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Draft Joint Standard on Outsourcing by Insurers released for public comment

  • Legal Development 10 September 2021 10 September 2021
  • Africa

  • Insurance & Reinsurance

On 8 September 2021, the Financial Sector Conduct Authority (“FSCA”) and the Prudential Authority (“PA”) jointly published the Draft Joint Standard on Outsourcing by Insurers (“Draft Joint Standard”), for public consultation.

Outsourcing in the insurance sector is currently regulated in terms of the Financial Sector Regulation Act 9 of 2017, Insurance Act 18 of 2017 (“Insurance Act”) and Prudential Standard GOI5 (“GOI5”) and falls within the regulatory ambit of the PA.

The PA and the FSCA are of the view that the management of outsourcing risks is critical not only from a prudential perspective but also from a conduct of business perspective in order to ensure fair treatment of and better outcomes for policyholders.

The PA and the FSCA accordingly seeks to expand the current outsourcing regulatory framework by issuing the Draft Joint Standard, in order to provide an appropriate and comprehensive regulatory framework governing outsourcing by insurers from both a prudential and conduct of business perspective.

Whilst the requirements for outsourcing of material activities and functions as stated in the Draft Joint Standard are substantially similar to those stated in GOI5, there are number of notable additional requirements mooted in the Draft Joint Standard which extend the regulatory obligations of insurers, which include the following:

  1. An insurer must, in order to identify and manage all risks introduced by the proposed outsourcing arrangement, undertake an appropriate due diligence for every activity or function to be outsourced, prior to entering into an outsourcing arrangement;

  2. An insurer, when terminating an outsourcing arrangement, must assess the potential impact, consequences and risks of the proposed termination to policyholders and the insurer’s business, and report to the board of directors where a potentially adverse consequence or risk has been identified; and

  3. Any notification of termination which is required to be submitted to the PA and the FSCA must (amongst other things) (i) include proof that the board of directors approved the termination; (ii) explain whether there are any outstanding issues that could have a potential impact on the service to policyholders and how these issues will be managed to ensure policyholders are not adversely affected; and (iii) highlight any outstanding fees and how such fees will be paid.

The Draft Joint Standard is intended to apply to all insurers licensed under the Insurance Act, except Lloyd’s and branches of foreign reinsurers.

In addition, the Draft Joint Standard will repeal and replace GOI5 and will amend the regulatory instruments referred to in Attachment 2 of the Draft Joint Standard to the extent provided for in that Attachment.

The PA and the FSCA recognise that (amongst other things) the requirements proposed in the Draft Standard may potentially result in increased ongoing compliance costs, in particular given that the regulated entities are required to report to both the PA and the FSCA respectively on the same subject matter.  Accordingly, the following transitional provisions are proposed:

  1. an insurer must comply with the Draft Joint Standard within 6 months from the commencement date;

  2. in respect of any outsourcing arrangement entered into prior to the commencement date of the Draft Joint Standard such arrangements must comply with the Draft Joint Standard within 1 year of the commencement date;

  3. during the 6-month transitional period as aforesaid, an insurer must continue to comply with the GOI 5 as if it had not been repealed.

The Draft Joint Standard is open for comment for a period of 6 weeks. Therefore, all industry stakeholders are encouraged to submit commentary, on or before 26 October 2021 by using the comments template to PA-Standards@resbank.co.za  for the attention of Mr. Ashendran Padayachee or alternatively to FSCA.RFDStandards@fsca.co.za  for the attention of Mr. Andile Mjadu.

Please see below the following documentation:

  1. Joint Communication 5 of 2021

  2. A Notice inviting submissions in relation to the Draft Joint Standard

  3. A draft Statement explaining the need for and intended operation of the Draft Joint Standard, and a Statement of its expected impact

  4. The Draft Joint Standard

  5. A comments submission template

  6. Questionnaire – Draft Joint Standard on Outsourcing by Insurers

End

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