Insurance Bill: deliberations

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Finance Standing Committee

12 September 2017
Chairperson: Mr Y Carrim (ANC)
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Meeting Summary

The Committee met with Treasury and the Financial Services Board for further deliberations on the Insurance Bill. The Bill was built on the Twin Peaks model of financial regulation envisaged in the Financial Sector Regulation Act (FSRA) in respect of prudential supervision. It provided a consolidated legal framework for the prudential supervision of insurers as envisaged in the FSRA. The Insurance Bill will: promote financial inclusion and insurance sector transformation; enhance safety and soundness of insurers through introducing a new Solvency Assessment and Management (SAM) regime; help maintain financial stability through introducing a framework for insurance group supervision; and facilitate alignment with international standards (adapted to South African circumstances) in accordance with South Africa’s G20 commitments. Also, the Bill entrenched the principle of proportionality and was empowering.

Major amendments were as follows:

Chapter 4- Licensing, Suspension and Withdrawal of Licence

There were concerns that there were no sufficient consequences for non-compliance with the financial sector charter. The clause enabled the Prudential Authority to broaden consequences for non-compliance with the charter.

Clause 22(3) had been amended to explicitly provide for the public policy objective of transformation at licensing stage. At licensing stage, the applicant should have a clear plan to meet transformation objectives. This was a more appropriate solution than requiring hard coded minimum targets.

Clause 16- Termination of appointment of key persons

On clause 16(4), the Association of Savings and Investment South Africa (ASISA) had proposed an amendment that, “any key person, other than an auditor, of an insurer or a controlling company who resigns or whose appointment has been terminated, must at the request of the Prudential Authority, notify the Prudential Authority in writing of any matter relating to the affairs of that insurer or controlling company of which the key person became aware in the performance of that key person’s role, responsibilities, duties or functions, and which may materially prejudice the ability of the insurer or controlling company to comply with this Act. However, Treasury disagreed as the clause only applied where the PA has requested the person to notify the PA of any potential non-compliance issue. It should not be for the person to decide on what was material and not material. The insurer will not have to respond to non-material matters; the PA will on notification apply its mind as to which matters, if any, to address with the insurer.

Clause 33- Governance framework

ASISA believed clause 33(1) and (2) had the effect that an insurer as well as a controlling company must each have an audit committee and cannot rely on Section 94(2) of the Companies Act. ASISA submitted that a separate audit committee for an insurer or controlling company may not always be needed, as is recognized in the Companies Act. However, Treasury disagreed as both the insurer and controlling company should have an audit committee. However, a general exemption provision was provided for that builds on the exemption provisions provided for in the FSR Act – this will facilitate the granting of an exemption from this provision where appropriate.

The EFF emphasised the need for clear and cogent legislative interventions to significantly redress imbalances of the past. Decisive political guidance had be taken by the Committee. The skewed ownership- not reflecting the demographics of the country- within the insurance space had to be addressed.

The Chairperson said the EFF’s input was not any different from the belief held by the majority of ANC Members. However, there was no position by the majority party in respect of legislating demographic representation in ownership. There was emerging policy but no mandate to fully agree with the EFF at this stage. Also, the idea was that the transformation summit- to be convened later in the year, and the transformation charter should also give guidance. The Bill, the transformation summit resolutions and the charter should speak to each other.

The Chairperson suggested that Treasury and a subcommittee, consisting of Members based in Tshwane, deliberate on the Schedule of the Bill during the constituency period. Clauses dealing with major policy issues would be flagged for the Committee’s consideration after the constituency period. Major clauses dealing with transformation policy would be discussed on a later date, and the Bill would be voted on by the third week of November 2017.

Meeting report

Ms Jo-Ann Ferreira, Executive, Financial Services Board, stated that the Bill was built on the Twin Peaks model of financial regulation envisaged in the Financial Sector Regulation Act (FSR) in respect of prudential supervision. It provided a consolidated legal framework for the prudential supervision of insurers as envisaged in the FSR Act.

The Chairperson stated that the Insurance Bill would be voted on by the third week of November 2017. Also, major clauses dealing with transformation policy would be discussed on a later date.

Ms Ferreira took the Committee through the proposed amendments.

The Chairperson said clauses 6 to 9 were straightforward and Members agreed.

Insurance Bill: deliberations

Clause 10- Designation of insurance group and licensing of controlling company

Ms Ferreira said clause 10 stipulated the designation of insurance groups and licensing of controlling companies.

Clause 10(2) had been amended to clarify that the designation of the insurance company must include the designation of a holding company that must apply to be the controlling company of the group.

Clause 10(5) was amended to align with the FSR Act.

