A warm welcome from the IIG Education Portfolio Head, Tebogo Raphatelo who was the MC for the morning and who introduced the topic as well as the speaker, Danny Joffee.
Danny is an admitted attorney and has a Masters in Law in Insurance and Company Law. He has been at the Hollard Company for 18yrs, heading up legal for Hollard Insure. He has chaired the SAIA Conduct Committee for 3yrs and sits on the SAIOA cell captive forum. Danny sits on the board of a large administration company of Hollard and an African based reinsurer.
Danny thanked the IIG and highlighted the work that is done in education as well as the role the IIG plays in fulfilling the needs around CPD.
Danny was grateful for the opportunity to discuss one of the big topical areas within our regulation which is cell captives. He is also fondly remembered being able to interact with audiences prior to Covid, although webinars do allow for a wider reach.
Danny kicked off by noting that when entering into a cell captive deal or relationship, it’s crucial to get it right up front. The topic of “where we are going to end up…” relates to the fact that we’re on a journey and we have not yet reached the destination. Even seasoned compliance and regulatory lawyers, it’s an area that they suffer with due to the ‘mystique’ it has around it.
What are Cell Captives?
Cell captives were in operation for some time and were regulated originally in terms of the Short-Term Insurance Act (STIA). A cell captive simply is a ring-fenced insurance scheme which tracks the profit and loss of the scheme taking into account the capital requirements, premium income, reinsurance, claims and the costs of managing the scheme. It allows the owner of the cell to earn profits or reimburse losses as if it was running its own insurance license by means of special class shares. It also allows the insurer to remain financially sound even if one cell has financial issues which renders it insolvent. One cell does not take down the whole license. Insurers are still responsible for claims and compliance with all laws and regulations.
A 3rd party cell allows the owner to realise the profitability of the scheme for example a car dealership owning a cell can making servicing its customer first priority as this can also be a value-add to the consumer as a one-stop-shop whereby they purchase a vehicle as well as the insurance that goes with it.
The Insurance Act Definition:
- “Cell Structure” means an arrangement under which a person (cell owner):
- Holds an equity participation in a specific class or type of shares of an insurer where it is administered and accounted for separately from other classes or types of shares.
- Is entitled to a share of the profits and liable for a share of the losses as a result.
The 2018 joint paper and recommendations followed the 2012 paper were as follows:
- Only a cell captive insurer can conduct business through cell structures.
- A cell captive insurer cannot insure 1st party and 3rd party risks in the same cell structure.
- Clarity around the definition of ‘similar arrangements’ and how they will be treated.
- Regulation around the financial soundness of 3rd party cells to have a minimum of R1 million as capital.
Our country has many cell-captives that operate so the intention of the regulator is not to come in with a broad brush and wipe the slate clean but to allow for various types of arrangements. Big issues that the regulator is addressing and implementing is that only cell captive insurers can conduct this business and does not get mixed with the success or failure of other business.
Insurers may only be cell owners to the extent they are insuring their own operational risks. A cell may not be used to reinsure 3rd party risks with the Insurer being the cell owner.
From a prudential point of view, no enforceable standards have been implemented. The main issue is that insurers must provide proper risk mitigation measures and proper financial due diligence must take place.
In order to mitigate conflict of interest, NMIs must be a tied agent for all products they perform financial services for, but their associates do not have to. Insurers need to do a comprehensive due diligence to confirm no conflict of interest and customer outcomes are not compromised as the onus is on the Insurer to guarantee and police. A comprehensive disclosure of dividends structure to policyholders is also required as well as prior notification to the FSCA.
Danny added that the regulator expects strong policing from the insurer and lightheartedly quoted the Spiderman mantra: “with great power comes great responsibility… “
The Way Forward – The PA Governance Standard
Given what was stated in the 2018 paper, the industry desperately needs certainty for the prudential matters now that the FSCA has made their stance official on binder holders owning cells. There is a need for clarity on the capital requirements and who may provide the capital. There is also a need for clarity on dedicated cell captive licenses. Can insurers own shares in the cell specifically where the scheme is cancelled or where the cell owner cannot afford the capital any longer and then what insurance licence can the business remain on. The issue of similar arrangements is complex and widespread and therefore what solutions can be given. What is the timeline of the implementation of this regulation as the cell captive area is growing rapidly in the non-life market.
Danny emphasized that teamwork is essential and cell captives must be in a position to administer the scheme’s cell. There must be responsibility for ongoing management of the scheme, but this does not mean complete autonomy. Other binder arrangements are still applicable.
Steps to Take Now
- Ensure your licensing conditions allow you to operate cells and the conditions are clear for the deal you want to enter into.
- Make sure you have done a comprehensive financial due diligence on the potential cell owner.
- If the owner of a cell is an NMI, ensure you have complied fully with the governance standard.
- There must be business continuity.
Danny closed off his session by thanking the MC and IIG. Tebogo in turn thanked him for his time and knowledge as well as Hollard Insure for sponsoring this webinar.
A brief Q&A was then accommodated.
Our MC, Tebogo, then took the opportunity to announce that the following IIG Insights session will be an IN-PERSON event which is the first time in 3yrs since the pandemic. We are very excited, and hope all interested get their bookings in as seats are limited!!
Article written by: Asiya Swaleh