On 30 September 2022, the Financial Sector Conduct Authority (“FSCA”) issued FSCA Communication 28 of 2022 titled “Publication of FSCA Conduct Standard 2 of 2022 – Requirements relating to third party cell captive insurance business” (“Communication”), informing the insurance industry that the FSCA has published Conduct Standard 2 of 2022 (INS) titled “Requirements relating to third party cell captive insurance business” (“Conduct Standard”). 

The Conduct Standard commenced on 1 October 2022

After tabling the draft Conduct Standard in parliament on 11 May 2022, the FSCA has made amendments and refinements to the draft Conduct Standard, where appropriate, in response to the various targeted engagements and public consultation processes. 

Of import, the changes and refinements include changes to the limitation of cell ownership by a non-mandated intermediary (“NMI”) and associates, the most notable change being that only cell owners that are NMIs will have to be tied agents of the cell captive insurer and not any of its associated NMIs. 

Section 6 of the Conduct Standard now titled “Additional requirements for ownership of cell structures by non-mandated intermediaries or associates of non-mandated intermediaries” provides (amongst others):

  1. a limitation on ownership of cells by cell owners that are NMIs only. Essentially, the Conduct Standard provides as follows:
    • a cell owner that is an NMI is restricted in that it may only offer policies underwritten in the cell structures in which it is a cell owner (i.e. it has to be a tied agent of the cell captive insurer); 
    • a cell owner that is an NMI may only have a third-party cell arrangement in place with one life cell captive insurer and one non-life cell captive insurer, or with one microinsurer, and may only render services as an intermediary for purposes of those insurers and in respect of policies underwritten in the specific cell structures of which it is the cell owner; and 
    • a cell owner that is an NMI will be required to be a registered financial services provider (“FSP”) and meet all requirements around fitness and propriety as required of FSPs under the Financial Advisory and Intermediary Services Act 2002, including having a Key Individual, compliance officer, and training programmes for staff members.
  2. that a cell captive insurer that enters into a cell structure with a cell owner that is an NMI or an associate of an NMI, must be able demonstrate, on an ongoing basis, that there is comprehensive management of risks. Where risks are identified, the cell captive insurer will be required to take steps to avoid, or where avoidance is not possible mitigate, the risks so identified. Inter alia, a cell captive insurer that enters into a cell structure with a cell owner that is an NMI or an associate of an NMI, must be able demonstrate, on an ongoing basis:
    • that any risks that may impede or adversely impact the fair treatment of policyholders as a result of the cell structure are avoided and where avoidance is not possible, mitigated; 
    • that the cell structure does not compromise the delivery of fair outcomes to policyholders; 
    • that the cell structure should ensure the offering of suitable insurance products that consistently deliver fair value to policyholders; and 
    • that the cell captive insurer has allocated adequate operational resources in respect of its control functions to be able to comply with the relevant governance and oversight requirements, bearing in mind the size and quantity of cell structures with the cell captive insurer.

It is noted that the FSCA will consider issuing further guidance on how it will apply the comprehensive risk management process set out in the Conduct Standard in respect of an associate of an NMI to ensure that such structures are not established and used to circumvent the intention of the Conduct Standard.

Whilst the Conduct Standard comes into operation on 1 October 2022, the Conduct Standard provides for a two-year transitional period for all cell structures entered into before the commencement date of the Conduct Standard. 

Therefore, all cell structures entered into prior to 1 October 2022 must, within two years from the commencement date (i.e. by 30 September 2024), comply with the requirements of the Conduct Standard.

It is also noted in the Communication that since the Conduct Standard has commenced, the temporary measure of the Prudential Authority which imposes a limitation on ownership of cell structures in the licence conditions of cell captive insurers in respect of third-party cell captive arrangements, will be lifted. In this regard, the FSCA has formally requested the Prudential Authority to remove these conditions as soon as possible after the effective date of the Conduct Standard on 1 October 2022.

The following documents can be accessed here:

(i)    Communication; 

(ii)    the Conduct Standard; 

(iii)    the consultation report of September 2022; and 

(iv)    Statement of Need and Intended Operation of Conduct Standard 2 of 2022.