5 January 2016EMEA analysis

Rainbow nation takes European regulation route

The current South African financial regulatory system review will result in the ‘Twin Peaks’ model of financial sector supervision, which entails a dual approach. The prudential regulator will focus on enhancing the financial stability of financial services providers, and the market conduct regulator will aim to protect the customers they cater for.

The proposed legislation is expected to be promulgated in due course, meaning that the segregation of supervision might be effective as soon as April or May 2016.

Some of South Africa’s impending and pending regulation will have implications for captives.

Solvency assessment and management

In 2009 the Financial Services Board (FSB), in collaboration with the South African insurance industry, began instituting the solvency assessment and management (SAM) regime. Based and modelled on the European Solvency II framework and the Insurance Core Principles established by the International Association of Insurance Supervisors, SAM aims to balance the industry by enshrining and promoting financial stability and regulating the manner in which insurers manage, identify and assess risk.


SAM is founded on three pillars: the first focuses on insurers capital modelling and the calculation of risk, while the second highlights the governance and management structures that must be instituted by firms to ensure they are compliant with the stipulations of the regulation. The third pillar is centred on the effective and coherent reporting and disclosure of business activities and associated risk. The three pillars are being implemented concurrently but are at different levels of refinement.

SAM will ultimately affect all insurers, including cell captive insurers, but will not have a direct impact on individual cells. The cell captive review (see below) proposes that each third-party cell must hold a minimum capital of R 1 million ($72,000). Captives established by large companies to self-insure their own risks, however, do fall under the requirements of SAM.

Review of third-party cell captive insurance

In South Africa, seven long-term and 11 short-term insurers have been registered to conduct cell captive insurance business. Both first and third-party data collected by the FSB indicates that at least 130 active short-term and 50 long-term insurance third-party cell arrangements currently exist. The implications of these types of transactions can be material.

In 2013, the FSB circulated its discussion paper Review of Third-Party Cell Captive Insurance and Similar Arrangements. Among others, the key proposals were:

  • Cell captive insurance will need to be conducted under a dedicated insurance licence and may not be combined with other forms of insurance business.
  • Third-party cell captive insurance arrangements may only be entered into with a binder holder. The binder holder must either be an underwriting manager or, alternatively, a non-mandated intermediary in terms of an approved affinity scheme.
  • Enhanced regulatory requirements will be put in place for third-party cell captive insurers with respect to adequate governance and risk management, the financial soundness of individual cells as well as the cell captive insurer, the market conduct and reporting to the regulator on each cell arrangement.

Reinsurance regulatory review

In April, the FSB circulated its Reinsurance Regulatory Review discussion paper for comments. If its proposals are implemented, cell captive insurers will be prohibited from acting as reinsurers and it could possibly be made less attractive for large companies to set up their own captives (if the intention is to self-insure 100 percent of the company’s risks).

Pure fronting will be avoided by placing limits on the percentage of businesses that may be ceded to a single counterparty; the recommendation by the FSB stands at 75 percent. In addition, reinsurance with a foreign reinsurer will only be accounted for on a statutory basis, if the regulatory framework is approved.

There is no doubt that these recent regulatory developments are indicative of a robust and vibrant policy environment. A common thread throughout current regulatory frameworks is the enhanced protection of the policyholder—a philosophy that should be ingrained in all insurers’ business strategies.

In order to adapt, insurers need to prioritise ongoing regulatory training and information sessions with brokers and customers to ensure in-depth understanding of current developments and compliance across all areas of business. Global insurers will have the advantage of drawing from markets that have already implemented similar frameworks.

Regulation is ultimately about balance—the industry and regulators will continue to seek a balance between market needs, protection of customers and insurers’ goals, growth and profitability plans.

Christoph Leuzinger is executive head of Global Corporate with Zurich South Africa. He can be contacted at: christoph.leuzinger@zurich.co.za