Binder Regulations 2

Transcription

1 2013

2 Binder Regulations 2

3 Topics 1. Principles informing the Binder Regulations 2. Binder functions 3. Remuneration 4. Information Letter 8/ Draft Information Letter 3/ FAQ s 3

4 1. Principles informing Binder Regulations Accountability of insurer Responsible outsourcing Policyholder protection Avoid conflicts of interest 4

5 2. Binder functions On behalf of the insurer Entering into, varying or renewing of policies Determining policy wording Determining premiums Determining the value of policy benefits Settling claims 5

6 Binder functions (cont) Functions that a binder holder performs as agent of the insurer As if the binder holder were the insurer when interacting with policy holders Actual entering into, varying or renewing of a policy Insurer only knows after the fact 6

7 3. Remuneration Principle a policy holder should not pay twice for the provision of the same or similar service NB when an intermediary performs binder functions and intermediary services 7

8 Remuneration (cont) Must be reasonable commensurate with the actual costs associated with rendering the services under the binder agreement Reasonable rate of return Binder fee may be expressed as a % of gross premium or fixed Rand amount 8

9 Remuneration (cont) UM Profit share and/or binder holder fee Outsourcing fee NMI Binder holder fee Outsourcing fee Commission Section 8(5) fee 9

10 4. Information Letter 8/2012 Published 4 December 2012 Guidance Activities constituting binder functions Remuneration Supervisory approach 10

11 Info Letter 8/2012 (cont) Monitoring Reporting template Reasonableness of remuneration On-site visits Regulatory and/or enforcement action 1 January 2013 Diligent efforts 90 Days alignment period 11

12 Info Letter 8/2012 (cont) System changes Policyholder information Detailed actions plans 1 January 2014 ACORD standard encouraged 12

13 5. Draft Information Letter 3/2013 Still in draft Published 30 April 2013 Public comment 31 May 2013 Guidance: Activities constituting binder functions Remuneration 13

14 Draft Info Letter 3/2012 (cont) Activities constituting binder functions Incidental activities Adequately render a binder function No additional fee paid to binder holders Binder holder may outsource to 3 rd party (if binder agreement allows this) 14

15 Draft Info Letter 3/2012 (cont) Remuneration Activity-based fee model Use suggested format or clear what is paid for each binder function Reasonable commensurate Binder fees to UM s may vary more due to specialisation 15

16 Replacement Policies 16

17 History: Cancellation of risk policy replacement - commission driven Implementation of LOA Standard stop churning Agreement between members of the Life Offices Association to restrict commission on replacements. Early agreement contravened certain free trade conditions championed by government decision made that advisor should earn full commission on replacement policies subject to good advice being given. 17

18 CODE OF REPLACEMENT Subsequently:LOA drafted a Code of Replacement Purpose: To govern insurer and intermediary behaviour when replacing policies 18

19 Code reconstituted by Asisa from 1 January 2012 Member life offices of ASISA have agreed to ASISA STANDARD ON REPLACEMENT - applicable to all business effected in RSA Purpose: To provide Rules to govern instances where one member life office (the replacing insurer) has or intends to replace a policy or policies of another member life office (the replaced insurer). In implementation of the Standard outcomes must be in line with the requirements of Treating Customers Fairly ( TCF) 19

20 The provisions of this Standard applies in addition to: Any obligation imposed by the FAIS Act The provision of this standard applies in addition to Part 3 of the Regulations of the Long Term Insurance Act Any other legislation 20

21 If conflict arises 21

22 Then legislation prevails 22

23 August 2012 the Standard on Replacement was tweaked to introduce a more comprehensive Replacement Policy Advice Record (RPAR) applicable to all stakeholders. From 1 January 2013: Both financial Advisors and direct marketers will complete and submit the same questionnaire - on behalf of the client to the insurer 23

