121
2013
2013
Binder Regulations
2
Topics 1. Principles informing the Binder Regulations
2. Binder functions
3. Remuneration
4. Information Letter 8/2012
5. Draft Information Letter 3/2013
6. FAQ’s
3
1. Principles informing Binder Regulations
• Accountability of insurer
• Responsible outsourcing
• Policyholder protection
• Avoid conflicts of interest
4
2. Binder functions On behalf of the insurer
• Entering into, varying or renewing of policies
• Determining policy wording
• Determining premiums
• Determining the value of policy benefits
• Settling claims
5
Binder functions (cont)
• Functions that a binder holder performs as agent of the insurer
• As if the binder holder were the insurer when interacting with policy holders
• Actual entering into, varying or renewing of a policy
• Insurer only knows after the fact
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3. Remuneration
Principle
• a policy holder should not pay twice for the provision of the same or similar service
• NB when an intermediary performs binder functions and intermediary services
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Remuneration (cont)
• Must be reasonable commensurate with the actual costs associated with rendering the services under the binder agreement
• Reasonable rate of return
• Binder fee may be expressed as a % of gross premium or fixed Rand amount
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Remuneration (cont) • UM
Profit share and/or binder holder fee
Outsourcing fee
• NMI
Binder holder fee
Outsourcing fee
Commission
Section 8(5) fee
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4. Information Letter 8/2012
• Published 4 December 2012
• Guidance
Activities constituting binder functions
Remuneration
• Supervisory approach
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Info Letter 8/2012 (cont)
Monitoring
Reporting template
Reasonableness of remuneration
On-site visits
Regulatory and/or enforcement action
1 January 2013
Diligent efforts
90 Days alignment period
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Info Letter 8/2012 (cont)
System changes
Policyholder information
Detailed actions plans
1 January 2014
ACORD standard encouraged
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5. Draft Information Letter 3/2013
• Still in draft
• Published 30 April 2013
• Public comment 31 May 2013
• Guidance:
Activities constituting binder functions
Remuneration
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Draft Info Letter 3/2012 (cont)
Activities constituting binder functions
Incidental activities
Adequately render a binder function
No additional fee paid to binder holders
Binder holder may outsource to 3rd party
(if binder agreement allows this)
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Draft Info Letter 3/2012 (cont)
Remuneration
Activity-based fee model
Use suggested format or clear what is paid for each binder function
Reasonable commensurate
Binder fees to UM’s may vary more due
to specialisation
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Replacement Policies
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History:
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• Cancellation of risk policy – replacement - commission driven
• Implementation of LOA Standard – stop churning
• “Agreement between members of the Life Offices’ Association to restrict commission on replacements.”
• “Early agreement contravened certain free trade conditions championed by government –
• decision made that advisor should earn full commission on replacement policies subject to good advice being given.”
CODE OF REPLACEMENT
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“Subsequently:LOA drafted a Code of
Replacement”
“Purpose: To govern insurer and intermediary
behaviour when replacing policies”
• “Code reconstituted by Asisa from 1 January 2012”
• “Member life offices of ASISA have agreed to“ASISA STANDARD ON REPLACEMENT”- applicable to all business effected in RSA”
• “Purpose: To provide Rules to govern instances where one member life office (the replacing insurer) has or intends to replace a policy or policies of another member life office (the replaced insurer).”
• In implementation of the “Standard” outcomes must be in line with the requirements of Treating Customers Fairly ( TCF)
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The provisions of this Standard applies in addition to:
20
The provision of this standard
applies in addition to
Part 3 of the
Regulations of the Long Term Insurance Act
Any obligation imposed by the FAIS Act
Any other legislation
21
If conflict arises
22
Then legislation prevails
• “August 2012 the Standard on Replacement was tweaked to introduce a more comprehensive Replacement Policy Advice Record (RPAR) – applicable to all stakeholders.”
• “From 1 January 2013: Both financial Advisors and direct marketers will complete and submit the same questionnaire - on behalf of the client to the insurer”
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WHAT DOES THE ASISA STANDARD
REQUIRES ADVISORS TO DO ?
