The Insurance license vs. the Cell captive Which one should you choose?

Manie Whisgary, head of technical and risk services of Centriq Insurance compares the cost and structure implications of a traditional insurance license to that of a cell captive in SA.

Long-term and short-term insurers operating in SA are heavily regulated by the Long-term Insurance Act 52 and the Short-term Insurance Act 53 of 1998 while general compliance with legislation and regulations are administered and monitored by the FSB.

Non-insurance entities interested in entering the insurance industry should therefore familiarise themselves with the legislation, cost and structure requirements of the respective license structures to ensure that the license they apply for meet their needs.

The traditional insurance license

Applying for and obtaining an insurance license is a time-consuming and complex process as applicants need to adhere strictly to the various procedures and legal requirements stipulated by the Registrar.

For example:

Some of the questions that an aspirational insurer will have to answer before the Registrar will consider an application are as follows. Whether the aspirational insurer:

- is a public company registered under the Companies Act and has the carrying on of long-term or short-term insurance business as its main object; or

- is incorporated without a share capital under a law providing specifically for the constitution of a person to carry on long-term or short-term insurance business as its main object;

- has the financial resources, organisation or management (as stipulated in the King Report on Corporate Governance) that is necessary and adequate for the carrying on of the business concerned;

- is not, or will not be, able to comply with the respective Act

- proved that the registration of the insurance license is in the interest of the public and that the proposed name of the applicant, or a translation, shortened form or derivative thereof, is not misleading or undesirable in any way.

These are only but a few examples that the Registrar (who may alter terms and conditions contemplated in section 9(2)(a) of the Act) will require from an entity wanting to register an insurance license.

Furthermore, the Registrar may either grant the insurer a comprehensive licence allowing the insurer to write all classes of policies or a restricted licence by limiting the insurers licence to specific kinds of policies based on the business plan, 5 year projections and expertise of the insurer.

Financial requirements

The cost of registering a traditional insurance license is substantial.

According to the guidelines of the FSB on the short-term and long-term insurance acts, the minimum paid-up capital requirement for registration is currently set at R10 million for long term insurance and R5 Million for short-term insurance.

It is however important to note that the actual amount of capital will be dictated by the kinds and volume of business to be conducted as set out in the 5 year projections submitted by the applicant and that the auditors of the applicant must confirm the paid-up capital before the applicant is registered as an insurer.

Concerning registration fees, a fee of R17 280-00, including VAT in terms of section 3(2)(b)(i) of the Act is payable upon application for registration while an additional fee of R12 320-00, including VAT is payable in terms of section 3(2)(b)(i) of the Act on the registration of the applicant as a long-term or short-term insurer.

Furthermore, every long-term or short-term insurer must pay a levy consisting of a fixed and a variable amount to the FSB from time to time. In the case of a long-term insurer, the variable amount is expressed as a percentage of liabilities while in the case of a short-term insurer; the variable amount is expressed as a percentage of gross premiums.

Financially Sound Condition

Both Long Term and Short Term Insurers must maintain its business in a financially sound condition by:

- having assets as defined in the Acts

- providing for its liabilities, and

- generally conducting its business, so as to be in a position to meet its liabilities at all times.

Insurers must also maintain a sufficient spread of assets as specified in the respective Acts and regulations to such Acts.

This means that short-term insurers must retain minimum assets of at least R3 million or 15% of nettt written premium income based on premium received in the previous financial year or on the expired portion of the current financial year whichever is the greater. Furthermore. short-term insurers must also retain a contingency reserve of 10% based on the previous 12 months nettt written premium. These solvency requirements are bound to change within the next two to three years with the introduction of Financial Condition Reporting (FCR). This method uses a risk based approach and may require most insurers to retain a lot more capital compared to current solvency requirements. It also requires the appointment of a statutory actuary who will sign off on the minimum capital requirements of short-term insurers.

Capital Adequacy Requirements for long-term insurers are also actuarially calculated and must also be signed off by a statutory actuary.

Auditing

Long-term and short-term insurers (including reinsurers) are also required to submit audited annual statutory returns within 4 months after the end of the Insurer's financial year as well as an unaudited statutory return within one month after the end of each quarter while financial statements need to be prepared in accordance with the Statements of General Accepted Accounting Practice among others.

Given the above, it is quite evident that Insurers spend an inordinate amount of time responding to regulators on regulatory issues such as distribution channels, compliance, products conflicting with the medical aid schemes act and remuneration of distribution partners to name but a few.

The Cell captive

Unlike a traditional insurance license, the cell captive provides non-insurance entities with a less cumbersome process to access an insurance facility. The cell captive owner utilises the insurance licence of the Cell Captive Insurance Company which allows the cell captive to focus on day to day insurance business whereas the Insurance Company is responsible for all statutory and regulatory reporting and full compliance with the respective Acts. The insurer remains primarily responsible for the administration of the insurance licence and accordingly reports to the regulator. The cell captive owner shares in the underwriting profits and risks in respect of business written through the cell without having to incur, for example, the burdens and expenses associated with regulatory compliance and a lengthy application process.

However, cell captive insurers must do a detailed due diligens to ensure that the cell captive owner has the necessary experience and expertise to write such business and the insurers will either do the administration themselves or outsource such administration to experts if the cell owner lacks the necessary skills and expertise.

Cell owners, with good traditional underwriting knowledge and experience will generally have the skills in underwriting and claims administration but may be challenged by the strict regulatory requirements (such as regular and onerous reporting, training and experience accreditation and financial adequacy among others) that apply once the cell captive has been established. However, these aspects can be overcome by the expertise and specialised services that the cell captive insurer brings to the relationship by virtue of its contractual ring-fencing via a preference shareholder agreement. This means that that the cell owner needn’t replicate the management structure or specialised service offering of the Insurer. Therefore, the cell owner has access to other additional services of the insurer such as actuarial, legal, technical and accounting services. The insurer will also analyse the reinsurance requirements of the cell owner and ensure that the cell is appropriately protected by reinsurance. This makes it an attractive option for non-insurers or cash-strapped entities that cannot absorb the fluctuation of insurance cycles.

Seeing that (a) the cell owner can negotiate capital requirements with the Insurer and that (b) the Insurer has the option of lending the cell owner capital, no minimum capital is required. However, it is important to note that the insurer is obliged to provide over-all solvency and will have to “put up” the capital if the cell is under capitilised. However, retained income generated from underwriting profits and investment income will relief the solvency strain on the cell.

Furthermore, the cell captive insurer assists with, or develops products on behalf of the cell owner, meaning that the onus is on the Insurer (and not the cell owner) to ensure that the products comply with regulations.

The cell owner can also insure its own risks via the cell which could be conventional or uninsurable insurance risks thereby enabling the cell owner to optimally manage its own risks and retaining the premium for predictable claims and reinsurance catastrophe exposures.