We put it to you, Mr Regulator

The High Court order granting the final winding up of Constantia Insurance Company Limited (CICL) was issued on 14 September 2022, marking the demise of a business that opened its doors some 70 years ago. All told, CICL survived for just over six weeks after being placed under provisional curatorship on 26 July 2022. In a media release confirming the liquidation, the South African Reserve Bank (SARB) noted that the provisional curator had been directed to consider “the best interest of the policyholders whose insurance policies were held and / or administered by and through CICL”.

The cold, hard facts left the curator few options

The curator was given strict instructions to “exercise the powers vested in him with a view to conserving the business and not, without leave of the Prudential Authority (PA), to alienate or dispose of any of the property of CICL”. More importantly, the curator was instructed to escalate matters to the PA in the event he “deemed it necessary or expedient that an application be made to the High Court for the liquidation of CICL”. The curator’s reports dated 5 and 11 August 2022 showed that the insurer was in a “markedly worse position” than previously reported: not only was the insurer’s solvency compromised, but its liabilities exceeded its assets, making the business technically insolvent. 

Constantia’s rapid fall from grace leaves much room for speculation. First and foremost, this writer sought clarity on the timing of the regulatory intervention. We asked the PA about the rationale for appointing a provisional curator given that three years had passed since the business first went on solvency watch, and in the context of CICL’s 2020 and 2021 financial statements reflecting an operational improvement. Why, we mused, would they push for a curator just as the business was showing signs of recovery, which recovery would surely assist the business in restoring its solvency? The PA confirmed that CICL had first reported a breach in regulatory solvency in June 2019 and that the PA had initiated numerous prudential engagements with the business since. 

These engagements were undertaken in terms of the Insurance Act in an effort to gradually implement a recapitalisation plan and [take] short-term measures to return the non-life insurer to financial soundness. “CICL managed to achieve certain of the short-term measures, which resulted in positive underwriting results in some classes of business and positive liquidity over the last two years,” said the PA, in a written response to our questions. They added that the short-term measures did not restore regulatory solvency, making it clear that a strategic partner was needed to inject capital into the non-life insurer. Unfortunately, the business failed to find a strategic partner within the time frame it was given despite the PA allowing numerous extensions for it to do so. 

Solvency a TCF imperative

The next question we put to the PA centred on how regulators can institute future remedial actions without accelerating the demise of the businesses they regulate. As we now know, the decision to approach the court to appoint a provisional curator had an immediate impact on CICL, with clients looking for alternative risk transfer mechanisms and partners. Had the PA considered the negative impact of the curatorship announcement on the business? “The legislation is very clear that all insurers operating in the market should be financially sound; we cannot allow an insurer to operate in a financially unsound position for an indefinite period as it places great risks on the policyholders of such an insurer,” said the PA. 

They added that under the circumstances, and with the information at their disposal at the end of July this year, “the PA, in conjunction with the Financial Sector Conduct Authority (FSCA), believed curatorship to be in the best interest of the policyholders and [preferred] for any recapitalisation discussions to be continued by the independent curator”. Furthermore, they argued, “CICL was provided with adequate opportunity, but ultimately failed to recapitalise the business, and the PA had to take the appropriate regulatory action”. Fair enough, but one cannot dispute that the court action will have spooked any potential investors while reversing the hard-won operational improvements made over the prior two years. 

The PA disagreed, saying: “We do not believe that we have hastened the demise of CICL, as our intention was for the recapitalisation of the business to happen under the guidance of the provisional curator … a curatorship, like any other form of regulatory action,  will never align [with] the motives of insurers, policyholders, brokers or underwriting managers”. Another reasonable reply, but one that hinted that the outcome, being the business’ final liquidation, was fait accompli the moment that court action was pursued. 

Stakeholders should have jumped ship long ago

The PA further noted that policyholders, brokers and underwriting managers would have had to review the possible impact of CICL’s solvency and provisional curatorship, and make decisions accordingly, either by their own assessment or following advice from the product provider. What conclusion, one wonders, could these stakeholders have reached given the PA’s apparently contradictory position leading up to the provisional curatorship application: their intent was both to “preserve the business” and “prevent the entity from underwriting any new business, thereby protecting new policyholders”. 

The PA claims that it acted in the best interest of policyholders; but we wanted to know whether their decision ended up causing more harm to policyholders by accelerating the insurer’s demise, and potentially leaving them without cover. Again, the PA was unmoved, saying that their “decision to place an entity under curatorship is not a decision that is taken lightly; it is a difficult decision that needs to weigh up the interest of all existing policyholders of the insurer and new policyholders”. Furthermore, they indicated that their “decision to stop the insurer from underwriting any new business was to conserve the current liabilities [without] adding further liabilities to an entity that was not meeting the required regulatory solvency”. 

If one concedes that CICL’s demise was inevitable, there would surely be an argument for the PA, Reserve Bank or some other government agency to create a pool of capital to assist insurers that run into issues with their solvency. We asked the PA if this was a possibility. Their response: “Currently there is no legislation that provides for such a funding option to assist struggling insurers, we will however review this option and give it consideration”. 

The final chapter

Per the SARB media release on the matter, the final chapter in CICL’s seven-decade history will read something like this: “The curator, acting in accordance with the order, made a recommendation to the PA for the urgent liquidation of CICL. Considering that CICL is factually insolvent, with no offers from investors to recapitalise the business, the PA accepted the recommendations of the curator, and both the PA and the curator lodged an urgent application on 30 August 2022 to the High Court of South Africa … On 14 September 2022, the High Court issued an order placing CICL under final liquidation”. 

The final word from the regulator was that “the urgent liquidation of CICL was in the best interest of all policyholders of CICL” regardless of that decision ‘ending’ a substantial insurance business and putting hundreds of people out of work. 

Writer’s thoughts:
Constantia Insurance Company Limited (CICL) is not the first non-life insurer to go to the wall, nor will it be the last. We will watch, with interest, to see whether the insurer’s creditors are fully compensated following its liquidation. Until then, what question would you like to put to the joint authorities re CICL’s liquidation? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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