24 WHAT DOES THE ASISA STANDARD REQUIRES ADVISORS TO DO? 24

25 Definition of Replacement Policy A new policy/ies, or variation of an existing policy/ies ( shall include but not be limited to a premium increase due to any other reason except the annual premium increase), where the policyholder or main life assured was also the policyholder or main life assured in respect of another policy/ies, and where a termination event occurs in respect of the latter policy/ies within a period of 4 months before or after the new policy/ies or variation is effected, and where the said termination event occurs in anticipation of, or as a consequence of effecting the new policy/ies or variation 25

26 The 4 month period must be calculated with reference to the effective date of the replacing policy and the termination date of the replaced policy. Replacement - adherence to FAIS Codecounselling 26

27 On completion of the proposal in respect of any policy or variation of an existing policy, the representative must: - ascertain whether the proposal is in respect of a replacement policy Irrespective of the client s answer, explain to the client: - the meaning of replacement - that replacements are potentially prejudicial - the levying/deduction of a termination charge - where a replacement is considered, the client has a legal right to comprehensive information regarding the consequences of replacement 27

28 The Standard does not limit the rights of the policyholders, RATHER: It affirms the legal requirement that the replacement is done on a fully informed decision 28

29 WHAT IS THE RESPONSIBILITY OF THE MEMBER LIFE OFFICES? 29

30 Responsibility of the member life offices: To ensure: - All representatives are properly trained - they understand the potential and real disadvantage of inappropriate replacements - They follow all practices that prevent inappropriate replacements giving effect to the Standard - They make compliance with this Standard a term of their contractual relationship with all representatives non compliance equates to a breach of contract / misconduct 30

31 Onus is on the advisor to ensure whether the client is replacing an existing policy. To remind advisors of this requirement, the insurers have included a prescribed replacement questionnaire on their new business application form." The ASISA Standard on Replacement requires the advisor to ask the client whether the new policy replaces all or part of their existing policy If the answer is yes then the RPAR needs to be completed. Must be submitted together with the proposal form to the replacing insurer 31

32 Replacing insurer must within 5 working days of receipt of the proposal, transmit the RPAR to the replaced insurer by Member life offices may not deviate from the prescribed format of the RPAR unless express consent has been obtained from ASISA 32

33 RPAR: Whether the replaced policy is in the investment or risk space Whether the new policy is in the investment or risk space Policyholder and advisor details 33

34 Replacing insurer may not directly or indirectly provide the representative with any commission, fee, incentive, remuneration for the replacement policy until all requirements have been satisfied Upon replacement: the replaced insurer may take whatever action it deems appropriate to advise the client of the clients rights in terms of this Standard and FAIS or to attempt to conserve the replaced policy The replaced insurer is required to take action in good faith and with due regard to the interests of policyholders, representatives and the industry as a whole 34

35 WHAT ARE THE DANGERS OF REPLACEMENTS? 35

36 Dangers of replacements Termination fees could become applicable Impact of age and health on the premium payable Charges and fees twice Lose tax advantages New exclusions and restrictions New waiting periods 36

37 WHAT IS NON - COMPLIANCE? 37

38 Non - compliance includes: If there is a replacement but no RPAR is included in the proposal submitted to the replacing insurer If there is a replacement but it has not been indicated If the replaced insurer when attempting to conserve the policy obtains information that indicates that there was non - compliance with the Standard If the replacing insurer has failed to transmit the RPAR to the replaced insurer within the prescribed period thus denying the replaced insurer a reasonable opportunity of conserving its business If the replaced insurer has a matter to be investigated and the replacing insurer has failed to investigate or provide the outcome of the investigation within the 5 day period 38

39 WHAT IS THE PURPOSE OF THE TRIBUNAL? 39

40 TRIBUNAL If the replacing insurer finds evidence of non - compliance, it must refer the matter to the Tribunal The replacing insurer has 4 weeks to refer the matter from the replaced insurer to the Tribunal, failure to refer, results in the replaced insurer being given a further 2 weeks to refer the matter to the Tribunal If the matter is not referred to ASISA within this 6 week period, it will not be accepted by ASISA for referral to the Tribunal, with a proviso that a longer period (not exceeding 12 months) will be condoned where the replacement is only discovered after 6 week period 40

