The Financial Sector Conduct Authority (Conduct Authority) published a draft Conduct Standard setting out the proposed requirements for the conduct of cell captive insurance business in relation to third party risks. Although the period for submission of comments has closed, it is important for any person who has entered into a cell structure arrangement to understand the implications of the draft Conduct Standard.
Click here to read the Statement supporting the draft Conduct Standard and the Draft Conduct Standard.
The purpose of the Conduct Standard is to address the potential risks to fair outcomes for policyholders and is aimed at protecting policyholders by ensuring that potential or actual conflicts of interest which may arise where the cell owner is a non-mandated intermediary (NMI) are adequately controlled and managed. These conflicts exist because an NMI can share in the underwriting profits as well as earn commission for selling of policies, which may therefore result in biased advice.
Limitations where the cell owner is an NMI
To address these concerns, the Conduct Authority has proposed the following limitations in instances where the cell owner is an NMI or an associate of an NMI:
- An NMI, or an associate of an NMI, that is a cell owner must be a tied agent of the cell captive insurer and may, therefore, only offer policies underwritten in the cell structures of that cell owner;
- An affinity relationship must exist between the main business of the NMI and the insurance business conducted through the cell structure of the cell owner; and
- The main business of the NMI must not be the rendering of services as an intermediary or the performance of any functions on behalf of an insurer.
An affinity relationship for purposes of the draft Conduct Standard, is one where:
- The primary business of the cell owner is not insurance business;
- The broader business relationship between the cell owner and the policyholder results in the offering of suitable insurance products and consistently offers fair value to the policyholder; and
- The conducting of insurance business through the cell structure does not otherwise compromise the delivery of fair outcomes to the policyholder.
An exemption process is also provided for where the arrangement will promote transformation of the insurance sector by allowing ‘incubator’ cells to access the insurance market. However, in considering such an exemption application, the Conduct Authority will need to, amongst other things, consider whether such an exemption will compromise the fair treatment of policyholders.
The Conduct Authority has confirmed that the draft Conduct Standard is consistent with its mandate to protect financial customers by promoting fair treatment by financial institutions. Once the Conduct Authority has carefully considered all submissions received on the draft Conduct Standard, necessary changes will be made, and it will be submitted to Parliament for a period of at least 30 days while Parliament is in session. In the meantime, we believe that affected parties should consider the impact of this draft Conduct Standard on their business model and plan accordingly.
Click here to read the Draft Conduct Standard – Financial Sector Regulation Act, 2017