A Q&A guide to insurance and reinsurance in South Africa.
The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the regulation of insurance and reinsurance contracts; the corporate structure of insurers and reinsurers; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities, including authorisation/licensing requirements; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in South Africa.
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This article is part of the PLC multi-jurisdictional guide to insurance and reinsurance. For a full list of contents visit www.practicallaw.com/insurance-mjg.
The South African insurance industry is highly developed and sophisticated. Both the long-term and short-term insurance industries are highly regulated. Many international reinsurers have offices in South Africa, and Lloyd's of London has a strong presence in the market. The local market has strong competition among insurers. There is also a strong broker and insurance intermediary influence.
The past 12 months has seen the insurance regulator focusing on projects that will result in greater regulation of insurers and reinsurers.
Current and future reform in the pipeline are as follows:
Financial soundness. The Solvency Assessment and Management Project (SAM), to come into force in January 2014, introduces a risk-based solvency regime for both long-term and short-term insurers and reinsurers based on the EU's Solvency II (Directive 2009/138/EC on the taking-up and pursuit of the business of insurance and reinsurance). This is to ensure that underwriting capital requirements align with underlying risks and maintain financial stability. The primary purpose is the protection of policyholders.
The binder regulations to the Short-term Insurance Act 1998 (STIA) and Long-term Insurance Act 1998 (LTIA) came into force on 1 January 2012. The regulations make a clear distinction between non-mandated and mandated intermediaries, and underwriting managers. Non-mandated intermediaries, in addition to commission, can earn a fee for providing binder functions on behalf of an insurer (that is, they can provide immediate insurance coverage that can be in oral or written form). A mandated intermediary can only earn commission as these intermediary-only acts on behalf of a policyholder by virtue of a written mandate. Underwriting managers can earn a fee for performing binder functions on behalf of an insurer; in addition, they can also gain a profit on underwriting. The underwriting manager can earn a profit as it only acts as an agent of the insurer.
Micro-insurance. A micro-insurance bill will be drafted in 2012. The bill seeks to lower the compliance and solvency requirements for "micro-insurance" policies to enable product offering and development in this area. (Micro-insurance generally refers to insurance involving low premiums, low caps or low coverage.) The bill seeks to ensure lower income earners are able to access insurance policies.
Risk based supervision. The Financial Services Board (FSB) will use this supervisory tool to ensure insurer and reinsurers are able to meet their obligations to policyholders as they fall due.
Treating customers fairly (TCF). This project seeks to implement a policy on how consumers should be treated from marketing, claims stage, renewal of policies and at cancellation of a policy. Implementation is expected to be in 2014.
The insurance industry (including short-term and long-term insurance, and reinsurance) in South Africa is governed primarily by:
The STIA, which regulates the short-term industry (that is, risk-based insurance of assets, bodily integrity and liability).
The LTIA, which regulates the long-term industry (mainly life and investment products).
The STIA and LTIA establish the offices of the registrars of short-term and long-term insurance. The executive officer of the FSB appoints each of the registrars. The registrars, through the FSB, are responsible for regulating the insurance industry. Regulatory and statutory information is available on the FSB's website at www.fsb.co.za.
The STIA and LTIA regulate the activities of insurers and reinsurers and outline the reporting, liquidity and capital requirements that must be met. The FSB supervises the reporting requirements and the regulation of insurers and reinsurers.
Insurance in South Africa is undertaken through an insurance contract. An insurance contract is reciprocal in nature: in exchange for premiums paid by an insured, the insurer undertakes to pay the insured a benefit on the occurrence of a specified event.
A short-term policy under the STIA can be one of, or a contract combining, any of the following (including contracts to renew or vary):
An engineering policy.
A guarantee policy.
A liability policy.
A miscellaneous policy.
A motor policy.
An accident or health policy.
A property policy.
A transportation policy.
