Regulator’s proposals on cell captive insurance are largely positive, says industry leader

"While we have some concerns about aspects of the regulator’s proposals, they are positive on the whole and go some way towards providing clarity in this important and growing segment of the insurance market,” said Herman Schoeman, MD of Guardrisk Insurance, who led the forum. "The proposals should ensure the integrity and sustainability of the cell captive market. They could also provide a sound basis for micro-insurance.”

Held on 30 October 2013, the forum focused on the implications of the FSB’s first discussion paper for the cell captive industry and the next steps towards a revised regulatory framework. Schoeman said the second discussion paper was expected at the end of November 2013, to be followed by a final round of comments and proposals. "Detail communication with cell owners will then be required before implementation.”

Third-party cell captive insurance refers to the business model whereby cell owners, such as retail chains and motor manufacturers, sell their insurance products to their customers. These products are in turn underwritten by licensed cell captive insurers, Guardrisk being the oldest and biggest.

According to the FSB, seven long-term insurers and 11 short-term insurers have been registered to conduct cell captive insurance in South Africa. They service at least 130 active short-term insurance third-party cell owners and about 50 long-term arrangements.

At the start of the forum, which some of South Africa’s most prominent insurance industry leaders attended, Schoeman sketched the context of the FSB’s discussion paper on cell captive operators and said that the review had been widely welcomed.

"The process started back in 2009 and was deemed necessary because of the growing industry, the rise of so-called similar arrangements, the varying levels of governance in the industry, and prudential and market conduct risks,” he said.

In the eyes of the regulator, some of the biggest risks are the potential inability of cell owners to recapitalise as a result of losses, and the fair treatment of customers, especially on the part of cell owners and partners in ‘similar arrangements’. Similar arrangements are cell captive lookalikes that conduct cell captive business under an existing insurance licence but without a separate and properly regulated cell captive licence.

This scenario means that cell captive insurance is not being conducted on a level playing field with the same rules for all players.

"One of the regulator’s proposals is for a separate and dedicated licence for third-party cell captive insurance,” Schoeman said at the forum. "We would potentially support this because the cell captive business is different from the traditional insurance environment. You cannot run a cell captive on a traditional insurance underwriting system. The technology, skills base and skills set are different.”

His concern about the issuing of separate and dedicated licences was that this will add to the cost of doing business.

Other proposals that Guardrisk supports are those aimed at prohibiting similar arrangements, improving the governance and risk management of cell captive insurance, and compelling cell owners to disclose the relationship with the insurer, and also to clearly disclose the insurer’s identity.

While he is in favour of the proposal to strengthen the financial soundness of cell captive operators, he does not agree with the proposal that cell owners be obliged to meet the R1 million capital requirement. "Our counterproposal is that the new Solvency Assessment and Management (SAM) regime will take care of that.”

Schoeman gave a neutral rating to some of the proposals, an example being that reporting be enhanced in the cell captive business. "If reporting is to be enhanced, my question is, what is the regulator going to do with this additional information? Will it really improve the managing of risks and the fair treatment of customers in this part of the industry?”

However, he is "a little concerned” about the proposal that insurers be fully responsible for the market conduct activities of cell owners and intermediaries, especially as far as the giving of advice to the policyholder is concerned.

"It is very tough for the insurer to take full responsibility for all actions of intermediaries and this will add significantly to the costs of doing business,” Schoeman said, adding that this aspect is under discussion with the regulator.

He also expressed concern about two other proposals – that the regulator’s prior approval be obtained for new cells and products, and that only binder holders may own cells.

"We do not support the proposal about the registrar’s prior approval for all new cells and products and services. This would have a high impact on the industry and create quite a difficult environment to operate in,” Schoeman said. He cited the potential length of turnaround times on the regulator’s part due to limited resources and experience in this field, among other things. "If the regulator’s approval is needed, we could be down the road to restriction of innovation.”

As for the proposal that only binder holders be allowed to own cells, Schoeman said this would have a medium to high impact on the industry. "It would be preferable to define who may not own a cell, for example a broker. I think we would all support that as it talks to conflict of interest.”

Finally, Schoeman touched on the proposal around the definition of an affinity scheme. The FSB says that to qualify as a cell, an affinity scheme’s insurance business must be ancillary to the primary business activity, and must directly protect the reputation and brand of that primary activity. "How do you measure this?” he asked. "We don’t have a clear-cut definition of an affinity scheme and the regulator has asked the industry to come up with one.”

Despite reservations about some of the proposals, Schoeman said the discussion document was largely sound. "Overall, I would give it a ‘good’ rating. It recognises that this segment of the insurance industry is important and that is very positive. The paper provides a positive move towards regulatory certainty and clarity and a sound base for micro-insurance, and ensures the integrity and sustainability of the cell captive market.”

During the question-and-answer session that followed, Patrick Bracher at Norton Rose Fulbright SA, said the presenter, Herman Schoeman, was one of the most authoritative and credible members of cell captive insurance in South Africa. "He is the bulwark of the cell captive industry,” Bracher said, pointing out that Schoeman’s evidence to the Cape High Court in a 2007 ruling upholding cell captive arrangements had been pivotal to the court’s finding. "The clarity of the judgment,” he said, "is because Herman gave evidence.”