41 Penalties for non - compliance: For the representative:- - it may issue a warning It may determine that no commission, fee, incentive or remuneration be paid directly or indirectly to the representative by the replacing insurer in respect of the replacement policy and that any consideration paid must be reversed and repaid by the provider, representative or agent to the replacing insurer It may grant the client a further 30 days cooling off period in which to cancel the policy in accordance with PPR 41

42 Reasonable man test: Excuse: client did not advise me would not suffice The ASISA tribunal panel member will make their decision in terms of whether the advisor could have foreseen - based on the facts at his or her disposal that there would have been a replacement The advisor should have a reasonable idea of the client s financial position based on the financial needs analysis. 42

43 By either of the insurers: - The tribunal shall advise ASISA of the breach of the Standard by the insurer who shall record the breach in a register for this purpose - In coming to a decision, the Tribunal must take into account any information regarding previous breaches of this Standard by the representative concerned THE INSURER CAN TAKE ADDITIONAL CONTRACTUAL OR DISCIPLINARY ACTION WHICH IT MAY DEEM NECESSARY 43

44 REALITY... 44

45 If correct procedures are followed, then there is no need for the regulator to intervene By adhering to the ASISA Standard, the advisors can ensure that the replacement was handled on an informed basis. 45

46 Replacement Policies Huge concern: Churning Twisting or churning is the process of using the cash value of one policy to purchase another policy with a larger benefit. Churning can also refer to a practice where the broker encourages the policy holder to cash in policies with a cash value and persuading them to pay for new cover with the proceeds. Churning thus refers to the practice where a FSP or representatives of a FSP convince a customer (new or existing) to replace an existing policy for another policy or product which has similar features and benefits. 46

47 Why does this happen? The reason why this is done is to enable the FSP/ representative to: meet sales targets that are set by either the FSP or product supplier or both, and to earn commission. 47

48 Some possible effects While the policyholder may acquire a policy with a larger death benefit, replacements often uses up the cash value that has built up in the original policy over the years. In some instances, the policyholder could be starting over regarding the accumulation of cash. What it means for the policy holder is that they are often exposed to risks that were not prevalent when the original policies were taken out. If a health condition develops and there has been no mention on the application because it seemed insignificant the insurer could reject any subsequent claim. 48

49 What should clients do? While the replacement of a life insurance policy may, in many cases, be appropriate the purchaser should be encouraged to look carefully at the policy. When replacing a policy the client will be expected to sign documentation confirming the policy replacement and that the adviser has explained certain matters relating to the change. 49

50 When it may be beneficial to replace an old policy: If there are added enhancements to an existing policy and the insurer is the same. Be sure that the client will not be disadvantaged by changing to the new cover. The broker should explain what the client may be missing out on by changing. If clients are increasing the cover, for example, and the insurer will cover the existing amount under the same conditions as the old cover only attaching any loadings or exclusions to the new sum assured. Policies do change over time and are often improved with added benefits 50

51 Make clients aware: Changes in their health or occupation. A new policy may end up with exclusions and loadings (an increase in premium due to perceived risk). Suicide clauses will start again. There is usually a period where suicide is not covered. As clients get older premiums may end up costing more as the premiums may be calculated differently to when they were younger and took out the original policy. Certain benefits that were on the old policy may not be on the new one. 51

52 2 nd Hand Policies 52

53 Why Second Hand Policies? Endowment policies: Sec 54 restrictive period Buy & sell policies Employer owned policies Preferred compensation

54 Role of Intermediary Licensed for Product Fit and Proper Requirements Code of Conduct

55 Role of Intermediary: Code of Conduct Information about financial service (Par 7) Reasonable & appropriate general explanation of nature & material terms of relevant contract/transaction to a client, & full disclosure of information reasonably be expected to enable client to make informed decision Material contractual information

56 Role of Intermediary: Code of Conduct Full and appropriate information: (i) Name, class or type of financial product concerned; (ii) nature & extent of benefits to provided, including details of manner in which benefits derived/calculated & manner in which they will accrue/be paid;

