Chapter 1: The SA general insurance market Flashcards
The value of gross written premiums written by SA short-term insurers in 2012
R94.5 billion
Legislation governing short-term insurance
Short-term Insurance Act of 1998
8 Short-term insurance policy types
- Property
- Transportation
- Motor
- Accident and Health
- Guarantee
- Liability
- Engineering
- Miscellaneous
2012 Proportion of SA GWP:
Property
33.4%
2012 Proportion of SA GWP:
Liability
4.7%
2012 Proportion of SA GWP:
Motor
43.1%
6 Major providers of short-term insurance in SA
- direct insurers
- reinsurers
- self-retention groups
- Lloyd’s of London
- Sasria (South African Special Risks Insurance Association)
- RAF (Road Accident Fund)
6 Possible Requirements that have to be met for FSB authorisation
- minimum capital requirements
- a detailed reinsurance programme
- auditors
- organogram of company structure
- proposed management
- detailed business plan
Lloyd’s was incorporated by which legislation
The Lloyd’s Act of 1871 in the UK.
Lloyd’s
Provides a market framework (premises, resources, etc) within which insurance may be conducted by the members.
It does not act as an insurer in its own right and, therefore, carries no insurance risk.
The actual business is insured directly with the members (a.k.a. Names or underwriting members).
Lloyd’s syndicates
Members are grouped into syndicates.
The members of a syndicate share the risks written by the syndicate’s underwriters. Liabilities or profits are allocated to the members on a “several basis” in proportion to their agreed participation at the start of the year.
Lloyd’s syndicate managing agent
A company appointed to manage the affairs of the syndicate, appoint the underwriter, and provide technical and administrative services.
Funds at Lloyd’s
If a member defaults on their liabilities, the other members of the syndicate are not responsible for them - there is no joint liability.
Because of this, each member is required to provide capital as security to support their total Lloyd’s underwriting business. These funds are held by Lloyd’s in trust and Lloyd’s has absolute authority to use it to pay claims or other liabilities arising from the member’s activities at Lloyd’s.
Lloyd’s Member’s agents
Look after the interests of individual members
- introduce members to syndicates
- advise members on how to spread their capital among different syndicates
- responsible for the regular audit of a member’s wealth
- responsible for submitting all financial statements to Lloyd’s
How long must a syndicate’s year of account must remain open (at minimum)
3 years
Reinsurance to close (RITC)
(not really reinsurance)
A transfer of assets and liabilities from one group of members (the ceding syndicate) to another (the receiving syndicate).
6 Reasons for setting up captives
- to FILL GAPS in insurance cover that may not be available from the traditional insurance market.
- to MANAGE THE INSURANCE SPEND of large companies
- to FOCUS EFFORT on risk management
- to reduce the impact of market cycles on risk pricing
- to gain TAX / LEGISLATIVE / REGULATORY ADVANTAGES
- to gain ACCESS TO REINSURANCE (directly)
Authorised captive
Free to provide insurance to risks other than those of its parent,
provided that this does not change its main purpose.
Disadvantages of owning a captive
- there may be a lack of risk transfer and the captive may suffer from a concentration of risk
- lack of know-how when dealing with more complicated claims.
Cell captive
Cell captive insurers have a corporate structure that allows them to
…. pass isolated and identified profits
… resulting from subsets of their insurance operations
… to parties other than their ordinary shareholders.
This allows cell captive insurers
… to “rent out” their insurance licence
… to companies looking to take advantage of the benefits of the captive insurance arrangement,
… but which cannot afford the captive insurance approach themselves.
Structure of a cell captive
A registered insurer (cell insurer) issues a specific class of shares to a corporate (cell shareholder).
Each of the specific classes of shares forms an individual ring-fenced cell.
Individual cells are represented by a separate class of ordinary shares with specified dividend rights that allow clients access to surplus profits in their cells.
The cell participant is responsible for the funding of the cell and the cell should be maintained at such levels as may be required by the shareholder’s agreement entered into.
Role of the cell captive company
- administration
- claims handling
- investment
services
8 Key characteristics of cell captive structures
- The cell shareholder EARNS INVESTMENT RETURN on the assets that arise from the shares being issued and the insurance business introduced.
- The insurer accounts for the shares, underwriting, investment activities and claims of EACH CELL SHAREHOLDER SEPARATELY.
- It is common for a cell to have an EXTENSIVE REINSURANCE program designed to consider the cell owner’s risk appetite and the nature of the risks underwritten.
- The policies issued by the cell insurer meet the definition of an insurance contract as set out by accounting standards for insurance contracts.
- A cell is NOT AN INCORPORATED ENTITY and has no legal status. The insurer is, therefore, the contracting party with the insured.
….. Only the financial consequences of the insurance and investment transactions are attributed to the cell.
….. The insurer charges an ADMINISTRATION FEE for providing the cell facility. - The assets of the cell are owned by the insurer as the cell has no legal status. All investment decisions rest with the insurer but the investment return is allocated to the cell.
- The insurer has a claim against the cell shareholder for any losses incurred in the cell (net of reinsurance recoveries) in excess of the accumulated net assets of that cell.
- Dividends are payable to the cell shareholder at the discretion of the insurer during the normal operations of the cell. If the cell facility is terminated, any accumulated net assets in the cell are remitted to the cell shareholder as a final dividend.
3 Cell captive structures available in south africa
- First party cells
- Third party cells
- Combined party cells
First party cells
Where the insurance business introduced relates to the cell shareholder’s own risks and that of their subsidiaries.
Third party cells
Where the insurance business introduced relates to third parties (usually the clients of the cell shareholder whereby the insurance offering is complementary to a product or service already provided by the cell shareholder)
Combined party cells
Where the insurance business introduced relates to own risks as well as to third parties.
The FSB 2013 discussion paper: “Review of 3rd party cell captive insurance and similar arrangements”
aimed to address 3 CONCERNS:
- different standard registration conditions that apply for different 3rd party cell captive insurers
- licensing conditions that may not be fully effective
- potential conflicts of interest inherent in third party cell captive arrangements where cell owners are intermediaries or related parties of an independent intermediaries
The FSB 2013 discussion paper: “Review of 3rd party cell captive insurance and similar arrangements”
made 14 NOTABLE PROPOSALS:
- the requirement that cells may only be owned by a binder holder (either an underwriting manager or a non-mandated intermediary in terms of an approved affinity scheme)
- prohibition on cell arrangements with independent intermediaries due to conflicts of interest
- allowance for cell arrangements with affinity schemes under certain conditions
- similar arrangements to be converted to cell arrangements
- prohibition on cell captive insurers doing any business other than cell arrangements
- prohibition on a mix of first party and third party cell business in one cell or arrangement
- prohibition on captive insurers conducting third party business
- MCR to be prescribed for each cell
- recapitalisation by cell owner must be conditional and included in the shareholder agreement
- proportional share of risk between cell owner and insurer: Insurer to assess the credit worthiness of the cell owner to determine upfront the proportional risk sharing arrangements
- prior approval from the Registrar for cells provided to affinity schemes
- prior notification to the Registrar for all other cell arrangements
- specific reporting requirements
- standard licensing conditions for various third party cell captive insurers
Affinity scheme
A third party cell captive arrangement where insurance business is ancillary to the primary business activity of the cell owner.