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Definition of “Replacement Policy”
“A new policy/ies, or variation of an existing policy/ies ( shall include but not be limited to a premium increase due to any other reason except the annual premium increase), where the policyholder or main life assured was also the policyholder or main life assured in respect of another policy/ies, and where a termination event occurs in respect of the latter policy/ies within a period of 4 months before or after the new policy/ies or variation is effected, and where the said termination event occurs in anticipation of, or as a consequence of effecting the new policy/ies or variation”
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• The 4 month period must be calculated with reference to the effective date of the replacing policy and the termination date of the replaced policy.
• Replacement - adherence to FAIS Code- counselling
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• On completion of the proposal in respect of any policy or variation of an existing policy , the representative must:
• “- ascertain whether the proposal is in respect of a replacement policy”
• “Irrespective of the client’s answer , explain to the client:
• - the meaning of “replacement”
• - that replacements are potentially prejudicial
• - the levying/deduction of a termination charge
• - where a replacement is considered, the client has a legal right to comprehensive information regarding the consequences of replacement
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• “The Standard does not limit the rights of the policyholders,
RATHER:
• It affirms the legal requirement that the replacement is done on a fully informed decision”
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WHAT IS THE RESPONSIBILITY OF THE MEMBER LIFE OFFICES?
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Responsibility of the member life offices:
• To ensure:
• - All representatives are properly trained - they understand the potential and real disadvantage of inappropriate replacements
• - They follow all practices that prevent inappropriate replacements – giving effect to the Standard
• - They make compliance with this Standard a term of their contractual
relationship with all representatives – non compliance equates to a breach of contract / misconduct
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• “Onus is on the advisor to ensure whether the client is replacing an existing policy.”
• “To “remind” advisors of this requirement , the insurers have included a prescribed replacement questionnaire on their new business application form."
• “The ASISA Standard on Replacement requires the advisor to ask the client whether the new policy replaces all or part of their existing policy”
• “If the answer is yes then the RPAR needs to be completed.”
• “Must be submitted together with the proposal form to the replacing insurer”
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• Replacing insurer must within 5 working days of receipt of the proposal , transmit the RPAR to the replaced insurer by email
• Member life offices may not deviate from the prescribed format of the RPAR unless express consent has been obtained from ASISA
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RPAR:
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Whether the replaced
policy is in the investment or
risk space
Whether the new policy is
in the investment or
risk space
Policyholder and advisor
details
• Replacing insurer may not directly or indirectly provide the representative with any commission, fee, incentive, remuneration for the replacement policy until all requirements have been satisfied
• Upon replacement: the replaced insurer may take whatever action it deems appropriate to advise the client of the clients rights in terms of this Standard and FAIS or to attempt to conserve the replaced policy
• The replaced insurer is required to take action in good faith and with due regard to the interests of policyholders, representatives and the industry as a whole
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WHAT ARE THE DANGERS OF REPLACEMENTS?
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Dangers of replacements
36
Termination fees could become
applicable
Impact of age and
health on the
premium payable
New exclusions
and restrictions
Charges and fees
twice
New waiting periods
Lose tax advantages
WHAT IS NON - COMPLIANCE?
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Non - compliance includes:
If there is a replacement but no RPAR is included
in the proposal submitted to the replacing insurer
If there is a replacement but it has not been
indicated
If the replaced insurer when attempting to conserve the policy
obtains information that indicates that there was non - compliance with
the Standard
If the replacing insurer has failed to transmit the
RPAR to the replaced insurer within the
prescribed period thus denying the replaced insurer a reasonable
opportunity of conserving its business
If the replaced insurer has a matter to be
investigated and the replacing insurer has
failed to investigate or provide the outcome of the investigation within
the 5 day period
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WHAT IS THE PURPOSE OF THE TRIBUNAL?
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TRIBUNAL
• If the replacing insurer finds evidence of non - compliance , it must refer the matter to the Tribunal
• The replacing insurer has 4 weeks to refer the matter from the replaced insurer to the Tribunal, failure to refer, results in the replaced insurer being given a further 2 weeks to refer the matter to the Tribunal
• If the matter is not referred to ASISA within this 6 week period, it will not be accepted by ASISA for referral to the Tribunal, with a proviso that a longer period (not exceeding 12 months) will be condoned where the replacement is only discovered after 6 week period
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Penalties for non - compliance:
For the representative:- - it may issue a warning
It may determine that no commission, fee, incentive or
remuneration be paid directly or indirectly to the
representative by the replacing insurer in respect of the
replacement policy and that any consideration paid must be reversed and repaid by the provider, representative or
agent to the replacing insurer
It may grant the client a further 30 days cooling off
period in which to cancel the policy in accordance with PPR
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Reasonable man test: • “Excuse: “client did not advise me” would not suffice”
• “The ASISA tribunal panel member will make their decision in terms of whether the advisor could have foreseen - based on the facts at his or her disposal – that there would have been a replacement”
• “The advisor should have a reasonable idea of the client’s financial position based on the financial needs analysis.”