57 Role of Intermediary: Code of Conduct (iii) where financial product is positioned as investment: (aa) details of manner in which value of investment is determined, including details of underlying assets /other financial instruments; (bb) disclosure of charges /fees levied against product,; and (cc) on request, information concerning past performance & warning that past performances are not necessarily indicative of future performances;

58 Role of Intermediary: Code of Conduct (iv) nature & extent of monetary obligations by client in favour of product supplier, provider etc (v) details of special terms or conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions/circumstances in which benefits will not be provided; (vi) any guarantees; (vii) to what extent the product is realisable/ funds accessible;

59 Role of Intermediary: Code of Conduct (x) restrictions /penalties for early termination/ withdrawal; (xi) material tax considerations; (xii) whether cooling off rights & procedures; (xiii) investment/other risks of product; and (xiv) insurance product where provision made for increase of premiums, amount of increased premium for first five years & thereafter on five year basis but not exceeding twenty years;

60 Role of Intermediary: Code of Conduct Suitability of Advice (Par 8) Provider must, prior to providing advice: Obtain appropriate & available information regarding client s financial situation, financial product experience & objectives Conduct an analysis, for purposes of advice Identify the financial product(s) appropriate to the client s risk profile and financial needs,

61 Role of Intermediary: Code of Conduct where financial product to replace existing financial product held fully disclose to client actual and potential financial implications, costs & consequences of replacement, as discussed per Code of Conduct

62 Role of Intermediary: Code of Conduct Ensure client understands advice & in a position to make informed decision. Where replacing an long term insurance product with any other financial product notify issuer of existing long-term insurance product of such advice.

63 Role of Intermediary: Code of Conduct Where a client (a) has not provided all information, as part of the analysis, or where provider has been unable to do analysis because of circumstances surrounding the case, there was not reasonably sufficient time to do so, provider to inform client thereof and ensure that client understands: (i) full analysis could not be undertaken; (ii) may be limitations on appropriateness of advice provided; and (iii) client to take care to consider whether advice appropriate considering client s objectives, financial situation and needs;

64 Role of Intermediary: Code of Conduct (b) elects to conclude transaction differing from recommended by provider, or elects not to follow advice furnished, or elects to receive more limited information /advice than provider is able to provide, provider must alert client as soon as possible of the clear existence of any risk to client & must advise client to take particular care to consider whether any product selected is appropriate to client s needs, objectives and circumstances.

65 Role of Intermediary: Code of Conduct Record of Advice Record of advice: basis on which advice was given: (a) brief summary of information and material on which advice based; (b) financial products considered; and (c) the financial product(s) recommended & why product(s) selected to satisfy client s needs and objectives Record of advice maintained where transaction/contract in respect of financial product concluded by or on behalf of the client as a result of the advice furnished. Provider provide client with copy of the record.

66 Liquidity of Product Sec 54 of Long Term Insurance Act: 5 year period, 1 loan, 1 withdrawal, 20% Increase in Premiums

67 Capital Gains Tax General Rule: CGT payable on 2 nd Hand Policy Exceptions Original Beneficial Owner of Policy Spouse, nominee (see SARS Binding Private Ruling: BPR 098 dated 24 March 2011), dependant or estate of Original Beneficial Owner & no amount payable as a result of cession to spouse, nominee or dependant Former spouse of Original Beneficial Owner ceded in terms of divorce order/court order

68 Capital Gains Tax Example (All CGT examples: SARS CGT Guide) Facts: John and Jack are the original beneficial coowners of an endowment policy. They donate the policy to Jill. Jill then cedes the policy back to Jack. Finally, Jack receives the policy proceeds on maturity from the insurer. Result:

69 Capital Gains Tax Disposal by John and Jack to Jill: Since the policy was donated, John and Jack are deemed to have received or accrued proceeds equal to the market value of the policy under para 38. However, under para 55(1)(a)(i) they must disregard any capital gain or loss on disposal of the policy as they were original beneficial owners at the time of the donation.

70 Capital Gains Tax Disposal by Jill to Jack: Under para 38 Jill is deemed to have acquired the policy at market value on the date of acquisition. She must account for any capital gain or loss arising on the cession to Jack, as she was not an original beneficial owner.

