DIRECTIVE FINANCIAL SERVICES BOARD REPUBLIC OF SOUTH AFRICA LONG-TERM INSURANCE ACT, 1998 (ACT 52 OF 1998)

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1 Ref: Directive 127.B.i (LT) DIRECTIVE FINANCIAL SERVICES BOARD REPUBLIC OF SOUTH AFRICA LONG-TERM INSURANCE ACT, 1998 (ACT 52 OF 1998) Addressee: Long-term insurers File: 10/17/1 Edition Issue date Effective date Directive Status st 7 October January 2009 Withdrawal date 127.B.i (LT) Draft - 2 nd rd Subject: Insurance business carried on by an off-shore branch of a 1 Purpose This directive provides clarity on the applicability of the Long-term Insurance Act (the Act) to those policies underwritten by an off-shore branch of a locally registered long-term insurer. 2 Background In recent years there has been considerable growth in the business conducted by offshore branches of locally registered long-term insurers. Much of this growth has arisen from insurance policies (mainly or exclusively with an investment content) actively marketed by such off-shore branches in South Africa to local residents. The question that has arisen is the extent to which the Act applies to the business of off-shore branches of insurers conducted in South Africa with local residents. The principle is acknowledged that a, like an individual, may legally conduct business beyond the area of application of South African legislation. A general rule of the construction of statutes is that the provisions of a law should not be read to apply extra-territorially unless it is clear that the legislature intended that result. Simultaneously, an insurer s foreign business will be subject to the law of the country where such business is carried on. Foreign insurance business, for example, will usually require the approval of, or the issuing of a licence by, the insurance regulator of the Page 1

2 country from which the branch operates, and the compliance with the laws of that country by the off-shore branch. The is the entity which assumes the ultimate liability for all its business, whether local or foreign, irrespective of whether the Act or a foreign law will apply to the underlying policies issued. Hence the Registrar of Long-term Insurance has to be informed of all the insurance liabilities of the registered insurer so as to apply the prudential requirements of the Act (refer to section 29 of the Act) to ensure that liabilities of the insurer can be met wherever they may have been incurred. For this reason, this office has previously issued a directive (Directive 127.A.i) requiring registered insurers to advise the Registrar when they establish an off-shore branch. Furthermore, details of offshore liabilities are to be included in returns to the Registrar, irrespective whether or not such liabilities have to be disclosed to the foreign regulator. It is therefore clear that the Act specifically determines that prudential requirements will apply to all the business of a long-term insurer including the business conducted by an offshore branch office. Conversely, the Act is silent on the application of market conduct requirements to business carried on by an offshore branch. This directive therefore primarily provides guidance on the approach to be followed in determining whether or not business is deemed to be conducted in South Africa and to what extent the market conduct aspects addressed in the Act would be applicable to such business carried on by an offshore branch of a. 3 Guidance on legal position 3.1 Prudential requirements As mentioned in paragraph 2 above, the Act is clear that the is the entity which assumes the ultimate liability for all its business, and therefore all prudential requirements stipulated in the Act aimed at ensuring financial soundness will apply equally to an insurer s foreign business. Thus, for instance, the financial arrangements in sections 29, 30, 32, 33, 34, 35 and 36 in Part IV of the Act, being applicable to all South African registered long-term insurers, apply extra-territorially in the sense that they necessarily encompass all the business of such insurers (i.e. including their off-shore branch business). Other prudential provisions in the Act that will equally apply to the business conducted by an offshore branch office include- Part V (Court approval required for compromise, arrangement, amalgamation, demutualisation or transfer); Part VI (Judicial management and winding-up of long-term insurers); and Section 46 (Policies to be actuarially sound). By contrast, there are prudential provisions of the Act which are unrelated to the financial stability of an insurer or the actuarial soundness of its policies that are unique to South Africa and therefore do not apply to policies issued by off-shore branches of locally registered insurers where it is deemed to be business conducted offshore. This includes the following sections: Page 2

