In December 2019, the Financial Services Conduct Authority (FSCA) published final policy proposals for conduct requirements applicable to third-party cell captive insurance business.

The proposals are noted as being final as they are intended to give certainty to the industry around the policy views on conduct related requirements specific to cell captive insurance to be introduced in order to mitigate any further regulatory arbitrage. 

The final proposals are as follows: 

1. Limitation on who may be a cell owner

The FSCA proposes that a non-mandated intermediary (NMI) or an associate of an NMI, that is a cell owner, must be restricted to rendering services as intermediary (including advice) only in respect of policies underwritten in the cell structure of that cell owner. The NMI cell owner may therefore not provide services or advice in relation to policies outside of the cell structure/s it owns. 

2. NMI cell owner must be a registered financial services provider (FSP) under the Financial Advisory and Intermediary Services Act (Act No. 37 of 2002) (FAIS Act) 

Comments from the public on the draft Conduct Standard included a proposal for more direct oversight by the FSCA over cell owners who are also NMIs. This can be done by strengthening requirements on cell owners who are NMIs by not allowing NMI cell owners to be representatives (as defined in the FAIS Act) on the insurer’s FSP license, and instead requiring the NMI cell owner to have its own FSP licence. This would mean that the NMI cell owner must meet the full FAIS fit and proper requirements for FSPs, such as having a Key Individual, Compliance Officer, etc. 

3. Strengthening governance and oversight requirements 

It is proposed that further stringent governance and oversight requirements be imposed on cell captive insurers to mitigate the specific risks exacerbated by the nature and business models of cell captive insurers which have been identified as particularly prominent in third-party cell captive insurance model.

4. Specific requirements related to product design 

The FSCA confirms that approval and sign off required in terms of Policyholder Protection Rule (PPR) 2 (which refers to sign off on product design, confirmation of distribution methods and disclosure documents) may not be delegated to cell owners or third parties, and senior management of the third party cell captive insurer remains accountable for all new products and product enhancements, including excess structures set in non-life insurance products. This will be clarified in the Conduct Standard, and possibly further enhanced through amendments to the PPRs. 

5. Additional disclosure requirements 

The FSCA proposes, in addition to PPR Rule 11, that further specific disclosure requirements will be imposed on NMI cell owners, or associates of such NMIs to confirm to policyholders the exact nature of the relationship and remuneration arrangements (including profit share and dividends) between the cell owner and the insurer. These disclosures must be made to the policyholder prior to the inception of any policy and if and when any of these arrangements change. 

6. Specific reporting requirements 

The first draft of the Conduct Standard published for comment in 2018 contained certain direct reporting requirements. As an alternative to the initial positioning in the draft Conduct Standard, it is proposed that a general reporting obligation should be placed on cell captive insurers to report the information as determined by the FSCA, in the medium and form, by the date, or within the period, as determined by the FSCA. The template for the additional reporting by cell captive insurers will be determined by notice on the FSCA’s website and will allow flexibility around the details required in the cell captive specific reporting. 

7. Exemption powers 

The proposal in the initial draft Conduct Standard was to allow for an exemption process from the limitations in the draft Conduct Standard to facilitate an inclusive insurance market and to promote the transformation of the insurance sector. This was to address concerns that limiting NMI cell ownership only to cell structures where there is a so-called affinity relationship (which was broadly associated with brand affinity), as was the proposal in the initial draft Conduct Standard, would stifle the incubation process, as new entrants into the market would not necessarily have an established affinity relationship or brand. 

8. Transitional arrangements 

The enhanced conduct requirements relating to cell captive insurance will potentially apply to both new and existing cell structures. If they were to only apply to new cell structures this would perpetuate the unlevel playing fields and support the regulatory arbitrage evident from the research done by the FSCA. Consideration is being given to appropriate transitional arrangements in order to ensure that the alignment of existing cell structures owned by NMIs to the new requirements be done in a practical manner and ensuring that it does not have an inappropriate negative impact on the industry. 

The updated draft Conduct Standard, along with the relevant supporting documents will be published for public comment in terms of the consultation requirements in the Financial Sector Regulation Act (Act No. 9 of 2017) (FSRA), and interested parties will have an opportunity to raise comments and views on the proposal through that proposal.