Lloyd’s South Africa : New Insurance Regulations
This article provides insights into the South African requirements for new coverholder approvals, as well as the review of existing coverholder agreements
South Africa’s National Treasury and the Financial Services Board (FSB) have tabled the amendments to the Insurance Regulations that give effect to certain conduct of business reforms. These should be read together with the replacement Policyholder Protection Rules (PPRs). The Regulations and PPRs are geared at supporting the Government’s objective to ensure that the right insurance products are available and accessible to all South Africans.
The proposed reforms include conduct of business risks and abusive practices that have been identified through supervision and this will be given effect within the existing regulatory framework.
The revised Regulations will have an impact on the current coverholder application and review process, among others. This article will provide some insights into the requirements to approve a new coverholder, as well as the review of existing coverholder agreements.
The FSB issued Insurance Regulations requiring all binder agreements concluded after 01 January 2018 to adhere to the provisions stipulated in Parts 5 and 6 of these Regulations. All existing binder agreements concluded before this date must be aligned within one year.
The process will be conducted in two parts:
- Binder agreements will be reviewed to determine if the agreement complies with the provisions of the Insurance Bill, as well as the revised Regulations.
- A due diligence check will be conducted on the applicant to ensure that it meets the requirements set out in the Regulations as well as adhere to other regulatory requirements as applicable.
To become a coverholder, the application must be sponsored by either a Lloyd’s broker or a managing agent. The Lloyd's broker will be the main point of contact for information regarding coverholder processes, systems and requirements. A due diligence process will be undertaken by Lloyd’s South Africa (LSA).
Lloyd’s may only enter into a binder agreement with a non-mandated intermediary or an underwriting manager (UMA).
The binder arrangement must:
- Promote fair outcomes for clients.
- Not result in duplication of administrative efforts or costs for the insurer.
- Not impede on the insurer’s ability to, identify, assess, manage and report on the risks of poor customer outcomes on an ongoing basis.
New Insurance Regulations, effective from 01 January 2018, require a more stringent due diligence process conducted at both application stage and annual reviews. These Regulations stipulate a strict due diligence process for new binder holders, including a cap on the fee that may be charged for performing binder functions.
Overview of Review process for new coverholder applications
- A request will be submitted to LSA from the Delegated Authorities to review the Coverholder application
- LSA will review the application as well as conduct the required due diligence process within 21 days of receipt of the request;
- Once the due diligence has been completed, our recommendations will be sent to the Delegated Authority team for final approval.
The review binder agreement will be completed as a separate process to the due diligence.
Due diligence process conducted by LSA
Once the Delegated Authorities team has commenced their due diligence process and advised LSA of the application, LSA will conduct further due diligence to provide assurance that the potential coverholder is a reputable firm and meets specific requirements. The following is required as part of the application to conduct the due diligence:
- A consent letter from the applicant that will allow LSA to request a letter of good standing from the Regulator.
- Fit & Proper questionnaires signed by key individuals who will have direct oversight over the coverholder business, including a summary of their qualifications and experience.
- Confirmation that there is no outstanding litigation against the applicant (finalised or pending).
- A copy of the business continuity plan as it pertains to the applicant’s business as well as details of succession plans in place for key staff.
- A copy of the complaints handling and claims handling processes.
- A copy of the Financial Services Provider (FSP) license - licensing conditions will be verified from the FSB website including the following:
- FSP number.
- Status of the FSP (Authorised, Withdrawn, Lapsed, Suspended).
- License categories. (CAT I - 1.2 and 1.6)
- Number of key individuals and representatives relative to the size of the business.
- Details of the compliance officer.
- A draft copy of the insurance certificates to be issued by the applicant (to check wording against local regulations).
- Latest annual financial statements.
- Confirmation that a separate bank account will be opened to receive premiums pertaining to the coverholder business.
- Confirmation of processes in place to process tax and VAT due.
- Confirmation of professional indemnity cover.
- Where premiums are collected, confirmation of Intermediaries Guarantee Facility (IGF) in place.