3 Section 31(Kinds and spread of assets); Section 53 (Option for payment of policy benefits in money); Section 54 (Limitations on provisions of certain policies); Section 55 (Limitation on policy benefits in event of death of unborn or of certain minors); section 57 (Life policy in relation to person rendering or liable to render military service); and Section 61 (Prescription of certain debt). 3.2 Market conduct requirements It is a factual enquiry whether the marketing or other activities of the off-shore branch are such as to categorise them as long-term insurance business conducted in South Africa, in which case all the requirements of the Act, namely the prudential requirements and the market conduct requirements, will apply to these policies. In determining the facts, the provisions of section 7(3) of the Act may be applied. The acts therein specified may serve as a useful guide to the Registrar to assess any particular situation. The deeming provision in section 7(3) of the Act merely creates a rebuttable presumption. It follows that if the off-shore branch office performs in South Africa any of the acts described in section 7(3)(a) or (b) of the Act, and desires to avoid the applicability of certain of the prudential requirements and the market conduct requirements of the Act, it must adduce evidence to the satisfaction of the Registrar, showing that it is not carrying on long-term insurance business in South Africa. This will constitute a legal onus on the off-shore branch. As mentioned above, the ultimate enquiry is one of fact whether or not business is conducted in South Africa. Factors which may indicate that the business conducted by the off-shore branch is foreign business, notwithstanding some aspects thereof being performed in South Africa, include the following: (a) (b) (c) (d) (e) (f) (g) The marketing of such policies is not confined to South Africa. The majority of policies are sold to persons ordinarily resident outside South Africa. The policy contract is concluded outside South Africa in that the acceptance of the proposal is effected outside South Africa s borders. Premiums are paid outside South Africa in a foreign currency. The policy is issued by the off-shore branch of the insurer. Policy benefits are to be discharged outside South Africa in a foreign currency. The same applies to the proceeds of loans made against the policy. The policy contains an express term that some or other foreign law governs the contract and that the parties to the contract must submit to the jurisdiction of a foreign court. Page 3

4 (h) The branch which issued the policy must have been licensed by, and operate under the supervision of, an insurance regulator of a country with an appropriate level of regulation and supervision. The fact that the off-shore branch conducts marketing activities within South Africa is in itself not conclusive that the business conducted in South Africa is business to which all the requirements of the Act apply. However, to the extent that marketing is performed within South Africa, such acts will be subject to the applicable laws of this country. Particular reference should in this regard be made to the Financial Advisory and Intermediary Services Act, 2002, and its subordinate legislation (codes of conduct). In addition to these normal requirements, this office expects of insurers and intermediaries to disclose to potential policyholders who may enter into off-shore branch office policies, that such policies may not be supervised by the South African regulator in every respect, where such business is deemed to be conducted off-shore. Where the business of an off-shore branch of a is deemed to be conducted in South Africa, such business will be subject to all provisions of the Act, including market conduct provisions. Examples of such market conduct rules that will have to be adhered to include the requirements of section 45 of the Act (prohibition of inducements) and section 49 of the Act (limitation of remuneration to intermediaries). 4 Foreign business other than off-shore branch office business The guidelines stated above relate only to the business of an off-shore branch office of a in South Africa. It is not intended to provide scope for a foreign insurer, not registered as a long-term insurer in South Africa, to operate in South Africa on the basis of adhering to the guidelines set out in paragraph 3 above. 5 Conclusion One of the main principles of regulation and supervision in the financial sector is the protection of the consumer. This implies that regulators must have the ability to effectively enforce the regulatory framework and oversee institutions conducting business in their specific territory with regard to both financial soundness and market conduct issues. All provisions of the Act will be applied to policies deemed to be business conducted in South Africa, with reference to section 7(3) of the Act. Locally registered insurers with offshore branches that are marketing within South Africa are invited to approach this office should they wish to motivate that this amounts to foreign business, notwithstanding some aspects thereof being performed in South Africa. Page 4

5 6 Information sharing This directive is available on the website ( of the Financial Services Board. Long-term insurers must bring this directive to the attention of its auditors (appointed in terms of section 19 of the Act) and the statutory actuary (appointed under section 20 of the Act). pp REGISTRAR OF LONG-TERM INSURANCE Page 5