your questions to us and we will discuss it in future articles.
