Insurance and reinsurance in South Africa: overview

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 definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; 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.

To compare answers across multiple jurisdictions visit the Insurance and Reinsurance Country Q&A tool.

This Q&A is part of the global guide to insurance and reinsurance. For a full list of contents visit www.practicallaw.com/insurance-guide.

Contents

Market trends and regulatory framework

1. What were the main trends in the insurance and reinsurance markets over the last 12 months?

Insurance

South Africa’s insurance industry has become and will continue to be a highly regulated market. South Africa follows European regulatory trends. Two regulators will be created, a prudential and a market conduct regulator. These regulations will be created through enabling legislation still to be passed. This, combined with the economic downturn, has consolidated and shrunk the insurance and intermediary markets.

Reinsurance

The South African insurance and reinsurance industry is highly developed and sophisticated. Many international reinsurers have offices in South Africa, and Lloyd's of London has a strong presence in the market. There is competition from local insurers who carry on reinsurance business and take a bigger share of the reinsurance market.

Over the past 12 months, the insurance regulator has focused on projects that will result in greater regulation of reinsurers.

For details of current and future reforms, see Question 36.

 
2. What is the regulatory framework for insurance/reinsurance activities?

Regulatory framework

The insurance industry in South Africa, including short-term and long-term insurance, and reinsurance is governed primarily by the:

  • Short-term Insurance Act 1998 (STIA), which regulates the non-life indemnity industry. This covers the risk-based insurance of assets, accident and health and liability.

  • Long-term Insurance Act 1998 (LTIA), which regulates the life industry. This covers mainly life and investment products.

The STIA and LTIA regulate the activities of insurers and reinsurers and outline the market conduct, reporting, liquidity and capital requirements.

In addition, certain specific types of business are regulated by specific statutes, including the:

  • Medical Schemes Act 1967 (MSA), which regulates the health business concerning providing money to pay medical expenses.

  • Pension Funds Act 1956, which regulates retirement benefits.

  • Unemployment Insurance Act 2001, which regulates unemployment insurance.

  • Compensation for Occupational Injury and Diseases Act 1993, which regulates compensation for disease and injury arising in the course of employment.

  • Road Accident Fund Act 1996, which covers road accident victims (within limits).

Regulatory bodies

The STIA and LTIA establish the offices of the registrars of short-term and long-term insurance. The executive officer of the Financial Services Board (FSB) appoints each of the registrars. The registrars, through the FSB, are responsible for regulating the insurance industry.

The FSB supervises the solvency reporting requirements and the regulation of insurers and reinsurers. Regulatory and statutory information is available on the FSB's website (www.fsb.co.za).

The FSB does not regulate or supervise the entire insurance group that has as a member an insurance subsidiary authorised in South Africa, but the regulation of the subsidiary entails some reporting requirements and accountability for the activities, solvency and financial support by the group.

The regulatory bodies will change with the passing of the Financial Services Regulation Bill. This will make the South African Reserve Bank the prudential regulator and will form a market conduct regulator from the FSB's market conduct departments.

The Financial Advisory and Intermediary Services Act 2002 regulates advice and intermediary services of insurers and their intermediaries.

 

Regulation of insurance and reinsurance contracts

3. What is a contract of insurance for the purposes of the law and regulation? How does it differ from a contract of reinsurance?

Contracts of insurance

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 Short-term Insurance Act (STIA) can be one of, or a contract combining any of, the following (including contracts to renew or vary the policy):

  • 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 Long-term Insurance Act (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 (investment) 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 businesses) the Policyholder Protection Rules (PPR) specify 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.

Contracts of reinsurance

A short-term reinsurance policy is defined as "a reinsurance policy in respect of a short-term policy".

A long-term reinsurance policy is defined as "a reinsurance policy in respect of a long-term policy".

Therefore the regulation of both insurance and reinsurance is similar. A specific licence is required to do reinsurance business. Reinsurance by offshore reinsurers is regulated by increasing capital adequacy requirements for locally unsecured reinsurance.

