26 February 2013

Ten things to know - insurance regulation in South Africa

This article discusses ten things to know in relation to foreign investment and insurance regulation in South Africa.
South Africa Insurance
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1 The regulator

Short-term insurance is regulated by the Financial Services Board (registrar of insurance) (FSB) under the Short-term Insurance Act, 1998 (STIA) for indemnity insurance. Long-term insurance is regulated through the Long-term Insurance Act, 1998 (LTIA) for life and investment products. Any person carrying on insurance business must be licensed to do so. Financial advisers and brokers must be authorised to provide financial advisory and intermediary services.

2 Subsidiary/branch

An insurer must be a registered South African public company or a Lloyd's underwriter. Branches of foreign insurers are not permitted. An insurer/reinsurer may be a wholly-owned subsidiary of a foreign company. Intermediaries may either incorporate a company in South Africa or operate through a branch, but must have a financial services provider licence.

3 FDI restrictions

Foreign ownership of insurers and intermediaries is not restricted. The FSB welcomes foreign investment in the Republic.

4 Control approvals

Any sale or transfer of 25% of the shares in a local insurer or reinsurer or its holding entity requires regulatory approval. The FSB evaluates whether the transaction is in the best interests of the public.

Directors must be approved as fit and proper. Foreign directors are allowed. The head office and public officer must be South African residents.

Insurance/reinsurance may be placed with foreign insurers to the extent the regulator accepts that the South African market has insufficient capacity or no will to cover the risks.

5 Minimum capital

The current minimum capital requirements are ZAR10 million for a long-term insurer/reinsurer and ZAR5 million for short-term insurer/reinsurer. But see 6 below.

The capital requirements may increase depending on the five year projections of the insurer.

Intermediaries require capital that renders the company solvent and liquid.

6 Risk based capital

Insurers are required to have assets in South Africa which in the aggregate value are not less than the aggregate value on that day of its liabilities plus the regulated capital adequacy requirements.

The Solvency Assessment and Management Project (SAM) will from January 2014 introduce a risk-based solvency regime for insurers based on Solvency II.

7 Group supervision

Save for the requirement in 4.1 above, there is no group supervision but SAM encompasses supervision of solvency at insurance group level. The FSB has been developing an approach to the supervision of groups by requiring more regular and extensive reporting.

8 Policyholder protection

South Africa has progressive policyholder protection provisions. The LTIA, STIA and the Financial Advisory and Intermediary Services Act, 2002 (FAIS Act) protect policyholder rights. The FAIS Act requires disclosure of intermediary remuneration and mitigates conflicts of interests.

Policyholder Protection Rules are in place. Treating Customers Fairly policies are being developed by the FSB based on the UK version.

The insurance industry also sets its own standards and has established a long-term and a short-term insurance ombud to settle personal claims equitably.

9 Portfolio transfers

Under the STIA and LTIA insurers must obtain the consent or mandate from policyholders for portfolio transfers.

In the case of long-term insurance policies, the High Court must approve the transfer of the business from one insurer to another. Short-term insurance business transfers require approval of the FSB.

10 Outsourcing

Outsourcing of insurance functions that insurers would otherwise need to perform themselves is only permitted in terms of an outsource policy and a formal agreement with the service provider.

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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