71 Capital Gains Tax Receipt of proceeds on maturity by Jack: Under para 55(1)(a)(i) Jack must disregard any capital gain or loss arising on termination of the policy, as he was one of the original beneficial owners.

72 Capital Gains Tax Example Cession of policy between spouses Facts: Paul and Steve are involved in a same-sex union which the Commissioner is satisfied is likely to be permanent. Paul is the original beneficial owner of a policy, which he cedes to Steve. What are the CGT implications for Steve upon surrender of the policy if (a) Paul donates the policy to him, or (b) he pays Paul something for the policy?

73 Capital Gains Tax Result: Paul and Steve are spouses as defined in s 1 and the roll-over provisions of para 67 apply. In other words, Steve takes over Paul s expenditure and any valuation date market value for the purpose of determining the base cost of the policy.

74 Capital Gains Tax Policy ceded for no consideration: Any gain or loss arising in Steve s hands will be excluded by para 55(1)(a)(ii). Policy ceded for consideration: Steve will be subject to CGT when he surrenders the policy. The exclusion in para 55(1)(a)(ii) does not apply if any amount was paid or is payable for the cession of the policy.

75 Capital Gains Tax Example Cession of policy to nominee Facts: Sam is the original beneficial owner, but not the life assured, of an endowment policy. He nominates Hazel as the beneficiary and thereafter cedes the policy to her for R1. What are the implications for Hazel when she surrenders the policy?

76 Capital Gains Tax Result: Hazel is the nominated beneficiary (nominee), but despite this, any capital gain or loss arising in her hands on surrender of the policy will be subject to CGT because she paid R1 for the policy. The exclusion in para 55(1)(a)(ii) only applies when the nominee does not pay an amount for the policy.

77 Capital Gains Tax Example Surrender of policy acquired from former spouse under a divorce order Facts: Zeb and Agnes were married under customary law in 1956 and their marriage complies with the requirements set out in the Recognition of Customary Marriages Act 120 of Zeb is the original beneficial owner of an endowment policy. Zeb and Agnes divorce and it is ordered by the court that Zeb s policy be ceded to Agnes. Agnes surrenders the policy.

78 Capital Gains Tax Result: Under para 55(1)(a)(iii) no capital gain or loss will arise in Agnes hands when she surrenders the policy.

79 Capital Gains Tax Result: Under para 55(1)(a)(iii) no capital gain or loss will arise in Agnes hands when she surrenders the policy.

80 Capital Gains Tax Policy, where a person is or was an employee or director whose life was insured in terms of that policy and any premiums paid by that person s employer were deducted in terms of section 11(w);

81 Capital Gains Tax Policies for purposes of Buy & Sell agreements, ceded back to the life insured, and no premium on the policy was paid or borne by the life insured while the other person was the beneficial owner of the policy.

82 Capital Gains Tax Example The buy-and-sell exclusion Facts: Abe and Bart are partners, and have drawn up a properly structured buy-and-sell agreement, funded by long-term policies. Under the arrangement Abe is the owner (payer and beneficiary) of a policy on the life of Bart and Bart is the owner (payer and beneficiary) of a policy on the life of Abe. The partnership is dissolved and the parties wish to retain the policies on their own lives. Abe cedes his policy to Bart and Bart cedes his policy to Abe.

83 Capital Gains Tax Result: Any capital gain or loss in the hands of Abe and Bart on ultimate surrender of the policies will be excluded under para 55(1)(c).

84 Capital Gains Tax Policy originally taken out on the life of a person, where that policy is provided to that person or dependant by or in consequence of that person s membership of a pension fund, pension preservation fund, provident fund, provident preservation fund or retirement annuity fund;

85 Capital Gains Tax Example Policy ceded to member of retirement fund Facts: Dave is a member of a pension fund. He is the life assured on an individual policy held by the fund. On retirement the policy is ceded by the fund to Dave. Dave surrenders the policy. Result: Any capital gain or loss arising in Dave s hands on surrender of the policy will be excluded for CGT purposes.