 
4. Are all contracts of insurance/reinsurance regulated?

The Short-term Insurance Act (STIA) and the Long-term Insurance Act (LTIA) regulate all contracts of insurance and reinsurance of any insurance business carried out in South Africa (see Question 3).

Certain specific types of business are regulated by specific statutes (see Question 2, Regulatory framework).

Contracts such as vehicle maintenance contracts, car hire damage waivers, guarantees provided by the manufacturer or seller of goods and hedging contracts fall outside the scope of regulation.

 

Corporate structure

5. What form of corporate organisation can insurers take?

The registrar will only grant a licence to an entity to carry on insurance business in South Africa as an insurer/reinsurer if the applicant is a public company incorporated in South Africa (Short-term Insurance Act (STIA) and Long-term Insurance Act (LTIA)).

The main object of the company must be to carry on short-term or long-term insurance business.

A licence to carry on insurance business in South Africa will not be granted to branches of foreign insurers. However, insurers and reinsurers can be 100% subsidiaries of foreign insurers.

 

Regulation of insurers and reinsurers

6. Are all insurers and reinsurers regulated? Are they all regulated in the same way?

The Financial Services Board (FSB) regulates insurers and reinsurers in the same way under the Short-term Insurance Act (STIA) and Long-term Insurance Act (LTIA).

See Question 2 for regulation of other forms of insurance, such as medical schemes.

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 they are registered to do so (see Question 9), or exempted by reason of being regulated under other statutes.

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 to back its insurance activities in South Africa.

  • 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.

 
7. Can insurers and reinsurers carry on non-insurance business? Are there any restrictions on their business activities?

Insurers and reinsurers can carry on non-insurance business that is ancillary to their main business. Separate insurance entities, which are also separately licensed, carry on life and non-life insurance business.

The main business of the entity must be to provide insurance. Registration may be refused if the stated business of the company includes business contrary to the public interest or to policyholder interests.

 
8. Are there any statutory limits or other restrictions on, or requirements relating to, the transfer of risk by insurance or reinsurance companies?

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 Short-term Insurance Act (STIA) and Long-term Insurance Act (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.

 

Operating restrictions

Authorisation or licensing

9. Does the entity or person have to be authorised or licensed?

Insurance/reinsurance providers

The requirements for registration as an insurer or reinsurer are set out in Part II of the Short-term Insurance Act (STIA) and Long-term Insurance Act (LTIA) (as applicable).

An entity cannot conduct any kind of long-term or short-term insurance business in South Africa unless registered to do so.

To register, an application must be made to the appropriate registrar at the Financial Services Board (FSB), using the application form published by the registrar and made available on its website (www.fsb.co.za).

The entity must provide details of the following to the registrar:

  • Shareholders.

  • Directors.

  • Management.

  • Nature of business.

  • Projections.

  • Financial resources.

The registrar has the discretion to impose conditions on the registration of the insurer or reinsurer, where appropriate.

Insurance/reinsurance intermediaries

If a person is providing "intermediary services" as defined in the Financial Advisory and Intermediary Services Act 2002 (FAIS Act), that person must be either:

  • Registered as a financial services provider (FSP).

  • 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.

Other providers of insurance/reinsurance-related activities

See Question 2.

There are no requirements for other providers of other insurance and reinsurance-related activities such as consultants or claims adjusters. If any insurer outsources functions that it would otherwise provide itself (such as administration or claims handling) it must do so in terms of the FSB's outsource directive.

The entities carrying on the insurance-related activities referred to in Questions 2 and 10 are statutorily regulated.

 
10. What are the main exemptions or exclusions from authorisation or licensing?

Insurance/reinsurance providers

The following are exempted from Long-term Insurance Act (LTIA) and Short-term Insurance Act (STIA) licensing because they are otherwise regulated:

  • Pension and other retirement funds.

  • Medical schemes.

  • Agricultural co-operatives.

  • The government's Unemployment Insurance Fund.

  • The Land Bank.

  • Banks providing bank guarantees.

Insurance/reinsurance intermediaries

No exemptions or exclusions apply (see Question 9, Insurance/reinsurance intermediaries).

