South Africa: International Reinsurance Newsletter - 4th Edition: South Africa Update

On 17 April, the National Treasury and the Financial Services Board ("FSB") published for comment the draft Insurance Laws Bill, 2015 ("the Bill"). The Bill, once enacted, will replace certain sections of the Long-term Insurance Act 52 of 1998 and the Short-term Insurance Act 53 of 1998 relating to prudential supervision, with effect from 1 January 2016. We consider briefly the effects that the Bill will have on reinsurance activities when enacted.

Following the 2008 Global Financial Crisis, South Africa recognised the need to have higher prudential and market conduct standards on banks and insurers. As in Europe, with the adoption of Solvency II, the FSB have been developing an equivalent prudential framework for insurers called the Solvency Assessment and Management Framework ("SAM"). The Bill contains the enabling legislation to allow for the implementation of the SAM regime. SAM forms part of South Africa's transition to the Twin Peaks reforms.

SAM is a risk-based supervisory framework which is aimed at contributing to financial stability by aligning an insurer's regulatory capital requirements with the underlying risks of the insurer. An insurer will be required to hold enough capital to meet the solvency capital requirement. An insurer will receive a "credit" for its reinsurance recoverable. The Bill empowers the FSB to prescribe in respect of an insurer's reinsurance arrangements, the requirements for the recognition and treatment of reinsurance and the limitations on the extent of the reinsurance business that an insurer may place with a reinsurer.

With the Bill implementing the SAM regime, many insurers will be looking to reinsurers to revise reinsurance programmes so as to maximise solvency relief within the SAM framework. We can expect to see changes in both reinsurance and retrocession arrangements of insurers and reinsurers operating in South Africa.

Coupled with the implementation of SAM, the Bill also facilitates a new reinsurance regulatory framework, as was discussed in our February 2015 International Newsletter, that will allow for a wider recognition of reinsurance, including through the use of branches of foreign reinsurers. The Bill envisages a foreign reinsurer conducting reinsurance business in South Africa. In order for a foreign reinsurer to conduct business in South Africa, the foreign insurer will have to:

  • Establish a representative office in South Africa
  • Appoint a representative and deputy representative, who must be natural persons permanently resident in South Africa
  • Establish a trust in South Africa in accordance with the provisions of the Trust Property Control Act and will have to provide security in the form of assets to such trust;
  • Be licensed as a foreign insurer in accordance with the prescribed requirements under the Bill
  • Demonstrate to the FSB that the laws of the country in which the foreign reinsurer is authorised and supervised establish a regulatory framework equivalent to that established under the Bill

It will be the responsibility of the representative to ensure that the foreign reinsurer complies with all South African legislation and to notify the FSB of any non-compliance. The FSB will be empowered to prescribe any further requirements relating to the roles and functions of the representative.

It is envisaged that a foreign reinsurer will be required to maintain its business in a financially sound condition, by providing security, in the form of assets to the trust. The FSB will be empowered to prescribe the requirements for the form of the security and the valuation of such assets.

The Bill also deals with some practical considerations regarding a foreign reinsurer. Claims against a branch of a foreign reinsurer must be recognised by a South African Court and the representative appointed may be cited as a nominal defendant. The representative may also institute any action in South Africa as a nominal plaintiff on behalf of the foreign reinsurer. The trust that will have to be established will have to meet any obligation under the reinsurance policy concerned if the foreign reinsurer fails to meet such obligation. If the FSB imposes a penalty on the foreign reinsurer for any non-compliance with local legislation, the trust will be responsible for the payment of such penalty if the foreign reinsurer fails to pay the penalty.

With the publication of the Bill, it shows that the regulators have recognised that the reinsurance market in South Africa plays a crucial role in the insurance sector. As in most other countries, reinsurance contributes to the stability of insurance markets and assists in improving the risk profile and financial soundness of insurers. We often receive questions from foreign reinsurers wishing to write business is South Africa. Unfortunately, our advice often disappoints them as the current position is restrictive and unnecessarily protective of local insurers. With the abandoning of the current position and the adoption of the SAM regime, the South African reinsurance market is "open for business".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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