Micro-Insurance challenges facing cell captives in SA

In National Treasury’s discussion paper on the provision and regulation of micro-insurance in SA entitled “The Future of Micro-Insurance Regulation in South Africa,” cell captives are highlighted as one of the avenues to explore when it comes to the provision of quality low-cost insurance products to low-income consumers in the country.

From a cell captive perspective however, there are some challenges and underlying risks that need to be addressed in order to meet the desired and noble objectives outlined in the discussion paper, namely “to develop a coherent and clear regulatory framework that will encourage and facilitate the provision and distribution of good value, low-cost products that are appropriate to the needs of low-income consumers by a variety of market players, who must treat their policyholders fairly and manage the risks of providing insurance.” These challenges and risks can be summarised as follows:

According to Adli Mallick (pictured 1), group compliance officer of Centriq Insurance, the introduction of new micro-insurance regulations provide challenges to existing short and long term insurers as National Treasury proposes the removal of barriers to entry for the small and mutual insurers in its discussion paper and a revision of certain existing regulatory requirements.

“Seeing that there is currently no specific legislation governing cell captives in SA and the regulators have not yet advised as to when a draft on cell captive legislation would become available (if at all), the situation creates some level of uncertainty in the insurance market regarding future regulation that may affect the way cell captive providers operate in SA,” says Patrick Ndururi (pictured 2), senior manager at Centriq actuarial services.

Currently all registered insurers already comply with regulations required to operate as fully fledged insurers in SA, which gives rise to the following questions: Would the introduction of a Micro Insurance Act require an existing insurer to also register as a micro-insurer and by implication also mean that they would be required to apply for a license to sell cell captives in SA?

“In the absence of legislation governing cell captive arrangements in the country, it is assumed that only the insurance companies that have been licensed to sell cell captives, would be authorised to issue cell captives to smaller operators selling micro-insurance products to consumers in SA. Future regulatory developments with regard to cell captive arrangements will be watched with keen interest by the insurance industry, for example, will a registered micro-insurer also be able to issue cell captives in terms of the Micro Insurance Act, or will this regulatory development be addressed in a new cell captive draft bill, adds Mallick.

Another matter that National Treasury would need to address is whether or not existing insurance companies would need to adhere to two insurance acts for example - one requiring a higher level of compliance in terms of the current insurance acts and the other with a lower level of regulatory compliance in accordance with micro-insurance regulations.

Currently the ring fencing of cell captives is not complete because the cell owners have an ultimate claim on the assets of the cell provider. It is Centriq’s position that compliance with regulations such as the Financial Advisory and Intermediary Services Act (FAIS) and the Financial Intelligence Centre Act (FICA) rests with the demarcated third party, the cell owner and not the cell provider. These regulatory matters still need to be finalised in the amendments to the regulations of the recently passed Insurance Laws Amendment Act.

“Due to the significant outsourcing of various functions, this tends to make it a bit onerous for the cell provider in setting requirements to be met by cell owners, which only serves as a deterrent for prospective cell owners in some cases,” says Ndururi, adding that the need for policyholder protection is greater in the micro-insurance environment.

Cell providers may also find it difficult to ensure compliance and exercise control of policyholder protection rules because they are somewhat removed from the ultimate policyholder.

Some of the current players in the micro-insurance environment may furthermore be unable or unwilling to put the required capital upfront. Says Ndururi: “This may require the cell provider to lend capital from the promoter cell. And since the cell owner may not share in the vision of the cell provider, it may put the lent capital at a higher risk.”

Other challenges include:

- Securing buy-in from the target groups (funeral parlours, burial societies and friendly societies) as these groups perceive their current business models to be working fairly well.

- Creating a demand for the intended short-term insurance products within the short-term insurance sector may require significant and ongoing consumer education.

- Investment constraints on friendly societies (as per the Friendly Societies Act of 1956) would prevent friendly societies from buying the class of shares needed to become a cell owner.

A desired regulatory change would be the introduction of legislation similar to the Protected Cell Company (PCC) Act, introduced in some countries, whereby cells are completely ring fenced and operate as separate legal entities. “Making cells directly accountable to regulators could be the way to go, although this could result in lower fees for cell providers due to the reduced statutory responsibilities,” adds Ndururi.

In Centriq’s view, mutual cell captives could also be allowed to accommodate the many micro-insurance providers that may be too small to set up their own independent cells.