A long-term policy under the LTIA can be one of, or a contract combining, any of the following (including contracts to vary):
An assistance policy.
A disability policy.
A fund policy.
A health policy.
A life policy.
A sinking fund policy.
Since 1998, the insurance contract has become more consumer-friendly. For personal lines contracts (that is, short-term contracts that relate to insurance of individuals rather than business entities) the Policyholder Protection Rules (PPR) stipulate how the policy must be presented to the policyholder to make it more accessible (for example, a personal lines policy must be in plain language) (see Question 18, Personal lines policies).
A short-term reinsurance policy in the STIA is specifically defined as "a reinsurance policy in respect of a short-term policy" and a long-term reinsurance policy in the LTIA is defined as "a reinsurance policy in respect of a long-term policy".
The STIA and LTIA regulate contracts that fall within the definition of a short-term and long-term policy, and reinsurance policy in respect of any insurance business carried out in South Africa (see Question 3).
Certain specific types of business are regulated by specific statutes:
The Medical Schemes Act 1967 (MSA) regulates certain accident and health business concerning providing money to pay medical expenses.
The Pension Funds Act 1956 regulates pensions.
The Unemployment Insurance Act 2001 regulates unemployment insurance.
The Compensation for Occupational Injury Act 1993 regulates compensation for injury arising in the course of employment.
The Road Accident Fund Act 1996 covers road accident victims, within limits.
Under the STIA and LTIA, the registrar cannot grant a licence to an entity to carry on insurance business in South Africa as an insurer/reinsurer unless the applicant is a public company incorporated in South Africa. The company must be incorporated with its main object to carry on short-term or long-term insurance business.
The FSB regulates insurers and reinsurers in the same way under the STIA and LTIA. Regulation is the same for both insurers and reinsurers. Both the STIA and LTIA prohibit any person from carrying out insurance or reinsurance business in South Africa unless registered to do so.
Lloyd's has a local appointed representative in South Africa. The STIA contains a specific chapter dealing with Lloyd's, which:
Establishes a trust fund.
Regulates the conduct of business by Lloyd's underwriters in South Africa through local coverholders as if its underwriters were registered as insurers in South Africa.
Insurers and reinsurers can carry on non-insurance business that is ancillary to their main business. The registrar approves the constitutional documents of an insurer and reinsurer once they are licensed. The main business of the entity must be to provide insurance. Registration could be refused if the stated business of the company included something contrary to the public interest or to policyholder interests.
Generally there are no statutory limits or restrictions relating to the transfer of risk by an insurance or reinsurance company provided that, where the insurer or reinsurer retains the risk, it ensures that it always remains financially sound and solvent as required by the STIA and LTIA. Restrictions can exist at registration stage under which the registrar can require the insurer to:
Reinsure a proportion of its liabilities.
Limit the scope of its licence.
Part II of the STIA and LTIA sets out the requirements for registration as an insurer or reinsurer respectively. An entity cannot conduct any kind of long-term or short-term insurance business in South Africa unless registered to do so.
Application is made to the appropriate registrar in accordance with the application form that has been published by the registrar and made available on www.fsb.co.za.
The information that must be furnished relates to:
The nature of business to be written.
The registrar has the discretion to impose conditions on the registration of the insurer or reinsurer, where appropriate.
If a person is providing intermediary services as defined in the Financial Advisory and Intermediary Services Act, 2002 (FAIS Act), then that person must be registered as a financial services provider (FSP), or as a representative of an FSP. Intermediary services include financial advice and services relating to entering into products, dealing with funds and handling claims.
It is an offence to provide intermediary services and not be registered under the FAIS Act.
No exemptions or exclusions apply (see Question 9, Insurance/reinsurance providers).
No exemptions or exclusions apply (see Question 9, Insurance/reinsurance intermediaries).
Claims handling and similar services do not require any licensing or registration. However, if intermediary services are being rendered (see Question 9, Insurance/reinsurance intermediaries).