Other providers of insurance/reinsurance-related activities

Claims handling and similar services do not require any licensing or registration but these activities can only be performed in terms of regulated agreements with registered insurers complying with outsource regulations and directives. However, if intermediary services are being rendered, then registration as an intermediary is required (see Question 9, Insurance/reinsurance intermediaries).

Restrictions on ownership or control

11. Are there any restrictions on the ownership or control of insurance-related entities?

Insurance/reinsurance providers

There are no specific 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 15% 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.

  • The owners, directors and managers must be fit and proper persons to do insurance business.

Insurance/reinsurance intermediaries

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 Financial Advisory and Intermediary Services Act 2002, must be licensed as a financial services provider (see Question 9, Insurance/reinsurance intermediaries). Intermediaries must show they are competent, fit and proper, with integrity, and financially sound.

Other providers of insurance/reinsurance-related activities

See above, Insurance/reinsurance intermediaries.

 
12. Must owners or controllers be approved by or notified to the relevant authorities before taking, increasing or reducing their control or ownership of the entity?

Insurance/reinsurance providers

Approval by the registrar is needed for a shareholder to acquire a shareholding of more than 15% or any controlling interest 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 refuse or regulate those changes.

The registrar may object to a particular person acquiring more than a 15% shareholding if, in its discretion, it believes the influence of the person is either:

  • Not in the interests of the public or the policyholders.

  • Prejudicial to the insurer.

Insurance/reinsurance intermediaries

Changes of the key individuals of authorised intermediaries must be notified to the Financial Services Board (FSB).

Other providers of insurance/reinsurance-related activities

Competence and integrity requirements are statutorily imposed for pension funds and medical schemes.

Ongoing requirements for the authorised or licensed entity

13. What are the key ongoing requirements with which the authorised or licensed entity must comply?

Insurance/reinsurance providers

Under the Short-term Insurance Act (STIA) and the Long-term Insurance Act (LTIA), to maintain an insurance or reinsurance licence, the business must:

  • Be maintained in a financially sound condition.

  • Possess sufficient assets.

  • Provide for liabilities.

  • Ensure liabilities can be met at all times without falling below capital adequacy requirements.

  • Continue to have the integrity and operational ability demonstrated at the time the licence was granted.

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 and capital adequacy.

Insurers cannot, without the consent of the registrar:

  • Allow their assets to be held by others.

  • Encumber their assets with security interests.

  • Provide security unless licensed to do so under a guarantee policy.

  • Invest in derivatives other than those stipulated in the STIA and LTIA.

Insurers and reinsurers must also ensure that they maintain their financial services provider (FSP) licence in compliance with the terms of the FAIS Act if they are providing financial advice (see Question 11, Insurance/reinsurance intermediaries).

Insurance/reinsurance intermediaries

If a business provides intermediary services, it must comply with licence requirements under the Financial Advisory and Intermediary Services Act 2002 and its Code of Conduct.

FSPs must ensure that they:

  • Are financially sound.

  • Are competent to provide the services.

  • Act with integrity.

Other providers of insurance/reinsurance-related activities

See above, Insurance/reinsurance intermediaries.

There are no additional ongoing requirements for other providers of other insurance and reinsurance-related activities (such as for consultants, claims adjusters or third party administrators), except that outsourced service providers must continue to fulfil the requirements of the outsourcing agreement throughout its term.

Penalties for non-compliance with legal and regulatory requirements

14. What are the possible consequences of an entity failing to comply with applicable legal and regulatory requirements? What recourse do policyholders have if they have done business with a non-approved entity?

Insurance/reinsurance providers

Short-term Insurance Act (STIA) and Long-term Insurance Act (LTIA). The STIA and LTIA specify the offences and penalties for non-compliance with statutory requirements. Non-compliance includes:

  • Not providing the registrar with certain information or documentation.

  • Failure to maintain a financially sound condition.

Fines range from between ZAR5 million and ZAR10 million.

If an insurer or reinsurer operates without a licence, it can be fined ZAR10 million.

