South Africa’s Insurance Laws Amendment Bill 2013 (‘ILAB’) has recently been published for public comment. ILAB, if adopted, will bring about amendments to the Long-term and Short-term Insurance Acts in order to regulate the governance, risk management and internal control measures of long- and short term insurers more strictly, as well as reinsurers (collectively referred to as ‘Insurers’).
The stricter regulation will require a detailed governance framework to be documented and implemented by Insurers. The purpose of the ILAB is aligned with various other concurrent initiatives being pursued by the National Treasury and Financial Services Board (including Solvency Assessment and Management, the regulation of outsourcing, binder relationships and cell captive arrangements, designing a micro-insurance regulatory framework and the Treating Customers Fairly initiative) which all ultimately serve to increase consumer or policyholder protection.
The purpose of this article is not to provide an overview of the legislative changes which will be brought about by the ILAB, but to consider whether the persons who will be appointed by Insurers as the heads of control functions, as required by the ILAB, will qualify as prescribed officers under the Companies Act, 2008 (the Act) and if so, what the consequences are.
Section 14K (read with section 14J) of the ILAB requires Insurers to appoint a head for each of the following functions:
1. risk management;
2. compliance;
3. actuarial control; and
4. internal audit.
In terms of section 14J, the authority and responsibilities of each control function must be documented and each control function must be structured to ensure that the function has the necessary authority, independence, resources, expertise and access to the board of directors (the ‘Board’) and all relevant employees and information, to exercise its authority and perform its responsibilities. The importance of the role of each of the heads of control functions is elevated by, among others, independence, remuneration, reporting and performance assessment requirements which apply to the head of each control function. The heads of control functions must also:
- regularly report to the Board or one of its committees;
- communicate directly and regularly meet with the chairperson of the Board or one of its committees;
- report directly to the Board in writing any matter relating to the business of the insurer which constitutes a contravention of any section of any applicable legislation that applies to the insurer; and
- where a contravention of the Long-term or Short-term Insurance Acts has occurred, submit a report to the Registrar if the Board has not taken requisite steps to rectify the contravention within 30 days of the matter being reported to it.
A question which arises from the apparent importance given to the roles of the heads of control functions of Insurers, is whether they will also qualify as prescribed officers.
The answer to this question is important for the following reasons:
1. prescribed officers under the Act have the same fiduciary duties of Directors as partly codified in sections 75 and 76 of the Act;
2. prescribed officers, like Directors, may be held personally liable for any loss or damages sustained by their employer as a result of a breach of fiduciary duties, or the breach of certain sections of the Act;
3. prescribed officers must strictly comply with the conflicts of interests provisions of section 75 of the Act;
4. the disqualification and ineligibility criteria set out in section 69 of the Act apply to prescribed officers;
5. Insurers’ Directors and officer’s liability insurance should cover any potential liability of all prescribed officers, which may, as a result of the ILAB, comprise of a greater group of employees of an insurer.
Under regulation 38(1)(b) of the regulations promulgated in terms of the Act, a person is designated a ‘prescribed officer’ of a company if that person:
(b) regularly participates to a material degree in the exercise of general executive control over and management of the whole, or a significant portion, of the business and activities of the company.
Taking into account the duties and apparent significance of the roles of heads of control functions as referred to above, it is likely that they will:
- regularly participate to a material degree in the exercise of general executive control over and management of a significant portion of the business and activities of Insurers; and
- therefore qualify as prescribed officers.
Although establishing whether someone qualifies as a prescribed officer depends on the facts of each case and despite the fact that the final wording of the ILAB may still be changed before it is enacted, the possible extension of fiduciary and other statutory duties to the heads of control functions appears to be in line with the intention of the legislature of increasing the responsibility of designated employees of Insurers for the appropriate oversight, control and increased governance of Insurers.