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By either of the insurers:
- The tribunal shall advise ASISA of the breach of
the Standard by the insurer who shall record the breach in a register
for this purpose
- In coming to a decision, the Tribunal must take
into account any information regarding
previous breaches of this Standard by the
representative concerned
THE INSURER CAN TAKE ADDITIONAL
CONTRACTUAL OR DISCIPLINARY ACTION WHICH IT MAY DEEM
NECESSARY
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REALITY............
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• “If correct procedures are followed, then there is no need for the regulator to intervene”
• “By adhering to the ASISA Standard, the advisors can ensure that the replacement was handled on an informed basis.”
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Replacement Policies
• Huge concern: Churning – Twisting or churning is the process of using the cash value of one
policy to purchase another policy with a larger benefit.
– Churning can also refer to a practice where the broker encourages the policy holder to cash in policies with a cash value and persuading them to pay for new cover with the proceeds.
– Churning thus refers to the practice where a FSP or representatives of a FSP convince a customer (new or existing) to replace an existing policy for another policy or product which has similar features and benefits.
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Why does this happen?
• The reason why this is done is to enable the FSP/ representative to:
• meet sales targets that are set by either the FSP or product supplier or both, and
• to earn commission.
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Some possible effects
• While the policyholder may acquire a policy with a larger death benefit, replacements often uses up the cash value that has built up in the original policy over the years. In some instances, the policyholder could be starting over regarding the accumulation of cash.
• What it means for the policy holder is that they are often exposed to risks that were not prevalent when the original policies were taken out. If a health condition develops and there has been no mention on the application because it seemed insignificant the insurer could reject any subsequent claim.
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What should clients do?
• While the replacement of a life insurance policy may, in many cases, be appropriate the purchaser should be encouraged to look carefully at the policy.
• When replacing a policy the client will be expected to sign documentation confirming the policy replacement and that the adviser has explained certain matters relating to the change.
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When it may be beneficial to replace an old policy:
• If there are added enhancements to an existing policy and the insurer is the same.
• Be sure that the client will not be disadvantaged by changing to the new cover.
• The broker should explain what the client may be missing out on by changing.
• If clients are increasing the cover, for example, and the insurer will cover the existing amount under the same conditions as the old cover only attaching any loadings or exclusions to the new sum assured.
• Policies do change over time and are often improved with added benefits
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Make clients aware:
• Changes in their health or occupation. A new policy may end up with exclusions and loadings (an increase in premium due to perceived risk).
• Suicide clauses will start again. There is usually a period where suicide is not covered.
• As clients get older premiums may end up costing more as the premiums may be calculated differently to when they were younger and took out the original policy.
• Certain benefits that were on the old policy may not be on the new one.
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2nd Hand Policies
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Why Second Hand Policies?