There are no particular requirements concerning the ownership or control of insurance or reinsurance companies. There is no restriction concerning the identity or domicile of a shareholder in a locally registered insurance or reinsurance company. However, the following rules apply:
Approval from the registrar is required where a shareholder wishes to acquire more than a 25% shareholding of an insurance or reinsurance company (see Question 12, Insurance/reinsurance providers).
Exchange control approval may be required for foreign shareholders to repatriate profits.
The acquirer must have sufficient capital.
There are no specific restrictions or authorisations concerning the ownership or control of foreign entities or shareholders in local entities providing marketing of insurance or reinsurance services. Any local or foreign entity providing an intermediary service or giving financial advice in South Africa, as defined in the FAIS Act, must be licensed as an FSP (see Question 9, Insurance/reinsurance intermediaries).
See above, Insurance/reinsurance intermediaries.
Approval by the registrar is needed for a shareholder to acquire a more than 25% shareholding in an insurance or reinsurance company (see Question 11, Insurance/reinsurance providers). Any changes in shareholding must be notified to the registrar who has discretion to regulate those changes. The registrar may object to a particular person acquiring a more than 25% shareholding if in its discretion it believes the influence of the person is not in the interests of the public or the policyholder, or is prejudicial to the insurer.
To maintain an insurance or reinsurance licence, the STIA and LTIA require that the business must be in a financially sound condition, and possess sufficient assets, provide for liabilities, and ensure liabilities can be met at all times.
This means that insurers and reinsurers must have assets, in South Africa, the aggregate value of which, on any given day, is at least the aggregate value of its liabilities on that day. The STIA and LTIA provide for the type and spread of assets which the insurer must hold, and contain provisions concerning valuation. Insurers cannot, without the consent of the registrar:
Allow their assets to be held by others.
Encumber their assets with security interests.
Invest in derivatives other than those stipulated in the STIA and LTIA.
Insurers and reinsurers must also ensure that they maintain their FSP licence in compliance with the terms of the FAIS Act if they are providing financial advice (see Question 11, Insurance/reinsurance intermediaries).
If a business provides intermediary services then it must comply with licence requirements under the FAIS Act and its Code of Conduct. FSPs must ensure that they:
Are financially sound.
Are competent to provide the services.
Act with integrity.
See above, Insurance/reinsurance intermediaries.
STIA and LTIA. The STIA and LTIA stipulate the offences and penalties for non-compliance with statutory requirements. Non-compliance includes:
Not furnishing the registrar with certain information or documentation.
Failure to maintain a financially sound condition.
In these cases, the insurer or reinsurer will be guilty of an offence and liable for a fine not exceeding ZAR100,000 (as at 1 January 2012, US$1 was about ZAR8).
If an insurer or reinsurer operates without a licence, it can be fined ZAR1 million.
FAIS Act. For FSPs, non-compliance with the terms of the FAIS Act can result in either or both of:
A fine of ZAR1 million.
Imprisonment for a period not exceeding ten years.
In extreme cases, the FSP can be punished with loss of the FSP licence.
Court actions. The registrar can bring a court action for:
Payment of an amount to be determined by the court as compensation for losses suffered by any other person.
A penalty for punitive purposes.
The costs of the legal proceedings.
FAIS Act penalties apply if the breach occurs when providing advice or intermediary services (see above, Insurance/reinsurance providers).
FAIS Act penalties apply if the breach occurs when providing advice or intermediary services (see above, Insurance/reinsurance providers).
There are no restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold.
The reinsurance treaty or policy's terms and conditions govern the extent to which a reinsurance company can or must monitor the cedant company's claims, settlements and underwriting.
The reinsurance treaty or policy's terms and conditions govern notification and disclosure obligations.
The typical form of a non-personal lines insurance policy consists of:
A schedule of insurance, including:
the insured's details;
the insured property or risks;
the period of insurance;
the excess/deductable; and
other specific information.