- Where a collecting agency is used to collect premiums, confirmation as to whether an agreement is in place with the agency.
- A declaration from the entity’s compliance officer that they meet the required operational abilities as described in the Financial Advisory and Intermediary Services (FAIS) Act (an office visit may be conducted by the LSA Compliance Officer).
- Cost analysis reflecting how the proposed binder fees have been calculated. This analysis is necessary to determine compliance with the following:
- The fees charged for the binder function (even if these are below the capped percentage) are reasonable and commensurate with the actual cost of performing the binder functions.
- The entity is not remunerated twice for the same activity.
- Any potential conflicts are actively and appropriate managed.
- A motivation as to why the proposed binder agreement will not impede on the service delivery to clients, will promote fair outcomes for policyholders and will not result in duplication of administrative efforts or costs for the insurer and finally will not impede on the insurer’s ability to, identify, assess, manage and report on the risks of poor customer outcomes on an ongoing basis.
- Where a binder fee in excess of the permitted fee is proposed, a copy of the motivation application that will be submitted to the Registrar for consideration and approval must be provided (see the table linked to below). This motivation must be accompanied by a cost analysis.
- Where the entity will enter into more than one binder agreement with more than one insurer, written agreement by all insurers must be provided.
- All new binder agreements entered into with a non-mandated intermediary (NMI), must be notified to the Regulator 30 days before the effective date of the binder agreement.
- A copy of the applicant’s governance, risk management and internal control framework.
- Information policies as it relates to data accuracy, validity, completeness and security.
- Confirmation of operational ability from the applicant’s compliance officer confirming integration between technology systems of the insurer and the binder holder will be possible and will enable the transfer of data as per the PPRs (to verify operational ability, an on-site visit to the coverholder may be required).
Governance and oversight requirements for Managing Agents
- The managing agent must indicate how it will exercise effective oversight over the binder holder on an ongoing basis, particularly in respect of identifying, assessing, managing and reporting on the risks of poor customer outcomes.
- The managing agent must satisfy itself that the binder holder has appropriate governance, risk management and internal control framework, and is able to comply with applicable laws, the terms of the binder agreement and the fitness and propriety requirements (including any specific technical abilities) that must be met to perform the binder activities. Where concerns around these controls arise, the managing agent must evidence that appropriate contingency plans are in place to address any shortcomings, including not providing policy and policyholder data (this will form part of the due diligence process conducted by both managing agents and LSA).
- The managing agent must have documented controls in place relating to information accuracy, validity, completeness and security (this will form part of the due diligence process conducted by both the managing agent and LSA).
- The managing agent must be able to evidence that the entity has the required operational ability to ensure integration between technology systems of the insurer and the binder holder that will enable the transfer of data as per the PPRs (this will form part of the due diligence process conducted by both the managing agent and LSA).
- The managing agent must be able to provide documented process that reflects how and how often the managing agent will assess the appropriateness of the functions being performed by the binder holder in terms of the binder agreement in line with their Treating Customers Fairly (TCF) objectives.
- The managing agent must provide a documented process to address any non-adherence to the binder agreement.
- Records must be stored for five years after the termination of the binder relationship between the insurer and the binder holder.
Table 1: Fees relating to non-mandated intermediaries (not applicable to UMA’s)
The binder fees will be capped as per the table attached here. Therefore a maximum fee of 9% (depending on the activities performed under the binder agreement) can be charged, provided that the binder holder can evidence that the fee is reasonable and commensurate to the activities performed.
- Any cancellation/termination of a binder must be notified to the South African Regulator at least 60 days before the cancellation/termination date.
- The insurer must, at least 30 days before entering into a binder agreement with an entity, notify the South African Regulator.
On renewal of the binder agreement, the Lloyd’s broker/underwriter must provide a declaration confirming whether any changes were made to the existing binder agreement.
Annual reviews will be conducted during which the same due diligence process as described above will be applied. In addition, the coverholder must report any changes in the status of the entity, key individuals, processes or fit & proper status as soon as reasonably possible.