The repealing of Section 45 and Regulation 4 of the Short-term Insurance Act 1998 by the new Insurance Act will see a change from a legislated requirement for credit intermediaries to hold a Section 45 guarantee to an unregulated market solution: commercial considerations between transacting parties, placing responsibility for the management of credit risk squarely at the foot of the insurer.
The current understanding of the Regulations in relation to the collection of premiums in the new Insurance Act, is that, as is currently the requirement, once an insurer authorises a person in writing to collect premiums on its behalf, that insurer is responsible for the actions of the person it so authorises, and furthermore, that once the premium is paid to the intermediary, the insurer is on risk.
The repealing of the section is expected to be by way of Prudential Standards that will be implemented once the new Act has gone live – best estimate of date remains July 2018. The exact date that the Standard will take effect is not yet known.
The repealing of section 45 will result in several potential alternative scenarios, one being the cessation of business activities by Intermediaries Guarantee Facility Limited once the Standards become effective, resulting in a run-off period of the guarantees still in force and a prescription period of three years after the expiry of the last current guarantee, and the eventual de-registration of the legal entity.
Other alternatives include the sale of the business (but not the insurance licence) to an approved buyer/s and the subsequent de-registration of the company, as probably being the quickest and easiest method ceasing activities. This method will require the approval of the Regulator as the current exemptions attaching to the licence will not be available. The Regulator will therefore have to satisfy itself as to what the purchaser is acquiring and the impact on the purchaser’s existing business.
A continuation of Intermediaries Guarantee Facility Limited itself is possible depending on who the new shareholders are, the resolution of any anti-competitive issues and the provision of a business plan that reflects a viable business going forward, taking into account that it would be competing with the rest of the market writing guarantee business, the higher capital requirements applicable to a mono-line insurer under SAM, the loss of current exemptions with regard to minimum capital, spreading of assets, SAM, reinsurance and FAIS compliance. This alternative will require re-licensing or conversion of the current licence according to the provisions of the new Insurance Act and it is during this process of conversion that the proposed business plan would be considered in light of the above considerations.
The Board and Management of Intermediaries Guarantee Limited are monitoring the unfolding situation closely and remain in regular contact with the FSB in the process.
For more information, contact:
Charles Hitchcock, SAIA Chief Operations Officer