Chapter 1: The SA General Insurance Market Flashcards
What are the different forms of insurance governed under the Insurance Act:
- Property
- Transport
- Motor
- Accident and Health
- Guarantee
- Liability
- Engineering
- Miscellaneous
- Agriculture
- Marine
- Aviation
- Rail
- Legal Expense
- Consumer Credit
- Trade Credit
- Travel
- Reinsurance
WHo are the main providers of Insurance in SA:
- direct insurers
- reinsurers
- LLoyds of London
- SASRIA
- RAF
Before being granted a licence to sell insurance what must the insurer have
- MCR
- A detailed reinsurance program
- Auditors
- An organogram of proposed company structure
- Proposed management
- A detailed business plan
What are the main reasons for setting up a captive?
- Fills Gaps in Coverage
Captives can cover risks that are uninsurable or undesirable in the traditional market, such as environmental pollution or emerging risks.
- Cost Control and Optimization
Allows companies to manage and optimize their total insurance spend, potentially reducing costs over the long term by avoiding market loadings and inefficiencies.
- Risk Management Focus
Encourages greater attention to risk management, since the parent company essentially bears its own risks. Captives can be tailored to a company’s unique risk profile.
- Stability in Pricing
Helps mitigate the effects of market cycles (hard and soft markets), which can cause premium volatility in the commercial insurance market.
- Tax and Regulatory Benefits
Premiums paid to a captive may be treated as business expenses, enabling pre-tax accumulation of reserves.
Some jurisdictions offer favorable tax treatment or regulatory environments to captives.
- Direct Access to Reinsurance Market
Captives can bypass traditional insurers and directly access the reinsurance market, which may offer broader coverage and lower costs.
- Customization and Flexibility
Full control over claims handling, underwriting, and pricing, allowing for highly customized insurance programs.
- Potential for Profit
If claims experience is favorable, the captive can generate underwriting profits that stay within the corporate group rather than going to external insurers.
What is an authorised captive?
A captive insurer that can provide coverage risks other than its parents provided this does not change its main purpose
What are the disadvantages of a captive insurer?
- Setup and Operational Costs
Establishing and maintaining a captive involves significant upfront and ongoing costs, including regulatory compliance, capital requirements, and administrative expenses.
- Regulatory Complexity
Captives must be licensed as insurance or reinsurance companies, which requires adherence to regulatory standards and solvency rules.
- Fronting Arrangements Can Be Costly
If using a fronting insurer, the parent pays extra because the fronting insurer charges for the credit risk of the captive defaulting.
- Risk Concentration
A captive might concentrate risk within the group, especially if diversification is limited or if reinsurance is inadequate.
- Limited Risk Transfer
Without effective reinsurance, there may be little or no true risk transfer, making the captive function more like a self-insurance mechanism.
- Potential Lack of Expertise
Captives may not have the same level of claims handling or underwriting expertise as traditional insurers, especially for complex risks.
- Capital Requirements
Captives require capital to be tied up to meet regulatory requirements, which could otherwise be used elsewhere in the business.
What is a cell captive?
A structure where a company ‘rents’ part of a licensed insurer’s licence to run its own insurance operations without the setup costs of setting up a full insurer or a full captive
What is a cell shareholder?
The company that rents a cell and receives a special class of shares tied to its specific insurance operations.
What are first-party cells?
Cells that insure the risks of the shareholder itself and its subsidiaries.
What are third-party cells?
Cells that insure risks of external clients or unrelated third parties, often tied to another product or service.
What is the primary purpose of a Protection and Indemnity (P&I) club?
To provide mutual insurance for marine liability risks that were historically too expensive or unavailable through commercial marine insurance markets.
What types of risks do P&I clubs typically cover?
Liabilities for loss of life or injury, damage to harbours, wreck removal, and pollution-related claims.
What is the purpose of SASRIA?
To provide insurance coverage for political act of riots and terrorism and in 1998, cover was extended to perils such as strikes and labour disturbances.
What are SASRIA’s objectives?
- Provide protection against special risks such as politically motivated strikes, riots, terrorism, civil commotion and public disorder
- Extend coverage to non political events such as non political riots, strikes and public disorder ensuring broader protection for policyholders
- Promote economic stability: Promote south african economic resilience by ensuring financial protection against civil unrest and related events
- Offer consequential loss cover: Covers both standing charges (fixed expenses) & working expenses (variable expenses)
What lines of business is SASRIA offered on?
- Material damage
- Motor
- Money
- Goods in transit
- Construction
- Business Interruption
Can any insurer offer coverage for SASRIA risks?
No. SASRIA is a legalised monopoly. No other insurer can offer coverage for the perils covered under SASRIA
What damages are paid under the RAF?
- Medical Expenses. Actual expenses incurred to date and future expenses to be incurred
- Loss of icnome and reduced earnings capacity
- Funeral expenses
- In the case of death, loss of future earnings paid to dependents
- General pain and injury awards
What are the main risks of using a UMA, and how can insurers mitigate them?
Risks include
- breach of mandate,
- poor underwriting,
- regulatory breaches,
- reputational harm.
Insurers mitigate these by using clear binder agreements, profit-sharing structures, audits, PI insurance, regulatory compliance, and close oversight.
Outline binder agreement
An outsourcing arrangement between an insurer and a 3rd partt
Who are the main providers of insurance in SA?
- Lloyds of london
- SASRIA
- RAF
- Direct Insurers
- Reinsurers
- Self Retention Groups
