The Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA) of South Africa have released a joint guidance notice concerning the application of sections 5(1) and 5(2) of the Insurance Act.
These sections relate to the insuring of first-party risks and conducting of insurance business by foreign entities.
This follows a joint guidance notice released by the two authorities in April 2019, which established broad parameters for the definition of a foreign reinsurer operating through an intermediary in South Africa.
The updated notice provides more clarity on the definition of a captive insurer, which is determined as an insurer domiciled in and operating from a foreign jurisdiction as a wholly owned subsidiary of a group of parent companies that is limited to first-party risks.
First-party risks are in turn defined as the operational risks of the group of companies or any joint arrangements that the insurer or cell owner is part of.
The notice highlights that in this context, operational risk refers to potentially incurring losses owing to inadequate or failed internal processes, personnel or systems.
The FSCA and PA also set out guidelines for licensing approaches under the Act, as foreign entities are required to be licensed under the framework of the legislation.
Specifically, the PA will consider licensing applications for any entity intending to insure first-party risks as part of captive or cell captive business in South Africa, while foreign-domiciled captive insurers conducting insurance business in South Africa may submit an application for exemption.