86 Capital Gains Tax Example Proceeds of policy paid to dependant of member of retirement fund Facts: Shirley is a member of a provident fund. She is the life assured on a policy that was taken out by the fund. She has one legal dependant being her son Denys. She dies and the policy proceeds are paid to Denys. Result: Any capital gain or loss arising in Denys hands will be excluded for CGT purposes.

87 Capital Gains Tax in respect of a risk policy with no cash value or surrender value; if the amount received or accrued constitutes an amount contemplated in section 10(1)(gG) or (gh).

88 Capital Gains Tax Policies subject to CGT Determination of base cost The base cost of 2 nd hand policy acquired before 1 October 2001: any of the prescribed methods. Most likely: time-apportionment basis or the market value. Para 31(1)(b): market value of policy = higher of surrender value, and Fair market value determined by the insurer assuming that the policy runs to maturity.

89 Capital Gains Tax Example Part-disposal of second-hand policy Facts: In 1996 Brenda took out a 5-year endowment policy as the original beneficial owner. Keith purchased the policy from Brenda in 2000 for R The market value of the policy on 1 October 2001 was R Keith made the following withdrawals:

90 Capital Gains Tax 1 July 2002: Withdrawal R5 000; Market Value immediately Before Withdrawal July 2003: Withdrawal R6 000 Market Value immediately Before Withdrawal R July 2006: Withdrawal R Market Value immediately Before Withdrawal R Keith adopts the market value method for determining the valuation date value of the policy.

91 Capital Gains Tax Result: Keith s capital gain or loss is determined as follows: 2003 year of assessment Proceeds Less: Base cost R4 500 (R5 000/R x R90 000) Capital gain 500 Base cost after part-disposal: R R4 500 = R

92 Capital Gains Tax 2004 year of assessment Proceeds R6 000 Less: Base cost R4 750 (R6 000/R x R85 500) Capital gain R1 250 Base cost after part-disposal: R R4 750 = R

93 Capital Gains Tax 2006 year of assessment (final withdrawal) Proceeds R Less: Base cost R (R /R x R80 750) Capital gain R39 250

94 Pros & Cons Pros Buyer after tax proceeds Loan against policy no CGT. A loan is not regarded as a disposal and would not trigger a CGT liability. However, should the loan not be repaid by the time disposal takes place, then the loan must be taken into account. Possible low price for seller (beneficial for buyer) Possible future bonuses built into policy

95 Pros & Cons Cons CGT Additional tax Restrictive periods Possible low price for seller (detriment for seller)

96 Pitfalls of 2 nd Hand Policies Possible pitfalls: Loans Against Policy Policy ceded for security Possible upfront costs Look at tax rate for individual purchasing (taxed at 30% within fund)

97 Cell Captives An introduction

98 Agenda International Context SA Context Cell Captives Structure First Party Cells Third Party Cells Market Information

99 Cell Captives International Context Cell Captives are mainly used for self insurance of Corporates own liabilities such as EB liabilities Various domiciles available Tax, Regulatory Environment, Skills, (Bermuda, Bahamas, Guernsey, Jersey, Malta, Mauritius). Corporates pool cross border insurance risks for price efficiency and appoint specialist Advisors/Managers to assist in managing Captive via Captive board (Actuarial Consultants, Benefit Consultants, Audit, Legal and Tax Advisors, Administrators). Develop benefit structure and execute ALM strategy using Reinsurers and Asset Managers/Banks. Protected Cell Companies exist (PCC) (Operate as distinct Insurer, not rent a license ). PCC not in SA yet.

100 International Topical Issues Solvency assessment and management European economic climate Tax treaties Investment markets (Equities) Reinsurance rates

101 Cell Captives SA Context Long term insurer or Short term insurer governed under South African Company and Insurance Laws. Approved by the FSB with it s own license conditions and restrictions. Insurer have the flexibility to issue a different class (other than ordinary equity) of participating equity to clients. Participating equity gives certain rights and obligations to holder (i.e. a Corporate has the obligation to fund CAR, but the right to earn profits in cell (and losses)).