An insuring clause. This clause stipulates what type of insurance and benefit is offered and what risks are covered.
The specific risks or benefits covered.
Exceptions and exclusions to cover.
General terms and conditions.
Specific terms and conditions for each type of cover.
Typical clauses found in this policy wording are:
War, riot, terrorism, nuclear risk and asbestos exceptions.
Consequences for misrepresentation by the insured.
Personal lines policies can include the same wording as non-personal lines policies but the wording is tailored towards individual persons. Personal lines policy wordings must comply with PPR, and:
Be in plain language.
Be fair and protect consumer interests.
Give policyholders at least 90 days to make representations relating to a rejected claim or dispute concerning the amount of a claim.
Advise policyholders of alternative dispute resolution mechanisms.
Provide policyholders with a period after the expiry of the 90-day period, of not less than six months, to institute legal action.
The Consumer Protection Act 2008 (CPA), which will come into force in relation to insurance on 1 October 2012. It has a large number of requirements that policy wordings must include to protect the individual. The policy wordings must be consumer friendly and protect their rights. No policy wording will be able to waive or deprive an insured's rights under the CPA and the insurance industry is preparing for this major shift in requirements.
Both facultative and treaty reinsurance are present in the South African market. Reinsurance contracts often contain follow the settlements and follow the fortune clauses. Other common clauses in reinsurance treaties include choice of law, arbitration in the event of a dispute, and consequences of misrepresentation and breach.
The STIA and LTIA impose specific obligations and limits concerning:
The free choice of insurer in certain transactions.
Prohibition on inducements.
Regulated premium collection by intermediaries.
Limited remuneration for intermediaries.
Misrepresentation and non-disclosure.
Contracts with minors.
Representations by agents.
Pay-as-paid clauses under which insurers must pay the insured even if the reinsurer has not paid the insurer.
PPR (see Question 18, Personal lines policies).
The PPR provide for a review procedure for rejected or limited claims. If an insured is not satisfied with the outcome of a claim, or the amount received under a claim, it can complain to the relevant ombudsman.
A complaint can be made to the FAIS ombudsman concerning the provision of advice or the rendering of intermediary services under the FAIS Act.
The CPA will also provide relief to consumers. If the insurance policy is not consumer friendly, consumers are able to enforce a right or resolve a dispute by:
Referring the matter directly to the Tribunal.
The matter can be reported to the FAIS or the long-term or short-term ombudsman. (Even though a licensed intermediary under the FAIS Act is exempt from the CPA, the services that it provides that are not intermediary services are not exempt from the FAIS Act.)
Consumer, either by:
approaching a court with jurisdiction; or
referring the matter to another alternative dispute resolution agent.
Finally, the insured can bring an action in court.
The Competition Act, 1998 prohibits standard industry-wide policy wordings. The quasi-governmental South African Special Risk Insurance Association (SASRIA) provides war risk, riot and similar cover.
For risk insurance, the following must be established:
An insured event must have occurred.
There must be a patrimonial loss with adverse financial consequences or damage suffered as a direct result of the insured event occurring.
The insured must have complied with the terms and conditions of the insurance policy.
Life and investment policies pay benefits on the happening of either the insured event or a stated maturity date.
A third party can claim under an insurance policy if he has been noted as a party entitled to claim benefits under the policy. Such a person may require an insurable interest, depending on the nature of the benefit.
A debt is extinguished three years after the right to claim arose (Prescription Act 1969). Insurance policies typically stipulate a time-bar period to institute a claim. If that term is not complied with, the insurer is usually not liable. The insured always has the recourse of approaching the relevant ombudsman or instituting legal action.
A reinsurance contract exists between the insurer/assurer and the reinsurer. The original policyholder or other third party cannot therefore enforce the reinsurance contract against a reinsurer as it does not have a direct claim against the reinsurer. A policyholder can bring a direct action against the reinsurer for a liability claim if the primary insurer is insolvent (Insolvency Act 1936).
