April 18, 2019

Guidance for non-admitted foreign (re)insurers on what constitutes ‘conducting insurance business’

On 17 April 2019, the Financial Sector Conduct Authority ("FSCA") and the Prudential Authority ("PA") published a Joint Guidance Notice 1 of 2019 ("Guidance Note") which provides long-awaited guidance on the application of sections 5(1) and 5(2) of the Insurance Act, 18 of 2017 ("Insurance Act") in respect of non-admitted foreign insurer or reinsurers ("(re)insurers"), and what constitutes conducting insurance business in South Africa, which would require them to obtain an appropriate licence in South Africa. The Guidance Note also provides some practical examples.

Section 5(1) of the Insurance Act requires anyone conducting insurance business in South Africa to have a licence. The focus of the Guidance Note is section 5(2) of the Insurance Act, which provides that a person is regarded as conducting "insurance business" in South Africa if (a) the person conducts insurance (or similar) business outside South Africa, and (b) that person, or another person, directly or indirectly acts in South Africa in respect of that business, including but not limited to rendering a financial service within the meaning of Financial Advisory and Intermediary Services Act, 37 of 2002 ("FAIS").

The Guidance Note seeks to provide clarity to the industry on the PA and FSCA's approach to determining when a non-admitted foreign (re)insurer will be regarded as conducing insurance business in South Africa. Specifically, the meaning of acting "directly or indirectly" is examined, and the following is noted:

  • In relation to foreign (re)insurers acting directly, it states that a foreign (re)insurer will be regarded as acting directly in South Africa where it "directly contacts or otherwise solicits a South African based customer (including a local insurer) with the purpose of enticing or swaying the customer to secure insurance from the foreign (re)insurer". Examples given include where a foreign (re)insurer:
    (a) regularly visits South Africa to support or share knowledge with the South African insurance industry;
    (b) solicits business from South African entities; or
    (c) establishes a representative office in South Africa.
  • In relation to foreign (re)insurers acting indirectly, whether the foreign (re)insurer will be regarded as conducting insurance business indirectly through a third person (intermediary) will depend on whether "the person is in any way acting on behalf of the foreign (re)insurer when placing the business with such insurer", and whether the foreign (re)insurer "in any way appointed, instructed or influenced the person to place the customer's business with the foreign (re)insurer". Examples given include where a foreign (re)insurer:
    (a) Appoints a financial services provider to solicit business from South African entities; or
    (b) Appoints a financial services provider to provide financial services in South Africa on its behalf.

The Guidance Note does not limit intermediation to Financial Services Providers as defined in FAIS, but does not give any additional examples. The examples of the direct and indirect "acts" discussed in the Guidance Note as practical examples of the application of section 5(2) of the Insurance Act are not exhaustive, and each case will be assessed individually. Importantly, the Guidance Note also emphasis that the Insurance Act does not prohibit the placing of (re)insurance offshore.

The Guidance Note confirms that the delegation by the PA to the FSCA on 1 October 2018 of its supervisory and enforcement powers in terms of section 5(1) of the Insurance Act relates only to unlicensed insurance business, and not unlicensed reinsurance business. The PA therefore remains the enforcement authority in relation to foreign (re)insurers whom it regards as conducting unlicensed reinsurance business in South Africa, in contravention of the Insurance Act. The Guidance Note specifies the steps which the PA will take where it regards a foreign (re)insurers to be conducting foreign reinsurance business in South Africa without being licensed to do so. The enforcement provisions and fines are also discussed.

A copy of the Guidance Note can be accessed here.