102 SA Topical Issues Solvency Assessment and Management Treat Customers Fairly (TCF) Binder Regulations and Outsourcing Investment markets Reinsurance rates Tax developments

103 Cell Captive Structure B C D Company D (Cell owner) A Core/Promotor Cell E Company E (Cell owner) H F G Company F (Cell owner) Insurer

104 Types of Cells First Party or Third Party Cells First Party Cell Cell owner owns participating equity and underwrites own risks in cell. Promotor Cell Shareholder Agreement Company D Policy Third Party Cell Cell owner owns participating equity and underwrites third party risks in cell. Promotor Cell Shareholder Agreement Company D Policy 1 Policy 2 Policy 3

105 First Party Cells Promotor Cell A Corporate A Investment Mandate Reinsurance agreement (Level PHI Liability) Asset Manager Reinsurer

106 Third Party Cells Cell A Owner Shareholder Agreement Promotor Cell A Binder Agreement Binder Holder Reinsurer Reinsurance agreement Policyholder A Policyholder B Policyholder C Seller/Broker Commission

107 Long Term Insurance Market Guardrisk Life 2% 20% 34% Momentum Centriq Life 14% Other 1% 1% 28% Old Mutual ART Sanlam Customised RMB Structured Life

108 Short Term Insurance Market Guardrisk Insurance 2% 2% 4% 1% 8% 26% 6% 51% ABSA Risk Centriq Other M&F Risk Finance Zurich Risk Finance Unitrans RMB Structured Insurance

109 REVIEW OF 3 RD PARTY CELL CAPTIVE INSURANCE AND SIMILAR ARRANGEMENTS

110 Agenda 1. Background 2. Introduction 3. Overall Findings 4. Key regulatory proposals 5. Way forward 110

111 Information letter 2/2011 Background Focus on 3 rd party cell captives Concerns: Different standard registration conditions Licensing conditions not fully effective Potential conflicts of interest Review to consider: Managing of conflict of interest Limiting 3 rd party cell owners to UMAs Prohibition on independent intermediaries owning a cell Affinity schemes to be prohibited or allowed subject to regulatory conditions Moratorium placed on new 3 rd party cell captive insurers 111

112 Introduction 2012 assessment of 3 rd cell arrangements: Existing ownership structures and business models (including similar arrangements) Financial soundness and market conduct risks Conflict or potential conflict of interest Mitigation of risks and conflict of interest Which structures/ arrangements or activities should be prohibited Report submitted to FSB end-sept

113 Overall findings 113

114 Cell owners Independent intermediaries Underwriting managers Corporates Affinity schemes Other insurers Pension Funds 114

115 Type of shares issued: Ordinary shares Features of structures Preference shares (redeemable or convertible) Voting rights may or may not be assigned to shares Capitalisation of cells not always required Recapitalisation of cells usually required but can be funded for a fee by promoter capital 115

116 Specific risks identified Risks to cell captive insurers: Contractual and exit strategy risk Operational risk Insurance risk Credit risk Reputational and market conduct risk 116

117 Specific risks identified Risks to policyholders: Risks to fair conduct of business Conflicts of interest Risks to ability to pay claims Risks relating to regulation and supervision: Conditions of registration Supervisory oversight 117

118 Key regulatory proposals 118

119 Regulatory proposals Cell captive insurance to be conducted under a dedicated insurance license Cell captive insurer not to conduct other forms of business Similar arrangement will no longer be permitted 3rd party cell captive arrangements only be entered into with a binder holder: Underwriting manager Non-mandated intermediary i.t.o. an approved affinity scheme 119

120 Regulatory proposals FSB approve on a case by case basis affinity schemes prior to arrangements entered into Prior notification for all other cell arrangements Enhanced regulatory requirements will be put in place for 3rd party cell captive insurers: Governance Minimum capital requirements for each cell Market conduct matters Reporting requirements On-going monitoring of shareholder/cell agreements Changes in licensing conditions 120

121 Way forward Discussion Document was issued to all insurers on 11 June 2013 Comments due by 31 July