FSB to deliver cell captive clarity within the next four months

Jonathan Faurie, FAnews Journalist

While many people expressed concern about the length of time that the Financial Services Board (FSB) took to finalise certain key pieces of legislation, good news for the industry is that the regulator is finalising its proposals for its changes to cell captive arrangements.

At a Zurich event which focused on the role cell captive arrangements can play in the industry, Jonathan Dixon, Deputy Executive Officer of Insurance at the FSB, said that the regulator would be able to release its Cell Captive Position Paper within the next three to four months.

Keeping to the course

Like with the Retail Distribution Review and Twin Peaks, the road towards the Cell Captive Position Paper has been a long process. The regulator began the process in 2013 and has been looking at various issues affecting the industry ever since.

While not giving away any specifics on the paper, Dixon pointed out that the changes within the paper will be centred on aligning cell captives with the three central pillars of Solvency Assessment and Management (SAM), those being financial soundness of cell captives, the governance of cell captives and the reporting from within cell captives.

While all three pillars will remain central to players within this market, perhaps the one that will garner the most attention is the reporting aspect. Dixon pointed out that this needs to be in line with the principles outlined by Treating Customers Fairly (TCF) and that there needs to be a clear clarity of messages within all marketing and disclosures that the company makes. There will possibly have to also be a reporting of TCF outcomes at an individual cell level.

Looking at the mechanics

While the position paper will no doubt outline the FSB’s exact position regarding these arrangements, Dixon did point out that product providers will have to sell cell captive insurance under a separate licence and that there can be no first and third party business occurring within the same cell.

By offering this type of insurance as a product, financial service providers are taking on a significant responsibility as there is a potential for cell captive arrangements to significantly benefit the public on a financial level. Because of this, financial soundness needs to be guaranteed.

SAM paints a clear picture of the minimum capital requirements (MCR) that insurers will need to adhere to if they want to operate within the industry; and cell captives will be no different. Each cell owner would need to have a MCR of R1 million and there will be limitations on how cell captive insurers can act as financiers. Rent-a-captive arrangements will be explicitly prohibited.

A bright future

A strong focus at the event was the future of cell captives. Is there a market for cell captives in South Africa? Christine Rodrigues, Director at Norton Rose Fulbright said that there is a future for these type of arrangements as there is a possibility for the public to participate in the profit share of the cell captive through managing their risks properly.

“The performance of the cell gives rise to a declared dividend. Shareholders can manage their own risk profile, thereby keeping their premiums low while monitoring their risk profile,” said Rodrigues. It also adds value to the market as the public has immediate access to insurance. They also don’t take on all of the risk as it is spread through the client, the cell owner and the insurer.

Editor’s Thoughts:
As a form of micro insurance, cell captive arrangements can achieve the objective of the industry to offer insurance products to low income individuals. The FSB Position Paper will provide clarity on the regulatory framework of this market, which will hopefully not cause to many unintended challenges for those within the industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.