• Endowment policies: Sec 54 restrictive period
• Buy & sell policies
• Employer owned policies
• Preferred compensation
Role of Intermediary
• Licensed for Product
• Fit and Proper Requirements
• Code of Conduct
Role of Intermediary: Code of Conduct
Information about financial service (Par 7)
• Reasonable & appropriate general explanation of nature & material terms of relevant contract/transaction to a client, & full disclosure of information reasonably be expected to enable client to make informed decision
• Material contractual information
Role of Intermediary: Code of Conduct
Full and appropriate information:
(i) Name, class or type of financial product concerned;
(ii) nature & extent of benefits to provided, including details of manner in which benefits derived/calculated & manner in which they will accrue/be paid;
Role of Intermediary: Code of Conduct
(iii) where financial product is positioned as investment:
(aa) details of manner in which value of investment is determined, including details of underlying assets /other financial instruments;
(bb) disclosure of charges /fees levied against product,; and
(cc) on request, information concerning past performance & warning that past performances are not necessarily indicative of future performances;
Role of Intermediary: Code of Conduct
(iv) nature & extent of monetary obligations by client in favour of product supplier, provider etc
(v) details of special terms or conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions/circumstances in which benefits will not be provided;
(vi) any guarantees;
(vii) to what extent the product is realisable/ funds accessible;
Role of Intermediary: Code of Conduct
(x) restrictions /penalties for early termination/ withdrawal;
(xi) material tax considerations;
(xii) whether cooling off rights & procedures;
(xiii) investment/other risks of product; and
(xiv) insurance product where provision made for increase of premiums, amount of increased premium for first five years & thereafter on five year basis but not exceeding twenty years;
Role of Intermediary: Code of Conduct
Suitability of Advice (Par 8)
• Provider must, prior to providing advice:
Obtain appropriate & available information regarding client’s financial situation, financial product experience & objectives
Conduct an analysis, for purposes of advice
Identify the financial product(s) appropriate to the client’s risk profile and financial needs,
Role of Intermediary: Code of Conduct
where financial product to replace existing financial product held fully disclose to client actual and potential financial implications, costs & consequences of replacement, as discussed per Code of Conduct
Role of Intermediary: Code of Conduct
• Ensure client understands advice & in a position to make informed decision.
• Where replacing an long term insurance product with any other financial product notify issuer of existing long-term insurance product of such advice.
Role of Intermediary: Code of Conduct
• Where a client (a) has not provided all information, as part of the
analysis, or where provider has been unable to do analysis because of circumstances surrounding the case, there was not reasonably sufficient time to do so, provider to inform client thereof and ensure that client understands:
(i) full analysis could not be undertaken; (ii) may be limitations on appropriateness of advice
provided; and (iii) client to take care to consider whether advice
appropriate considering client’s objectives, financial situation and needs;
Role of Intermediary: Code of Conduct
(b) elects to conclude transaction differing from recommended by provider, or elects not to follow advice furnished, or elects to receive more limited information /advice than provider is able to provide, provider must alert client as soon as possible of the clear existence of any risk to client & must advise client to take particular care to consider whether any product selected is appropriate to client’s needs, objectives and circumstances.
Role of Intermediary: Code of Conduct
Record of Advice
• Record of advice: basis on which advice was given:
(a) brief summary of information and material on which advice based;
(b) financial products considered; and
(c) the financial product(s) recommended & why product(s) selected to satisfy client’s needs and objectives
• Record of advice maintained where transaction/contract in respect of financial product concluded by or on behalf of the client as a result of the advice furnished.
• Provider provide client with copy of the record .
Liquidity of Product
• Sec 54 of Long Term Insurance Act: 5 year period, 1 loan, 1 withdrawal, 20% Increase in Premiums
Capital Gains Tax
• General Rule: CGT payable on 2nd Hand Policy
• Exceptions
Original Beneficial Owner of Policy
Spouse, nominee (see SARS Binding Private Ruling: BPR 098 dated 24 March 2011), dependant or estate of Original Beneficial Owner & no amount payable as a result of cession to spouse, nominee or dependant
Former ‘spouse’ of Original Beneficial Owner ceded in terms of divorce order/court order
Capital Gains Tax
Example (All CGT examples: SARS CGT Guide)
Facts:
John and Jack are the original beneficial co-owners of an endowment policy. They donate the policy to Jill. Jill then cedes the policy back to Jack. Finally, Jack receives the policy proceeds on maturity from the insurer.
Result:
Capital Gains Tax
Disposal by John and Jack to Jill:
Since the policy was donated, John and Jack are deemed to have received or accrued proceeds equal to the market value of the policy under para 38. However, under para 55(1)(a)(i) they must disregard any capital gain or loss on disposal of the policy as they were original beneficial owners at the time of the donation.
Capital Gains Tax
Disposal by Jill to Jack:
Under para 38 Jill is deemed to have acquired the policy at market value on the date of acquisition. She must account for any capital gain or loss arising on the cession to Jack, as she was not an original beneficial owner.