The policyholder can enforce a policy with the assistance of the regulator even if the entity or contract does not comply with the law.

Financial Advisory and Intermediary Services Act 2002 (FAIS Act).For financial services providers (FSPs), non-compliance with the terms of the FAIS Act can result in either or both of:

  • A fine of ZAR10 million.

  • Imprisonment.

In extreme cases, the FSP can be punished with loss of the FSP licence.

FSPs are liable in damages for breach of their conditions causing a loss to clients.

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.

  • Interest.

  • The costs of the legal proceedings.

Insurance/reinsurance intermediaries

FAIS Act penalties and damages apply if the breach occurs when providing advice or intermediary services (see above, Insurance/reinsurance providers).

Other providers of insurance/reinsurance-related activities

FAIS Act penalties apply if the breach occurs when providing advice or intermediary services (see above, Insurance/reinsurance providers). All providers of insurance-related services can be sued for damages arising from a breach of contract.

Restrictions on persons to whom services can be marketed or sold

15. Are there any restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold?

There are no restrictions on the persons to whom insurance/reinsurance services and contracts can be marketed or sold save for limits on insuring minors.

 

Reinsurance monitoring and disclosure requirements

16. To what extent can/must a reinsurance company monitor the claims, settlements and underwriting of the cedant company?

The reinsurance treaty or reinsurance policy terms and conditions govern the extent to which a reinsurance company can or must monitor the cedant company's claims, settlements and underwriting.

 
17. What disclosure/notification obligations does the cedant company have to the reinsurance company?

The reinsurance treaty or policy's terms and conditions govern the cedant company’s notification and disclosure obligations.

 

Insurance and reinsurance policies

Content requirements and commonly found clauses

18. What are the main general form and content requirements for insurance policies? What are the most commonly found clauses?

A "short-term personal lines policy" is a policy where the policyholder is a natural person acting otherwise than solely for the purposes of their own business. Any other policy is a non-personal lines policy.

Personal lines policies

Personal lines policy wordings must comply with Policyholder Protection Rules. Under these rules, a personal line policy must:

  • 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.

Policy content

The typical form of an insurance policy consists of:

  • A schedule of insurance, including:

    • the insured's details;

    • the insured property or risks;

    • defined events;

    • the period of insurance;

    • the premiums;

    • the commission; and

    • the excess/deductible.

  • An insuring clause which 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.

  • Limits of indemnity.

  • General terms and conditions such as claims reporting and handling.

  • 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 or fraud by the insured.

  • Exclusions appropriate to the risk.

  • Extensions for specific risks, such as product liability.

 
19. Is facultative or treaty reinsurance more common? What are the most commonly found clauses in reinsurance policies?

Facultative/treaty reinsurance

Both facultative and treaty reinsurance are present in the South African market. Most insurers more commonly use treaty reinsurance.

Commonly found clauses

Reinsurance contracts can contain follow-the-settlements and follow-the-fortune clauses. Reinsurance treaties commonly include choice of law, arbitration in the event of a dispute, and consequences of misrepresentation and breach clauses.

Implied terms

20. Are there any terms that are implied by law or regulation (even if not included in the insurance or reinsurance contract)?

The Short-term insurance Act (STIA) and Long-term Insurance Act (LTIA) impose specific terms in relation to:

  • The free choice of insurer in certain credit-related transactions.

  • Prohibition on inducements to insure.

  • Regulated termination provisions for non-payment of premiums.

  • Misrepresentation and non-disclosure.

  • Contracts with minors.

  • Representations by agents.

  • Pay-as-paid limits under which insurers must pay the insured even if the reinsurer has not paid the insurer.

  • The rule against double compensation/indemnity.

There is a general duty of good faith in relation to insurance policies.

Customer protections

21. How do customer protections in the general law affect insurance contracts? What customer protections are generally included in insurance policies to supplement this?

The Policyholder Protection Rules provide for a review procedure for rejected or limited personal lines 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 Financial Advisory and Intermediary Services Act 2002 (FAIS Act) ombudsman concerning the provision of advice or the rendering of intermediary services under the FAIS Act.