The Chairperson said the clause dealt with transformation and the Committee had previously agreed to defer all transformation clauses. The Committee, through the interim Transformation of the Financial Sector report, urged the participation of previously disadvantaged groups within the insurance space- provided it does not disadvantage current insurance policyholders. Also, Treasury should not use the protection of policyholders as a rationalisation to preclude new entrants and emerging companies. Broadly, the Committee agreed with the clause but would want to have further discussions on its policy implications. The Committee would come back to the clause.

Clause 14- Approval of appointment of certain key persons

Ms Ferreira stated that as per comments received by Treasury, the view of the Association of Savings and Investments South Africa (ASISA) was that a change of auditing firm by the insurer should require the approval of the Prudential Authority (PA), but not necessarily a change in the audit partner as this can add unnecessary delays and costs. ASISA submitted that auditing firms already had a professional accountability and responsibility to see that the partner appointed to an insurer had the necessary experience and expertise and it was also in the interests of the insurers to check that this was the case. ASISA recommended that a proportionate approach would be to provide that the PA should be notified of a change in audit partner and is able to request further details, and direct that a change be made if they consider it reasonably necessary.

Treasury disagreed on the basis that it was important to also approve the audit partner to ensure that the audit partner has the necessary expertise and experience and to facilitate accountability of the audit partner. This approach would also allow for the PA to require the removal of the audit partner as opposed to the audit firm, which in turn may mitigate reputational risk to the firm.

Mr F Shivambu (EFF) said the Bill should prominently espouse transformation, consistent with the Constitution. Suggestions and proposals from the EFF on ownership of insurance companies must find expression in the Bill.

The Chairperson replied that the Bill would not be passed before the transformation of the financial sector report. The Committee would want to vote on the report before it passed the Bill.

Clause 16- Termination of appointment of key persons

On clause 16(4), ASISA had proposed an amendment that, “any key person, other than an auditor, of an insurer or a controlling company who resigns or whose appointment has been terminated, must at the request of the Prudential Authority, notify the Prudential Authority in writing of any matter relating to the affairs of that insurer or controlling company of which the key person became aware in the performance of that key person’s role, responsibilities, duties or functions, and which may materially prejudice the ability of the insurer or controlling company to comply with this Act. However, Treasury disagreed as the clause only applied where the PA has requested the person to notify the PA of any potential non-compliance issue. It should not be for the person to decide on what was material and not material. The insurer will not have to respond to non-material matters; the PA will on notification apply its mind as to which matters, if any, to address with the insurer.

Members agreed with Treasury’s reasoning.

The Chairperson asked why clause 16(5) had been deleted.

Ms Ferreira explained that it was deleted to align the Bill with the FSR Act.

Chapter 4- Licensing, Suspension and Withdrawal of Licence

Ms Caroline Da Silva, Deputy Executive Officer: Financial Advisory and Intermediary Services (FAIS), FSB, said there were concerns that there were no sufficient consequences for non-compliance with the Financial Sector Charter. The clause enabled the PA to broaden consequences for non-compliance with the charter.

Clause 22(3) had been amended to explicitly provide for the public policy objective of transformation at licensing stage. At licensing stage, the applicant should have a clear plan to meet transformation objectives. This was a more appropriate solution than requiring hard coded minimum targets.

The Chairperson agreed but indicated the Committee would want to deliberate further on whether the clause should be strengthened. Transformation had to be understood as reducing monopoly, de-racialising the sector among other progressive overtures. He emphasised the need to think about consequences for non-compliance with transformation objectives which would not destabilise the sector. 

Mr Shivambu emphasised the need for clear and cogent legislative interventions to significantly redress imbalances of the past. Decisive political guidance had be taken by the Committee. The skewed ownership- not reflecting the demographics of the country- within the insurance space had to be addressed.

The Chairperson said Mr Shivambu’s input was not any different from the belief of the majority of ANC Members. However, there was no position by the majority party with respect to legislating demographic representation in ownership. There was emerging policy but no mandate to fully agree with the EFF at this stage. Also, the idea was that the transformation summit-to be convened later in the year, and the transformation charter should also give guidance. The Bill, the transformation summit resolutions and the charter should speak to each other.

Mr Shivambu made reference to clause 22(3). Transformation benchmarks should be set out clearly. At all times, the PA must clearly state and ensure that licenses are evenly distributed among private persons, cooperatives, State-Owned Entities and other prospective players. The status quo should not be maintained by legislation. Also, transformation commitments should not be relegated to charters which did not have meaningful impact.

The Chairperson said the ANC had no position on Mr Shivambu’s proposal.

Mr Shivambu added that there must be a limit to the number of foreign companies within the insurance space as profits in the majority of cases were not reinvested in the country. There had to be a cap on the number of foreign-owned insurance companies.

