On 17 January 2018, the President of South Africa signed the Insurance Act (the Act) into law. Risk managers and their insurers will need to understand the implications of the Act, which along with other key regulatory measures, provides a consolidated legal framework for the prudential supervision of the insurance sector, consistent with international standards for insurance regulation and supervision.

This article was originally published on Commercial Risk Online.

Under the ‘Twin Peaks’ model of regulation, two regulators will be established – a Prudential Authority within the South African Reserve Bank and a new Financial Sector Conduct Authority. The Prudential Authority will supervise the safety and soundness of financial institutions while the Financial Sector Conduct Authority will supervise how financial services firms conduct their business and treat customers.

Some of the Act’s most significant changes are in the area of prudential supervision.

As a starting point, the Act will still permit local direct insurers and local reinsurers to place reinsurance directly with a foreign reinsurer; however, foreign insurers and reinsurers will be prohibited from soliciting business in South Africa on a cross-border basis.

Consequently, non-admitted foreign insurers and reinsurers who wish to carry out insurance business in South Africa on a cross-border basis will need to be licensed in South Africa. The Act will allow foreign reinsurers to obtain a licence to establish a branch office as an alternative to incorporating a local subsidiary.

The Insurance Act, together with the publication of insurance prudential standards, also facilitates the regulation of the new risk-based solvency regime for South African short-term and long-term insurers, known as the Solvency Assessment and Management Regime (SAM).

SAM seeks to align the regulation of the local insurance industry with international standards, while at the same time tailored to be appropriate for the characteristics of the South African insurance industry, specifically to be a proportionate, risk-based approach with appropriate treatment for both small insurers and large, cross-border insurance groups.

SAM will be based on the European Solvency II capital adequacy, risk governance, and risk disclosure regime; it will share the same broad features as Solvency II, being a principles-based regulation based on an economic balance sheet, and using the same three pillar structure of capital adequacy (Pillar 1), systems of governance (Pillar 2), and reporting requirements (Pillar 3).

Another interesting feature of the Insurance Act is that it introduces a legal framework for microinsurance. Microinsurance is generally aimed at the low-income population, managed in accordance with generally accepted insurance practices.

The Insurance Act delineates microinsurance as a separate class of insurance business. Providers of microinsurance must be registered as dedicated microinsurers, under a separate license. Microinsurers will be permitted to underwrite both life and non-life policies and will benefit from less onerous solvency and regulatory compliance requirements (within the constraints of specific monetary caps on the premiums charged and policy benefits provided by these insurers).

Further, the Insurance Act introduces a new group-wide supervision regime for insurers, regulating and imposing requirements on controlling companies to protect policyholders and beneficiaries from risks emanating from an insurance group. Insurance groups in South Africa are becoming common place, and although insurance groups benefit from operating in a group structure (ie diversification of risk) such intragroup arrangements equally present a range of risk exposures.

Group supervision as set out in the Insurance Act enables the regulator (the Prudential Authority) to form a comprehensive view of the overall risk exposure of South African insurance groups and enables the Prudential Authority to mitigate any potentially adverse systemic impact on the South African financial system.

The requirements that may be imposed on controlling companies are similar to those imposed on an insurer. Importantly, to enable prudential supervision, the Prudential Authority may designate a company as an “insurance group”.

The Insurance Act entrenches the need for transformation of the sector as envisaged by the Financial Sector Code for Broad-Based Black Economic Empowerment issued in terms of the Broad-Based Black Economic Empowerment Act, 2003.

Transformation is now an explicit objective in the Insurance Act, and in order for an insurer to qualify for a license in terms of the Insurance Act, said insurer must, among other things, demonstrate its commitment to transformation of the insurance sector, for example, in meeting the targets envisaged in the Financial Sector Code.

It is expected that the Insurance Act will come into force during the second quarter of 2018.