Finally, the insured can bring an action in court.

Consumer protection is likely to be strengthened because the Financial Services Board (FSB) is reviewing the Conduct of Business framework. All personal insurance is subject to the overriding Treating Customers Fairly outcome-based regulation.

Standard policies or terms

22. What are the main standard policies or terms produced by trade associations or relevant authorities?

The Competition Act 1998 prohibits standard industry-wide policy wordings.

The quasi-governmental South African Special Risk Insurance Association (SASRIA) provides war risk, riot, terrorism and similar cover.

 

Insurance and reinsurance policy claims

Establishing an insurance claim

23. What must be established to trigger coverage under an insurance policy?

For risk insurance, the following is applicable:

  • Notice of claims must be given as soon as reasonably possible.

  • Claims information must be provided in writing.

  • If a claim is finally rejected, a court action must be instituted within contractual time limits, usually not less than six months.

  • Claims can be rejected for late notice.

  • An insurer that has paid a claim (or not, if the contract allows it) can exercise rights of subrogation against third parties to recover indemnified patrimonial losses.

Life and investment policies pay benefits on the happening of either the insured event or a stated maturity date.

Third party insurance claims

24. What are the circumstances in which third parties can claim under an insurance policy?

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 third party can claim losses directly from a liability insurer if the insured is declared insolvent.

Time limits

25. Is there a time limit outside of which the insured/reinsured is barred from making a claim?

A debt is generally (subject to some exceptions and extended periods) extinguished three years after the right to claim arose (Prescription Act 1969). Insurance policies typically include a time-bar period to institute a claim. If that term is not complied with, the insurer is usually not liable.

Enforcement

26. Can the original policyholder or other third party enforce the reinsurance contract against a reinsurer?

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).

A cut-through clause in the insurance and reinsurance policy entitles the insured to receive payment directly from the reinsurer (except in certain circumstances) where the primary insurer is insolvent.

Remedies

27. What remedies are available for breach of an insurance policy?

Insurer

The remedies available are to claim:

  • 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).

Where either party has acted in bad faith on entering into an insurance contract the contract may, depending on the circumstances, be void, voidable or unenforceable.

Insured

The remedies for breach are the same as for the insurer (see above, Insurer) plus a ruling by the insurance ombudsman.

Punitive damage claims

28. Are punitive damages insurable? Can punitive damages be reinsured if they are covered by an underlying policy?

Punitive damages are generally not provided for in South African law. There is nothing in South African law to prevent an insurance policy from covering punitive damages, provided that the policy does not indemnify the insured for a risk that 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.

South African law allows for the awarding of damages for the breach of constitutional rights in circumstances where constitutional rights are affected and there is no other remedy. When it comes into operation, the Protection of Personal Information Act will allow for an award for aggravated damages for unlawfully processing or revealing private information.

 

Insolvency of insurance and reinsurance providers

29. What is the regulatory framework for dealing with distressed or insolvent insurance or reinsurance companies, or other persons or entities providing insurance or reinsurance related services? What regulatory and/or other protections exist for policyholders if the insurance company is insolvent?

The Insolvency Act 1936 applies to cases of insolvency.

The Short-term Insurance Act (STIA) and Long-term Insurance Act (LTIA) devote separate parts to business rescue, placing under curatorship and winding-up of insurers. Business rescue has the same object as Chapter 11 filings in the US.

The relevant registrar has the power to proceed or to intervene and to become a party to the application for business rescue, curatorship 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 which is always the case.

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 into business rescue. A curator or business rescue practitioner 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.

 
30. Can excess insurance policies "drop down" to provide coverage if the primary insurer goes into insolvency?

See Question 29.

It is possible for an insured to claim on excess insurance policies designed to provide additional financial cover in the event of a claim, if the first insurer becomes insolvent. This is governed by the wording of the excess insurance policy and not statute.

 
31. Is a right to set-off mutual debts and credits recognised in an insolvency proceeding involving an insurer or reinsurer?

