The FSCA has published a conduct standard setting out the requirements relating to third-party cell captive insurance business.
Conduct Standard 2 of 2022 (INS) came into operation on 1 October and applies immediately to cell structures entered into after that date. However, cell arrangements entered into before 1 October have two years in which to comply with the conduct standard.
The FSCA said the main objective of the conduct standard is to set out the requirements with which cell captive insurers must comply to mitigate certain conduct-of-business-related risks that have been identified in respect of third-party cell captive insurance business arrangements.
One of the most important changes is that only cell owners that are non-mandated intermediaries (NMIs) will have to be tied agents of the cell captive insurer and not any of its associated NMIs.
Section 6 of the conduct standard (“Additional requirements for ownership of cell structures by non-mandated intermediaries or associates of non-mandated intermediaries”) limits the ownership of cells by cell owners that are NMIs only.
Essentially, the conduct standard states:
- A cell owner that is an NMI is restricted in that it may only offer policies underwritten in the cell structures in which it is a cell owner (in other words, it must be a tied agent of the cell captive insurer).
- A cell owner that is an NMI may only have a third-party cell arrangement with one life cell captive insurer and one non-life cell captive insurer, or with one microinsurer, and may only render services as an intermediary for purposes of those insurers and in respect of policies underwritten in the specific cell structures of which it is the cell owner.
- A cell owner that is an NMI will have to be a registered FSP and meet the fitness and propriety requirements under the FAIS Act, including having a key individual, compliance officer, and training programmes for staff members.
The section also states that a cell captive insurer that enters into a cell structure with a cell owner that is an NMI or an associate of an NMI must be able demonstrate, on an ongoing basis, that there is comprehensive management of risks.
Where risks are identified, the cell captive insurer must take steps to avoid – or where avoidance is not possible, mitigate – the identified risks.
A cell captive insurer that enters into a cell structure with a cell owner that is an NMI or an associate of an NMI must be able demonstrate on an ongoing basis:
- That any risks that may impede or adversely impact the fair treatment of policyholders as a result of the cell structure are avoided, and where avoidance is not possible, mitigated;
- That the cell structure does not compromise the delivery of fair outcomes to policyholders;
- That the cell structure should ensure the offering of suitable insurance products that consistently deliver fair value to policyholders; and
- That the cell captive insurer has allocated adequate operational resources in respect of its control functions to be able to comply with the relevant governance and oversight requirements, bearing in mind the size and quantity of cell structures with the cell captive insurer.
The conduct standard contains a general “overarching” requirement that a third-party cell captive insurer must exercise ongoing oversight over the business operated under its licence.
The other provisions of the conduct standard are set out below.
Due diligence
Before a cell captive insurer enters a cell structure, it must undertake a comprehensive due diligence assessment of the business of the cell owner and the business plan of the proposed cell structure.
The due diligence assessment must enable the cell captive insurer to confirm certain things in respect of the cell owner and the cell captive structure.
The cell captive insurer must confirm that the cell owner has systems and processes to support the cell captive insurer in complying with:
- the relevant requirements of the Policyholder Protection Rules and the Short-term Insurance/Long-term Insurance regulations; and
- any regulatory reporting requirements, including Conduct of Business returns.
If the cell owner is a non-mandated intermediary, the cell captive insurer must confirm that the cell owner meets the fitness and propriety requirements for FSPs under the FAIS Act.
If the cell owner is a binder holder, the cell captive insurer must confirm that the cell owner has the necessary technical knowledge, skills and expertise to ensure that the business conducted through the cell structure will result in the offering of suitable insurance products that provide fair value to the types, kinds or categories of policyholders at which the products will be targeted.
The cell captive insurer must confirm that the cell structure will have:
- Sufficient financial and operational capability to conduct its business in a prudent manner that will ensure fair outcomes for policyholders;
- A business model and organisational culture that is designed to promote the fair treatment of policyholders; and
- Appropriate governance, risk and compliance management processes and internal controls.
In addition, the cell captive insurer must confirm that the cell structure will have measures in place to:
- Ensure that the insurance business to be conducted in the cell structure will result in products that are designed in a way that makes them suitable for the types, kinds or categories of policyholders for whose needs the products are developed;
- Ensure that premiums are determined in a manner that is fair;
- Monitor claims ratios on an ongoing basis to ensure fair value to customers;
- Ensure that products are distributed through appropriate and accessible distribution channels; and
- Ensure that its claims and complaints processes are efficient and easily available for use by the types, kinds or categories of policyholders for whose needs the products are developed.
None of the abovementioned confirmations may be delegated to the cell owner.
Disclosure to policyholders
A cell captive insurer must, before it enters into a policy and in addition to the disclosure requirements in terms of any other legislation, provide a potential policyholder with concise details of:
- The exact nature of the relationship between the cell captive insurer and the cell owner to which the policy relates;
- Where the cell owner is a non-mandated intermediary, all remuneration arrangements (including profit share and dividends) between the cell owner and the cell captive insurer in relation to the policy; and
- Any other fees or charges payable by the policyholder to the cell owner, in relation to the policy.
Complaints
A cell captive insurer’s complaints escalation and review process must allow for a complaint to be escalated directly to the cell captive insurer.
The cell captive insurer must keep a central register of complaints, regardless of whether a complaint was received by the cell structure, an independent intermediary or directly by the cell captive insurer.
Reporting requirements
A cell captive insurer must, at least 30 days before entering into any cell structure agreement, notify the FSCA of the proposed cell structure.
The FSCA may at any time at its own accord, by notice to the cell captive insurer:
- Raise an objection related to the cell structure agreement; and
- Instruct the cell captive insurer to –
- resolve the objection to the satisfaction of the Authority; or
- amend any of the terms and conditions of the cell structure by a date determined by the Authority.
A cell captive insurer must, at least 60 days before terminating a cell structure agreement, inform the FSCA of:
- The date on which the agreement will terminate;
- The reasons for the termination of the agreement;
- How the policies underwritten in the cell structure will be dealt with; and
- Any other details required by the Authority to ensure the protection of any policyholder who may be impacted by the termination.
Licence conditions
The Prudential Authority (PA) currently includes a limitation on the ownership of cell structures in the licence conditions of cell captive insurers in respect of third-party cell captive arrangements. This condition was included by agreement between the FSCA and PA pending the finalisation of the conduct regulatory framework. As the conduct standard has been finalised, the licence condition can be lifted.
The FSCA has asked the PA to remove these conditions as soon as possible after with the effective date of 1 October.
The requirements and limitations in the conduct standard will replace the PA’s licence condition limitation on licensed cell captive insurers, as the FSCA will be responsible for the supervision and enforcement of the conduct standard.
Download the conduct standard
Conduct Standard 2 of 2022 (INS) can be downloaded from FSCA’s website, www.fsca.co.za > Regulatory Framework > Standards > Insurer/Microinsurer.
For more information, contact the FSCA’s Regulatory Framework Department at Johann.Vanderlith@fsca.co.za.