Capital Gains Tax
Receipt of proceeds on maturity by Jack:
Under para 55(1)(a)(i) Jack must disregard any capital gain or loss arising on termination of the policy, as he was one of the original beneficial owners.
Capital Gains Tax
Example – Cession of policy between spouses Facts: Paul and Steve are involved in a same-sex union
which the Commissioner is satisfied is likely to be permanent. Paul is the original beneficial owner of a policy, which he cedes to Steve. What are the CGT implications for Steve upon surrender of the policy if
(a) Paul donates the policy to him, or (b) he pays Paul something for the policy?
Capital Gains Tax
Result:
Paul and Steve are spouses as defined in s 1 and the roll-over provisions of para 67 apply. In other words, Steve takes over Paul’s expenditure and any valuation date market value for the purpose of determining the base cost of the policy.
Capital Gains Tax
Policy ceded for no consideration:
Any gain or loss arising in Steve’s hands will be excluded by para 55(1)(a)(ii).
Policy ceded for consideration:
Steve will be subject to CGT when he surrenders the policy. The exclusion in para 55(1)(a)(ii) does not apply if any amount was paid or is payable for the cession of the policy.
Capital Gains Tax
Example – Cession of policy to nominee
Facts:
Sam is the original beneficial owner, but not the life assured, of an endowment policy. He nominates Hazel as the beneficiary and thereafter cedes the policy to her for R1. What are the implications for Hazel when she surrenders the policy?
Capital Gains Tax
Result:
Hazel is the nominated beneficiary (nominee), but despite this, any capital gain or loss arising in her hands on surrender of the policy will be subject to CGT because she paid R1 for the policy. The exclusion in para 55(1)(a)(ii) only applies when the nominee does not pay an amount for the policy.
Capital Gains Tax
Example – Surrender of policy acquired from former spouse under a divorce order
Facts: Zeb and Agnes were married under customary
law in 1956 and their marriage complies with the requirements set out in the Recognition of Customary Marriages Act 120 of 1998. Zeb is the original beneficial owner of an endowment policy. Zeb and Agnes divorce and it is ordered by the court that Zeb’s policy be ceded to Agnes. Agnes surrenders the policy.
Capital Gains Tax
Result:
Under para 55(1)(a)(iii) no capital gain or loss will arise in Agnes’ hands when she surrenders the policy.
Capital Gains Tax
• Result:
• Under para 55(1)(a)(iii) no capital gain or loss will arise in Agnes’ hands when she surrenders the policy.
Capital Gains Tax
Policy, where a person is or was an employee or director whose life was insured in terms of that policy and any premiums paid by that person’s employer were deducted in terms of section 11(w);
Capital Gains Tax
Policies for purposes of Buy & Sell agreements, ceded back to the life insured,
and no premium on the policy was paid or borne by the life insured while the other person was the beneficial owner of the policy.
Capital Gains Tax
Example – The buy-and-sell exclusion
Facts:
Abe and Bart are partners, and have drawn up a properly structured buy-and-sell agreement, funded by long-term policies. Under the arrangement Abe is the owner (payer and beneficiary) of a policy on the life of Bart and Bart is the owner (payer and beneficiary) of a policy on the life of Abe. The partnership is dissolved and the parties wish to retain the policies on their own lives. Abe cedes his policy to Bart and Bart cedes his policy to Abe.
Capital Gains Tax
Result:
Any capital gain or loss in the hands of Abe and Bart on ultimate surrender of the policies will be excluded under para 55(1)(c).
Capital Gains Tax
Policy originally taken out on the life of a person, where that policy is provided to that person or dependant by or in consequence of that person’s membership of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund;
Capital Gains Tax Example – Policy ceded to member of
retirement fund
Facts:
Dave is a member of a pension fund. He is the life assured on an individual policy held by the fund. On retirement the policy is ceded by the fund to Dave. Dave surrenders the policy.
Result:
Any capital gain or loss arising in Dave’s hands on surrender of the policy will be excluded for CGT purposes.
Capital Gains Tax
Example – Proceeds of policy paid to dependant of member of retirement fund
Facts: Shirley is a member of a provident fund. She is
the life assured on a policy that was taken out by the fund. She has one legal dependant being her son Denys. She dies and the policy proceeds are paid to Denys.
Result: Any capital gain or loss arising in Denys’ hands
will be excluded for CGT purposes.
