Cell Captive insurance … Going forward?

In June last year the Financial Services Board (FSB) invited comments on their discussion paper entitled Review of third-party cell captive insurance and similar arrangements in which they tabled several proposals dealing with cell captive insurance.

Notable proposals included:

• That cell captive insurance would need to be conducted under a dedicated insurance licence, and that it may not be combined with other forms of insurance business
• That so called "similar arrangements” would no longer be permitted and would need to be converted to third-party cell captive insurance arrangements in a dedicated cell captive insurance licence

The FSB also proposed that third-party cell captive insurance arrangements may be entered into with binder holders only. They elaborated on this, noting that it needed to be either an underwriting manager or a non-mandated intermediary in terms of an approved affinity scheme.

The FSB would consider these on a case by case basis so as to determine whether an arrangement qualified as an affinity scheme for cell ownership purposes. Going forward, the FSB proposed a banning of the writing of first-party and third-party business within the same cell.

In the view of the FSB, an affinity scheme that met the qualifying criteria would have to have an existing client/member relationship outside of the insurance relationship. The relationship would furthermore have to be such that the cover provided protected in some form the reputation or brand of the main business activity of the cell owner.

The FSB also proposed that prior approval from the Registrar would be required for all cell arrangements entered into with affinity schemes, and that prior notification to the Registrar would be required for all other cell arrangements.

With regard to the regulatory environment pertaining to cell captive insurance, the FSB proposed that enhanced regulatory requirements would be put in place for third-party cell captive insurers with an emphasis on:

• Adequate governance and risk management (including prescribed provisions in cell agreements)
• The financial soundness of individual cells (including a minimal capital requirement for each cell)
• Market conduct, reporting requirements and ongoing monitoring of cell agreements by the Registrar to ensure compliance with all regulatory requirements

The FSB furthermore stated their intention to align the various cell captive insurer licences with one another. This was to ensure that the same standard registration conditions apply to third-party cell captive insurers that follow similar business models.

Whilst efforts to bring clarity and congruency to an element of the insurance market that is not always well known or understood can only be considered as necessary and laudable, it is important, in going forward with cell captive regulation, that the following is considered:

(a.) The sustainability of the cell market

(b.) The suitability of the structures for cell owners and insurers

(c.) The practical realities thereof

In my view, some of the issues surrounding the FSB's initial proposals that would require deeper thought going forward include restricting cell captive ownership to the binder holder only. Bona fide affinity scheme type cell owners may not necessarily want to enter the arena of providing full administrative/binder type facilities, and may rather wish to simply outsource those types of functions to specialist providers.

Given the FSB's current workload, practically having to vet each and every affinity type scheme could furthermore pose operational strain on the FSB. This may delay the implementation of these types of schemes. A more practical approach may be to have defined rules relating to the issuance of affinity scheme cell captive facilities in place, ensuring that insurers operate within these rules via the current regime of on-site inspections etc.

Given that current regulation already caters for inter alia binder and outsourcing arrangements in the form of Treating Customers Fairly (TCF), Solvency Assessment and Management (SAM), and a host of other requirements, it may not necessarily be required to have standalone separate regulation dealing with these types of issues insofar as they pertain to cell captive insurance. Cell captive insurance (being a subset of the broader insurance landscape), can adequately be regulated within the framework of the existing legislation like STIA (Short-Term Insurance Act), LTIA (Long-Term Insurance Act), TCF (Treating Customers Fairly), ILAB (Insurance Laws Amendment Bill) etc.

The industry is currently waiting for feedback from the FSB in response to what was submitted to them by industry last year. Once received, it will be interesting to see to what extent the industry's suggestions influence (and secure) the FSB's buy-in with regard to cell captive insurance.

I look forward to seeing what the future holds for a very necessary, dynamic and exciting part of the South African insurance landscape.