The draft Insurance Laws Amendment Bill addresses development in the South African insurance market in respect of corporate governance, risk management, internal controls and insurance group supervision. The draft Insurance Laws Amendment Bill (ILAB) forms part of the interim of the Financial Services Board’s (FSB) Solvency Assessment and Management (SAM) regime and aligns the South African Insurance market with internationally accepted standards for insurance supervision and regulation. (December 2013)

Requirements in respect of corporate governance, risk management and internal controls

The draft ILAB requires insurers to demonstrate that they have adequate corporate governance, risk management, and internal controls in place to manage
their business. These requirements include:

Corporate governance:
Insurers must adopt and implement an effective governance framework that provides for the prudent management and oversight of their insurance business and adequately protects the interests of policyholders.

The governance framework must be proportionate to the nature, scale and complexity of the insurer’s insurance business and risk profile, and must as a minimum provide for:

  • # An adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities and an effective system for ensuring the transmission of information;
  • # Compliance with the relevant insurance legislation and prescribed requirements;
  • # Written policies, approved by the insurer’s board of directors, in respect of general governance, risk management, investments, reinsurance and risk mitigation, internal controls, remuneration and outsourcing.

The FSB may at any time review an insurer’s governance framework or require the board of directors and/or senior management of the insurer to demonstrate that the governance requirements are being complied with. The FSB may also direct insurers to strengthen and effect improvements to their governance frameworks.

Board of Directors:
The draft ILAB requires insurers to have a sufficient number of non-executive and
independent directors to promote objectivity in decision making. An appropriate number and mix of individuals are required to ensure that there is an overall
adequate spread and level of knowledge, skills, and expertise.

The chairperson of the board of directors should be independent and may not
have been the chief executive officer at any time during the preceding three years. The board of directors must establish an audit committee. Exemption from the FSB is required if the board elects not to establish a risk committee or a remuneration committee.

The audit committee of an insurer must consist of at least three directors. The 2 of 3 audit committee members should not be employees of the insurer or any of its related parties. The chairperson of the board of the insurer or its controlling company may not be a member of the audit committee.

Duties of each director:
Each director of an insurer, in addition to the requirements of the Companies Act, must:

  • # At all times meet the fit and proper requirements as prescribed in the draft ILAB;
  • # Act in the best interests of the insurer and policyholders, putting the interests of the insurer and policyholders ahead of their own interests; and
  • # Exercise independent judgment and objectivity in decision making, taking into account the interests of the insurer and policyholders.

Risk management policies:
The draft ILAB requires insurers to develop and regularly review adequate written risk management policies. This includes policies in respect of investments, reinsurance, risk mitigation and remuneration.

Internal control system:
The development and implementation of a compliance plan which ensures the insurer’s compliance with the Insurance Acts, and provides for the effectiveness and efficiency of operations, ensuring the availability and reliability of financial and non-financial information, is required.

Control functions:
Insurers need to establish the following control functions:

  • # Risk management;
  • # Compliance;
  • # Actuarial; and
  • # Internal audit.

The board of directors must regularly review the performance of each control function. A regular independent review of the control functions is required to be performed by internal audit or objective external reviewers.

Insurers must appoint a head for each of the control functions within the insurer. The head of each control function must regularly report to the board of directors (or one of its committees) and communicate directly with the chairperson of the board of directors (or one of its committees).

Insurance group supervision
The draft ILAB introduces insurance group supervision in the South African insurance market. Insurance group supervision will apply to all insurance groups unless an insurer has applied for exemption from the requirements as set out in the draft ILAB.

An insurance group exists where there are two or more entities of which at least one is an insurer, and one has a significant influence on the insurer.

Controlling company:
Insurance groups are required to have an FSB authorised non-operating, public holding company. The intention is not to extend the supervision of the insurer to the holding company but to keep the holding company responsible for the prudential and market conduct requirements of the group.

Transparent group structure:
The controlling company is required to ensure that the structure of the insurance
group does not impede the financial soundness of any insurer that forms part of the group or the ability of the FSB to:

  • # Determine how the different types of business of the insurance group are conducted; or
    # Determine the risk profile of and the manner in which internal risk management is organised and conducted by the group.

Acquisitions and disposals:
Controlling companies are required to obtain approval from the FSB for all material acquisitions or disposals. The FSB needs to be notified of all other acquisitions and disposals.

Financial arrangements:
The draft ILAB introduces financial soundness requirements for insurance groups. The group’s capital and solvency position should be adequate given the group’s overall risk profile.

Other Amendments
The requirements as per the FSB’s Outsourcing Directive have been included in the draft ILAB. The powers of the FSB have also been strengthened in respect of the approval of registration of insurers and the variation of registration conditions of insurers.