There is no right to set-off mutual debts and credits recognised in an insolvency proceeding involving an insurer or reinsurer, except for setting off reciprocal debts such as unpaid premiums against claims.

In some circumstances, a liability claimant may recover their proved loss directly from their insurer if the liability insurer is insolvent.

 

Taxation of insurance and reinsurance providers

32. What is the tax treatment for insurers, reinsurers, and other persons or entities providing insurance and reinsurance-related services?

Short-term insurers

The ordinary rules for determining taxable income applies to short-term insurers, reinsurers and other persons or entities that are resident and carry on short-term insurance business in South Africa. Short-term insurers can deduct the following as incurred expenditure:

  • Premiums on reinsurance.

  • The actual amount of liability incurred in respect of any claims, less any claims recovered, to the extent that the amount has been paid by the short-term insurer.

The tax legislation makes certain allowances for:

  • An unearned premium provision, calculated in accordance with the provisions of the Short-term Insurance Act.

  • Claims that the short-term insurer estimates will become payable that are:

    • reported but not paid (reduced by any estimated recoveries under a policy of re-insurance); or

    • not yet reported (reduced by any estimated recoveries under a policy of re-insurance).

These allowances will be amended so that a short-term insurer is allowed a deduction of amounts which are recognised as insurance liabilities in accordance with IFRS. These amendments will take effect from the year of assessment ending on or after the date on which the Insurance Act 2016 comes into operation, therefore probably in 2018.

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

Long-term insurers have special rules of taxation. Long-term insurers hold and administer a certain amount 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:

  • Untaxed policyholder fund.

  • Individual policyholder fund.

  • Company policyholder fund.

  • Corporate fund.

  • Risk policy fund.

 

Insurance and reinsurance dispute resolution

33. Are there special procedures or venues for dealing with insurance or reinsurance complaints or disputes?

Insurance disputes

If disputes cannot be agreed between the insured and insurer, the following methods can be used to deal with complaints or disputes:

  • Policy or claim rejection disputes can be referred to the short-term or long-term ombudsman.

  • Disputes concerning the Financial Advisory and Intermediary Services Act 2002 (FAIS Act) can be referred to the FAIS ombudsman.

  • Otherwise, disputes can be litigated in a court or arbitrated. Under the Policyholder Protection Rules, a personal lines policy cannot provide that disputes must be resolved by arbitration.

There are no specific remedies or procedures other than the rules of the Ombudsman and the Arbitration Act.

Reinsurance disputes

Formal disputes between insurers and reinsurers are rare. A compromise is usually 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 case law dealing with reinsurance disputes.

 
34. Are arbitration clauses in insurance and reinsurance agreements enforceable?

Under the Policyholder Protection Rules, a personal lines policy cannot provide that disputes must be resolved by arbitration. Arbitration clauses in other insurance policies are enforceable.

See Question 33, Insurance disputes.

 
35. Are choice of forum, venue and applicable law clauses in an insurance or reinsurance contract recognised and enforced?

Insurance contracts of a registered South African insurer are governed by South African law, choice of forum and venue. Foreign reinsurance policies may have foreign forum, venue and applicable law. This is determined by contract and private international law.

 

Reform

36. What proposals are there for reform of the law, regulation or rules relating to the provision of insurance or reinsurance services?

Current and future reforms of the law, regulation or rules relating to the provision of insurance or reinsurance services are set out below.

Insurance Bill 2015

The Insurance Bill introduces a new solvency regime called the "Solvency Assessment and Management Project" and has been updated to reflect the revised Insurance Core Principles by the International Association of Insurance Supervisors (IAIS).

The Insurance Bill will have a prudential focus as a result of the "Twin Peaks model" of financial regulation. The Twin Peaks model is designed to remedy the current regulatory framework, which relies primarily on industry-specific regulators (often performing prudential, market conduct oversight, administrative and enforcement functions in their respective sectors). This has proved inefficient. The Twin Peaks approach entails creating a "prudential regulator" housed in the South African Reserve Bank and transforming the Financial Services Board (FSB) into a dedicated market conduct regulator. Both regulators will jointly supervise anti-money laundering initiatives in the Twin Peaks programme, with the following responsibilities:

  • The objective of the prudential regulator will be to maintain and enhance the soundness of regulated financial institutions in insurance, banking and financial conglomerates.