Mr D Hanekom (ANC) cautioned that legislation should not be far off from provisions of the World Trade Organisation and other international commitments that the country was a signatory to.

Clause 27- Suspension of license

Mr Shivambu said the Prudential Authority should suspend the licence of an insurer or controlling company in full or in part, if it appeared, on the basis of available information that the insurer or controlling company was failing to adhere to transformation benchmarks.

Ms Ferreira replied that the consequences for non-compliance and benefits from suspending non-compliance companies should be weighed before suspension of a license because at times the impact on the financial sector could be catastrophic. She felt the focus should be on how to effectively police and ensure compliance using measure such as penalties.

The Chairperson agreed with Treasury and indicated that Members were satisfied with clauses 28 to 32

Clause 33- Governance framework

Ms Ferreira stated that ASISA believed clause 33(1) and (2) had the effect that an insurer as well as a controlling company must each have an audit committee and cannot rely on Section 94(2) of the Companies Act. ASISA submitted that a separate audit committee for an insurer or controlling company may not always be needed, as is recognised in the Companies Act.

Treasury disagreed as both the insurer and controlling company should have an audit committee. However, a general exemption provision was provided for that builds on the exemption provisions provided for in the FSR Act – this will facilitate the granting of an exemption from this provision where appropriate.

The Chairperson said the clauses sounded plausible.

Clause 36- Maintenance of financially sound condition

Ms Ferreira said that Professional Provident Society (PPS) had submitted that clause 36(2) must be clearly worded in such a way that it excludes business operating on a mutual model with members as the beneficial owners through a trust. This will mean that the trust itself was excluded from the requirements to hold capital as group eligible own funds to meet any prescribed group solvency capital requirement. Treasury had disagreed on the basis that where trust controls more than one business the trust must meet the financial soundness requirement. The rationale for group supervision equally applies to mutual structures holding more than one business. Insurance groups benefit from the pooling and diversification of risk, intra group financing, and integrated governance structures. However, being part of a group also presents a range of risks to an insurer. These may include, for example, direct or indirect risk exposures to other group entities, conflicts of interest, and inadequate risk assessment. The Bill introduced a new group-wide supervision regime for insurers, including where a mutual entity controls the insurance group. This allowed the regulator to regulate and place requirements on the controlling company, in order to protect policyholders and beneficiaries from risks emanating from the insurance group. Also, the capital did not have to be held at the controlling company level – it can be held at the level of the subsidiaries.  

Treasury had attempted to articulate the conditions clearer.  

Clause 41- Security requirements for branches of foreign reinsurers and Lloyd’s- Trust and trustees

Clause 41(3) (b) had been amended to read, “The trust deed may not be amended or terminated by any person without prior approval of the PA”.

The Chairperson asked if FSB and Treasury had consulted with the relevant department dealing with trusts and trustees. This was basic courtesy that must be followed.

Treasury indicated it had not consulted with the relevant department. Treasury and FSB did not think it would be a concern and felt the clause was unique and robust.

The Chairperson said Treasury would want to consult before making amendments dealing with issues in the purview of other departments in future.

Clause 42- Failure to provide or maintain security

Ms da Silva said clause 42(2) had been amended to “The Prudential Authority may, in the circumstances referred to in subsection (1) or if the Prudential Authority reasonably believes that a branch of a foreign reinsurer or a Lloyd’s underwriter is failing to provide or maintain the security referred to in section 40 —

(a)        direct a branch of a foreign reinsurer or Lloyd’s to submit a recovery scheme to the Prudential Authority for approval that sets out the measures that the branch of a foreign reinsurer or Lloyd’s will implement to restore the security; or

(b)        suspend or withdraw  the  licence  of  the  branch  of  a  foreign  reinsurer  or  Lloyd’s underwriters and Lloyd’s.

The Chairperson said it was perfectly reasonable. Strengthening the reporting and disclosure requirements was paramount.

Clause 46- Annual financial statements and accounting requirements

Ernst and Young had submitted that clause 46(1) required the insurer or controlling company’s annual financial statements to be prepared in accordance with IFRS, but omitted to make reference to the requirements for preparation of company financial statements set out in the Companies Act. As the definitions of annual financial statements contained in the Companies Act were not aligned to the definition contained in IFRS, unless reference was made to both IFRS and the Companies Act for preparation of financial statements there was potential for a conflict of laws.

Treasury had agreed to amend the clause to read “in accordance with the Companies Act and International Financial Reporting Standards issued by the International Accounting Standards Board or a successor body”.

The Chairperson suggested that Treasury and a subcommittee, consisting of Members based in Tshwane, deliberate on the Schedule of the Bill during the constituency period. Clauses dealing with policy issues would be flagged for the Committee’s consideration after the constituency period.

The meeting was adjourned.  

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