Amongst a raft of legislative and regulatory changes impacting
the financial services industry in South Africa, the Financial
Services Board ("FSB"), the authority that regulates,
inter alia, the activities of insurers and reinsurers in South
Africa, has been interacting with the industry in respect of
proposals to alter the regulatory framework under which reinsurance
business will be carried out in South Africa in future.
Currently, in order to carry out reinsurance business in South
Africa, a person or entity must be registered to do so. The local
insurance laws prohibit any person from carrying on insurance or
reinsurance business in South Africa unless that person is licensed
to do so. The FSB cannot issue a license unless the applicant is a
public company incorporated in South Africa. There are also ongoing
requirements for a registered insurer or reinsurer, in order to
maintain its license, to ensure that its business is in a
financially sound condition and that it possesses sufficient assets
so as to ensure that its liabilities can be met at any given day.
The only exception to the above requirements is Lloyds's
underwriters who do not have to obtain a license. This is part of a
dispensation granted to Lloyds in terms of the Short-term Insurance
In consequence of the above, foreign reinsurers participate in
the local market by either establishing a subsidiary in South
Africa or by way of the provision of cross-border reinsurance,
provided that in the latter case the activities of the foreign
reinsurer do not amount to "carrying on short-term insurance
business in the Republic" of South Africa requiring
registration and licensing per the above.
During April 2015, the FSB published a discussion document
setting out its intended, and extensive, changes to the framework
for reinsurance in South Africa. Consultations with and submissions
by the industry have led to subsequent changes in the FSB's
intended framework, and these were canvassed by the FSB in their
recently held annual regulatory review workshop . While the FSB has
yet to propose draft regulations for public comment encapsulating
the amendments to the reinsurance framework, it would appear that
the proposals are crystallising.
The actual impact of the FSB's intended proposals remains
uncertain at this stage. In arriving at its latest proposals, the
FSB has engaged with the industry by way of position papers and the
aforementioned discussion document.
The current proposals set out by the FSB are:
allowing foreign reinsurers to
operate in South Africa through a branch, provided that the foreign
reinsurer is authorised and supervised in a country which has a
regulatory framework which is equivalent to the South African
allowing for an adjustment of the
credit rating of locally registered reinsurers, for purposes of the
local direct insurer's solvency calculations, to avoid the
impact of the sovereign cap on the locally registered
the introduction of a prohibition on
fronting, effected by a cap on the reinsurance which can be
effected by insurers, likely by the inclusion of a prohibition on
an insurer directly or indirectly reinsuring more than 75% of the
premiums to either a foreign reinsurer on a cross-border basis, a
branch of a foreign reinsurer, a professional reinsurer, or another
direct insurer in South Africa. In the case of licensed direct
insurers and professional reinsurers, the limitation on the amount
that is to be reinsured or retroceded is increased to 85% where the
counterparty is an entity within the same group; and
foreign reinsurers will be prohibited
from soliciting business in South Africa on a cross-border
The above proposals reflect a substantial deviation by the FSB
from its previous proposals, which included assumed downward credit
rating adjustments in respect of foreign reinsurance supplied on a
cross-border basis, branches of foreign reinsurers and Lloyd's,
and a prohibition on reinsurers conducting composite business, both
proposals which appear to have been abandoned.
While the above proposals are still subject to change, and will
likely still experience revisions, the proposals are likely to have
contemplated the majority of conceptual commentary emanating from
the industry and can reasonably be relied on as informing the draft
regulations to come. The FSB abandoning its mooted assumed credit
ratings downgrade in respect of foreign reinsurers, and provision
being made for foreign reinsurers to operate by way of branches,
will provide an opportunity for foreign reinsurers to operate in
the local market, and from South Africa as a hub for reinsurance
business in the African markets for which high growth is
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branch of insurance in the United Arab Emirates (UAE) market.
Accordingly, issues such as allocation of costs have not yet been
considered by UAE or Dubai International Financial Centre (DIFC)
It is a fundamental principle of insurance law that the utmost good faith must be observed by each party. This rule was stated clearly by Lord Mansfield since 1766, when he said1that: "Insurance is a contract upon speculation..."
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The Short-term Insurance Act is exempt from the provisions of
the CPA for a period of 18 months until 1 October 2012. Those
insurance sector lows must be aligned with the consumer protection
measures in the CPA or the provisions of the CPA will apply to
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