The Insurance Act 18 of 2017 (“Act”) came into effect on 1 July 2018 and seeks to promote and maintain a fair, stable and safe insurance market. The Act does this through the establishment of a legal framework, which operates within the twin peaks model established by the Financial Sector Regulation Act 9 of 2017, with the view to regulate insurers and insurance groups. This legal framework has been established in order to: (i) monitor and preserve the safety and security of insurers; (ii) improve the protection of policyholders (and potential policyholders); (iii) increase access to insurance for all South Africans; (iv) ensure the promotion of broad-based transformation of the insurance sector; and (v) contribute to the general stability of the financial system.
In a previous Legal Insight titled: “Financial Regulation: Shifts to keep an eye on” (https://www.tumboscott.com/blog/financial-regulation-shifts-to-keep-an-eye-on), the twin peaks model is explored in much detail and may form a helpful background to this piece. This legal insight focuses purely on some of the mechanisms that have been introduced by the Act into the insurance industry.
Financial soundness requirements
The Act places an obligation on an insurer to maintain the financial soundness of its businesses at all times. An insurer is required to do this by ensuring that their own funds are equal to the prescribed minimum capital or solvency requirements. In the case of an insurance group, the controlling company is required to ensure that the holding group holds funds that are equal to the capital solvency requirement.
In the event that an insurer provides notice to the Prudential Authority that it shall (or may in the next three months) fail to meet its solvency capital requirement, then the insurer may be directed by the Prudential Authority to submit a scheme or re-capitalisation strategy for approval that sets out the measures that will be taken within an agreed period to re-establish the level of funds that are necessary to comply with the solvency and liquidity requirement or to reduce the insurer’s risk profile with the view of meeting the solvency capital requirements. This requirement applies equally to a controlling company in respect of an insurance group.
Public disclosure requirements
There is a clear focus in the Act on accountability and transparency. Amongst other disclosure requirements, the Act makes provision for insurers to provide the Prudential Authority with, information about the beneficial holders of shares or interests in insurance companies. Interestingly, the Act ensures that non-compliance with its provisions, any review, investigation, or verification that is required by the Prudential Authority (termed in the Act as “major developments”) be disclosed. The only exception in this respect is where non-disclosure has been approved by the Prudential Authority.
Suspension and withdrawal of licence
Certain listed instances of non-compliance with licence conditions, the Act or the Financial Sector Regulation Act or failures in relation thereto, constitute grounds for suspension of a licence. However, the interests of the policyholders are not abandoned during this process. The Prudential Authority is required to take all necessary measures to ensure that during the suspension period, the interests of the policyholders are safeguarded. From the suspension date, the insurer is not permitted to enter into any new insurance policies in the class to which the suspension relates; however, the insurer is required to continue conducting its business in respect of the active insurance policies. Should the insurer or controlling company satisfactorily remedy the circumstances that informed the suspension, then the Prudential Authority may, for instance, revoke the suspension, or vary the licence conditions.
Where the licence is withdrawn, as a result of failure to remedy an instance of non-compliance or any other circumstance contemplated in the Act, the Prudential Authority is required to publish a notice of withdrawal and the reasons therefor on the official website and any other media deemed appropriate by the Prudential Authority. Policyholders are, however, not left unprotected when such a route is followed. In this respect, the Prudential Authority is obliged to ensure that the insurer will: (i) make a satisfactory arrangement to discharge its duties under all of its insurance policies; (ii) resolve its business in an orderly manner; and (iii) transfer its business to another insurer by a specified date.
In sum
The regulatory shifts that have been introduced by the Act and aligned with the twin peaks model will ultimately be beneficial to both the insurance industry and policyholders alike.
From a regulatory perspective, atleast, your monthly insurance premiums are in better hands.
Tshepiso Scott, Managing Director : Tumbo Scott Inc