Amongst a raft of legislative and regulatory changes impacting the financial services industry in South Africa, the Financial Services Board ("FSB"), the authority that regulates, inter alia, the activities of insurers and reinsurers in South Africa, has been interacting with the industry in respect of proposals to alter the regulatory framework under which reinsurance business will be carried out in South Africa in future.

The actual impact of the FSB's intended proposals remains uncertain at this stage.

Currently, in order to carry out reinsurance business in South Africa, a person or entity must be registered to do so.  The local insurance laws prohibit any person from carrying on insurance or reinsurance business in South Africa unless that person is licensed to do so.  The FSB cannot issue a license unless the applicant is a public company incorporated in South Africa.  There are also ongoing requirements for a registered insurer or reinsurer, in order to maintain its license, to ensure that its business is in a financially sound condition and that it possesses sufficient assets so as to ensure that its liabilities can be met at any given day.  The only exception to the above requirements is Lloyds's underwriters who do not have to obtain a license.  This is part of a dispensation granted to Lloyds in terms of the Short-term Insurance Act, 1998.

In consequence of the above, foreign reinsurers participate in the local market by either establishing a subsidiary in South Africa or by way of the provision of cross-border reinsurance, provided that in the latter case the activities of the foreign reinsurer do not amount to "carrying on short-term insurance business in the Republic" of South Africa requiring registration and licensing per the above.

During April 2015, the FSB published a discussion document setting out its intended, and extensive, changes to the framework for reinsurance in South Africa. Consultations with and submissions by the industry have led to subsequent changes in the FSB's intended framework, and these were canvassed by the FSB in their recently held annual regulatory review workshop . While the FSB has yet to propose draft regulations for public comment encapsulating the amendments to the reinsurance framework, it would appear that the proposals are crystallising.

The actual impact of the FSB's intended proposals remains uncertain at this stage.  In arriving at its latest proposals, the FSB has engaged with the industry by way of position papers  and the aforementioned discussion document.

The current proposals set out by the FSB are:

  • allowing foreign reinsurers to operate in South Africa through a branch, provided that the foreign reinsurer is authorised and supervised in a country which has a regulatory framework which is equivalent to the South African framework;
  • allowing for an adjustment of the credit rating of locally registered reinsurers, for purposes of the local direct insurer's solvency calculations, to avoid the impact of the sovereign cap on the locally registered reinsurer;
  • the introduction of a prohibition on fronting, effected by a cap on the reinsurance which can be effected by insurers, likely by the inclusion of a prohibition on an insurer directly or indirectly reinsuring more than 75% of the premiums to either a foreign reinsurer on a cross-border basis, a branch of a foreign reinsurer, a professional reinsurer, or another direct insurer in South Africa. In the case of licensed direct insurers and professional reinsurers, the limitation on the amount that is to be reinsured or retroceded is increased to 85% where the counterparty is an entity within the same group; and
  • foreign reinsurers will be prohibited from soliciting business in South Africa on a cross-border basis.

The above proposals reflect a substantial deviation by the FSB from its previous proposals, which included assumed downward credit rating adjustments in respect of foreign reinsurance supplied on a cross-border basis, branches of foreign reinsurers and Lloyd's, and a prohibition on reinsurers conducting composite business, both proposals which appear to have been abandoned.

While the above proposals are still subject to change, and will likely still experience revisions, the proposals are likely to have contemplated the majority of conceptual commentary emanating from the industry and can reasonably be relied on as informing the draft regulations to come. The FSB abandoning its mooted assumed credit ratings downgrade in respect of foreign reinsurers, and provision being made for foreign reinsurers to operate by way of branches, will provide an opportunity for foreign reinsurers to operate in the local market, and from South Africa as a hub for reinsurance business in the African markets for which high growth is expected.