Capital Gains Tax
in respect of a risk policy with no cash value or surrender value;
if the amount received or accrued constitutes an amount contemplated in section 10(1)(gG) or (gH).
Capital Gains Tax
• Policies subject to CGT • Determination of base cost • The base cost of 2nd hand policy acquired before
1 October 2001: any of the prescribed methods. Most likely: time-apportionment basis or the market value.
• Para 31(1)(b): market value of policy = higher of surrender value, and Fair market value determined by the insurer
assuming that the policy runs to maturity.
Capital Gains Tax
Example – Part-disposal of second-hand policy
• Facts:
• In 1996 Brenda took out a 5-year endowment policy as the original beneficial owner. Keith purchased the policy from Brenda in 2000 for R100 000. The market value of the policy on 1 October 2001 was R90 000. Keith made the following withdrawals:
Capital Gains Tax
• 1 July 2002: Withdrawal R5 000; Market Value immediately Before Withdrawal 100 000
• 1 July 2003: Withdrawal R6 000 Market Value immediately Before Withdrawal R108 000
• 1 July 2006: Withdrawal R120 000 Market Value immediately Before Withdrawal R120 000
• Keith adopts the market value method for determining the valuation date value of the policy.
Capital Gains Tax • Result:
Keith’s capital gain or loss is determined as follows:
2003 year of assessment
Proceeds 5 000
Less: Base cost R4 500 (R5 000/R100 000 x R90 000)
Capital gain 500
Base cost after part-disposal: R90 000 – R4 500 = R85 500.
Capital Gains Tax • 2004 year of assessment
Proceeds R6 000
Less: Base cost R4 750 (R6 000/R108 000 x R85 500)
Capital gain R1 250
Base cost after part-disposal: R85 500 – R4 750 = R80 750.
Capital Gains Tax
• 2006 year of assessment (final withdrawal)
Proceeds R120 000
Less: Base cost R80 750 (R120 000/R120 000 x R80 750)
Capital gain R39 250
Pros & Cons
• Pros
Buyer – after tax proceeds
Loan against policy – no CGT. A loan is not regarded as a disposal and would not trigger a CGT liability. However, should the loan not be repaid by the time disposal takes place, then the loan must be taken into account.
Possible low price for seller (beneficial for buyer)
Possible future bonuses built into policy
Pros & Cons
• Cons
CGT Additional tax
Restrictive periods
Possible low price for seller (detriment for seller)
Pitfalls of 2nd Hand Policies
• Possible pitfalls:
Loans Against Policy
Policy ceded for security
Possible upfront costs
Look at tax rate for individual purchasing (taxed at 30% within fund)
Cell Captives – An introduction
International Context
SA Context
Cell Captives Structure
First Party Cells
Third Party Cells
Market Information
Agenda
Cell Captives – International Context
Cell Captives are mainly used for self insurance of Corporates own
liabilities such as EB liabilities
Various domiciles available – Tax, Regulatory Environment, Skills,
(Bermuda, Bahamas, Guernsey, Jersey, Malta, Mauritius).
Corporates pool cross border insurance risks for price efficiency and
appoint specialist Advisors/Managers to assist in managing Captive via
Captive board (Actuarial Consultants, Benefit Consultants, Audit, Legal
and Tax Advisors, Administrators).
Develop benefit structure and execute ALM strategy using Reinsurers and
Asset Managers/Banks.
Protected Cell Companies exist (PCC) (Operate as distinct Insurer, not
“rent a license”).
PCC not in SA yet.
International Topical Issues
Solvency assessment and management
European economic climate
Tax treaties
Investment markets (Equities)
Reinsurance rates
Cell Captives – SA Context
Long term insurer or Short term insurer governed under South African
Company and Insurance Laws.
Approved by the FSB with it’s own license conditions and restrictions.
Insurer have the flexibility to issue a different class (other than ordinary
equity) of participating equity to clients.
Participating equity gives certain rights and obligations to holder (i.e. a
Corporate has the obligation to fund CAR, but the right to earn profits in cell
(and losses)).