The remedies available are:
Performance of the policy obligations.
Damages (a damages claim is rarely brought).
Cancellation of the policy.
Costs of the legal proceedings (if legal proceedings are brought by the injured party).
Punitive damages are not provided for under South African law. There is nothing in law to prevent an insurance policy covering punitive damages, provided that the policy does not indemnify the insured for a risk which is the consequence of the insured's deliberate or intentional conduct. However, this would still need to be tested against public policy. If it is contrary to public policy, the insurance policy would be unenforceable.
The Insolvency Act 1936 applies to cases of insolvency. The STIA and LTIA devote separate parts to the topic of judicial management and winding-up of insurers. However, both the STIA and LTIA will have to be amended to take into account a new Companies Act 2008 that came into force on 1 May 2011. The Companies Act 2008 has done away with judicial management and introduced business rescue which is similar to Chapter 11 filings in the US. The relevant registrar has the power to intervene and to become a party to the application for the judicial management or winding-up of the insurer. The registrar will intervene if it deems it in the interest of the insurer's policyholders to do so. Written approval of the Minister of Finance is required to apply for the winding-up of an insurer. The policyholder will be an unsecured or concurrent creditor in the liquidation.
Where an insurer is in financial distress, the registrar will almost always apply to the court to put the insurer under curatorship. A curator is a court-appointed figure, supervised by the High Court, with wide powers to wind down the insurer in the best interests of the policyholders and creditors.
See Question 29.
See Question 29.
The ordinary rules for determining taxable income applies to short-term insurers, reinsurers and other persons or entities providing insurance. However, short-term insurers can deduct as expenditure incurred:
Premiums on reinsurance.
The actual amount of liability incurred in respect of any claims, less any claims recovered.
The tax commissioner can make certain allowances for:
Claims brought to the insurer's attention but not yet paid.
Claims that are neither brought to the insurer's attention nor paid.
Allowances claimed as a deduction in a year of taxation assessment must be included as income in the next year of assessment.
Long-term insurers have special rules of taxation. Long-term insurers hold and administer certain of their assets on behalf of policyholders while the balance of the assets belong to shareholders. Long-term insurers are therefore taxed at different tax rates depending on which of the four funds assets have been allocated to:
Indexed policyholder fund.
Individual policyholder fund.
Company policyholder fund.
If disputes cannot be agreed between the insured and insurer, the following methods can be used to deal with complaints or disputes:
In relation to disputes concerning policy or claim rejection disputes, the dispute can be referred to the short-term or long-term ombudsman.
In relation to disputes concerning the FAIS Act, the dispute can be referred to the FAIS ombudsman.
Otherwise, disputes can be litigated in a court or arbitrated. Under the PPR, a personal lines policy cannot provide that disputes must be resolved by arbitration.
Formal disputes between insurers and reinsurers are very rare. Usually a compromise is sought for business or commercial considerations. If a reinsurance dispute is not resolvable by agreement, court litigation or arbitration is undertaken. There is a very limited body of South African law dealing with reported reinsurance judgements.
See Question 33.
See Question 33.
See Question 1.
Main activities. The SA Insurance Association represents most of the insurance companies in South Africa. It promotes the short-term insurance industry to create an awareness and understanding of the industry.
Main activities. ASISA represents the majority of South Africa's asset managers, collective investment scheme management companies, linked investment service providers, multi-managers and life insurance companies.
Qualified. South Africa, 1970
Areas of practice. Financial services and markets; banking and finance; media; pensions.
Advises the South African Insurance Association, Lloyd's of London in South Africa, the National Credit Regulator, most South African insurers, and many brokers.
Qualified. South Africa, 2008
Areas of practice. Insurance; financial services and markets; shipping; banking and finance.
Advises insurance associations in South Africa, most South African insurers and many brokers.