The South African Financial Services Board has released a discussion paper reviewing third-party cell captive insurance business models in a bid to reinforce the current regulatory framework.
In the paper, the board explained that it has become “increasingly concerned” that some aspects of third-party cell captive insurance business create unnecessary risks for insurers and policyholders.
In a number of jurisdictions, such as Guernsey, Jersey and the Cayman Islands, protected cell company (PCC) legislation successfully governs cell captive business. In those domiciles, a PCC is a separate legal entity—a trait that it shares with a traditional insurance company.
“However, unlike a traditional insurance company the structure of a PCC is subdivided into the core, which contains the capital for the whole of the entity, and individual cells, which have the option to be capitalised individually and separate from the core or use the core funds to meet its capitalisation requirements.”
“The assets of each individual cell are statutorily segregated to ensure that a claim against one cell cannot be covered by the assets of another cell.”
But in South Africa, cell captive arrangements are governed by contractual arrangements with cell owners. They provide for the separation of funds and limitation on cross-subsidisation between cells.
“Despite these contractual arrangements, there is no legal ring-fencing of funds in the case of liquidation, as the current insurance legislative framework regards all the assets and liabilities of third-party cells as part of the assets and liabilities of the insurer," according to the discussion paper.
To combat these issues, the board proposes that cell captive business be conducted under a dedicated insurance licence that is not combined with other forms of insurance business.
It also calls for enhanced regulatory requirements to be out in place for third-party cell captive insurers alongside prior approval from the registrar for all cell arrangements entered into with affinity schemes.
Comments on the discussion paper must be submitted in electronic format to the registrar of long- and short-term insurance by 31 July 2013.