SA Topical Issues
Solvency Assessment and Management
Treat Customers Fairly (TCF)
Binder Regulations and Outsourcing
Investment markets
Reinsurance rates
Tax developments
Cell Captive Structure
Insurer
Core/Promotor Cell
C
G
A E
B D
F H
Company D
(Cell owner)
Company E
(Cell owner)
Company F
(Cell owner)
Types of Cells
First Party or Third Party Cells
First Party Cell
• Cell owner owns participating equity and underwrites own risks in cell.
Third Party Cell
• Cell owner owns participating equity and underwrites third party risks in cell.
Promotor Cell
Company D Shareholder
Agreement
Policy
Promotor Cell
Company D Shareholder
Agreement
Policy 1
Policy 3 Policy 2
First Party Cells
Investment
Mandate
Corporate A Promotor Cell A
Reinsurance agreement (Level PHI Liability)
Reinsurer Asset Manager
Third Party Cells
Cell A
Owner
Binder Holder
Reinsurance agreement
Shareholder Agreement
Reinsurer
Promotor Cell A
Binder Agreement
Policyholder A
Policyholder B
Policyholder C
Seller/Broker
Commission
Long Term Insurance Market
34%
28%
1%
1%
14%
2%
20%
Guardrisk Life
Momentum
Centriq Life
Other
Old Mutual ART
Sanlam Customised
RMB Structured Life
Short Term Insurance Market
51%
6%
26%
1% 8%
2% 2%
4%
Guardrisk Insurance
ABSA Risk
Centriq
Other
M&F Risk Finance
Zurich Risk Finance
Unitrans
RMB Structured Insurance
REVIEW OF 3RD PARTY CELL
CAPTIVE INSURANCE AND
SIMILAR ARRANGEMENTS
Agenda
1. Background
2. Introduction
3. Overall Findings
4. Key regulatory proposals
5. Way forward
110
Background Information letter 2/2011
• Focus on 3rd party cell captives
• Concerns: – Different standard registration conditions
– Licensing conditions not fully effective
– Potential conflicts of interest
• Review to consider: – Managing of conflict of interest
– Limiting 3rd party cell owners to UMAs
– Prohibition on independent intermediaries owning a cell
– Affinity schemes to be prohibited or allowed subject to regulatory conditions
• Moratorium placed on new 3rd party cell captive
insurers
111
Introduction
• 2012 assessment of 3rd cell arrangements:
– Existing ownership structures and business models
(including similar arrangements)
– Financial soundness and market conduct risks
– Conflict or potential conflict of interest
– Mitigation of risks and conflict of interest
– Which structures/ arrangements or activities should
be prohibited
• Report submitted to FSB end-Sept 2012
112
Overall findings
113
Cell owners
• Independent intermediaries
• Underwriting managers
• Corporates
• Affinity schemes
• Other insurers
• Pension Funds
114
Features of structures
• Type of shares issued:
• Ordinary shares
• Preference shares (redeemable or convertible)
• Voting rights may or may not be assigned
to shares
• Capitalisation of cells not always required
• Recapitalisation of cells usually required
but can be funded for a fee by promoter
capital 115
Specific risks identified
Risks to cell captive insurers:
• Contractual and exit strategy risk
• Operational risk
• Insurance risk
• Credit risk
• Reputational and market conduct
risk
116
Specific risks identified
Risks to policyholders:
• Risks to fair conduct of business
• Conflicts of interest
• Risks to ability to pay claims
Risks relating to regulation and
supervision:
• Conditions of registration
• Supervisory oversight
117
Key regulatory proposals
118
Regulatory proposals
• Cell captive insurance to be conducted under a
dedicated insurance license
• Cell captive insurer not to conduct other forms
of business
• “Similar arrangement” will no longer be
permitted
• 3rd party cell captive arrangements only be
entered into with a binder holder:
Underwriting manager
Non-mandated intermediary i.t.o. an approved affinity scheme
119
Regulatory proposals
• FSB approve on a case by case basis affinity schemes
prior to arrangements entered into
• Prior notification for all other cell arrangements
• Enhanced regulatory requirements will be put in place
for 3rd party cell captive insurers:
• Governance
• Minimum capital requirements for each cell
• Market conduct matters
• Reporting requirements
• On-going monitoring of shareholder/cell agreements
• Changes in licensing conditions
120
Way forward
• Discussion Document was issued
to all insurers on 11 June 2013
• Comments due by 31 July 2013
121