  • The FSB will be responsible for supervising the conduct of business covering all aspects of banks, insurers, pension funds and intermediaries.

It is unclear when the Insurance Bill will be promulgated. The promulgation of this Bill is dependent on the Financial Sector Regulation Bill which will give effect to the "Twin Peaks Model". Once the Insurance Bill becomes effective the industry will have a two year period to regularise itself.

Third party cell captive insurance review

The FSB released a discussion paper in June 2013 for comment on issues concerning affinity schemes, dedicated licences and limits for cell insurers. A cell insurer is a registered insurer that allocates shares to cell owners who place insurance for themselves or third parties through the insurer and derive profits from dividends based on the success of the insurance portfolio introduced and ring-fenced from other cells. The FSB is to provide further guidance as to what is considered a "cell insurer" and who can be a cell owner.

Micro-insurance

Micro-insurance will be regulated under the Insurance Bill 2015.

Treating Customers Fairly (TCF) principles

This principle-based policy requires insurers to develop principles around six outcomes so that consumers are treated fairly at all stages of an insurance transaction.

Retail Distribution Review

The objective of this intermediary remuneration review is to promote appropriate, affordable and fair advice and services. The review supports a sustainable business model for financial advice by regulating all fees for intermediary services. The principles of this review will be implemented through the promulgation of the Insurance Bill and amended intermediary laws.

Demarcation Regulations

There was much public comment on the prohibition on gap cover and product restrictions on hospital cash plan insurance policies when the first draft of these regulations was published in 2002. The latest draft of these regulations acknowledges that health insurance products have a role in the market place, but should operate within a framework that complements and does not compete with medical schemes. There are no regulations yet and this is likely to be addressed by the new Insurance Act.

Reinsurance review

The FSB has conducted a reinsurer review of the South African market. Licensing issues have been reviewed and the FSB is looking at requiring foreign reinsurers to register a branch in South Africa subject to certain requirements. In addition, the FSB is reviewing the amount of risk that is required to be retained in South Africa thereby preventing 100% fronting arrangements.

 

Main insurance/reinsurance trade organisations

SA Insurance Association

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.

W www.osti.co.za

Association for Savings and Investments SA (ASISA)

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.

W www.asisa.co.za



Online resources

South African Legal Information Institute

W www.saflii.org

Description. The South African Legal Information Institute at the University of Cape Town provides free access to up-to-date sources of South African law in legislation, judgments and journals mainly in English.



Contributor profiles

Patrick Bracher, Partner

Norton Rose Fulbright South Africa Inc

T +711 685 8801
F +27 11 301 3214
E patrick.bracher@nortonrosefulbright.com
W nortonrosefulbright.com

Professional qualifications. University of South Africa

Areas of practice. Banking and finance; insurance law (pure insurance, regulatory aspects and the commercial side); financial transactions and regulatory law.

Recent transactions. Advises many of South Africa's insurers, the South African Insurance Association, Lloyd's of London in South Africa, the National Credit Regulator and the Council for Medical Schemes.

Publications. He has written countless articles and presented many lectures and seminars. He is a constitutional lawyer, who hosts a fortnightly radio programme on the Bill of Rights and is editor and main author of the legal blog www.financialinstitutionslegalsnapshot.com.

Christine Rodrigues, Partner

Norton Rose Fulbright South Africa Inc

T +27 11 685 8912
F +27 11 301 3344
E christine.rodrigues@nortonrosefulbright.com
W nortonrosefulbright.com

Professional qualifications. BCom Honours (First Class), University of the Witwatersrand (specialising in Insurance and Risk Management); LLB, University of South Africa

Areas of practice. Financial services, including regulatory and corporate matters affecting the insurance industry.

Recent transactions. Advises most South African insurance companies, brokers and insurance industry bodies on regulatory, governance and corporate issues.


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