The Prudential Authority and the Financial Sector Conduct Authority (PA and FSCA) published Joint Standard 1 of 2024 (Joint Standard) in terms of the Financial Sector Regulation Act, 2017, which will come into effect from 1 December 2024.
The Joint Standard sets out the PA and FSCA’s requirements regarding the outsourcing of material functions by licensed insurers and replaces Prudential Standard GOI 5. The Joint Standard provides a more comprehensive regulatory framework governing outsourcing by insurers from both a prudential and market conduct perspective. The Joint Standard intends to ensure that both the PA and FSCA apply requirements uniformly by assessing compliance in relation to their respective prudential and market conduct supervisory functions.
The Joint Standard applies to all insurers (including micro-insurers and reinsurers) licensed under the Insurance Act, 2017, but excludes Lloyd’s and branches of foreign reinsurers.
The Joint Standard introduces more enhanced due diligence and performance management processes and policies which insurers are required to implement. Insurers will also be required to consider their outsourcing arrangements in terms of credit and conduct risks.
Some of the new requirements that will be introduced by the Joint Standard are:
- An insurer must, before entering into an outsourcing arrangement, undertake appropriate due diligence for every activity or function that it intends to outsource in order to identify and manage all risks introduced by the outsourcing arrangement. The scope of the due diligence must include assessing the costs, benefits and potential risk to its insurance business. Outsourcing arrangements should only be entered into where there is evidence that the benefits outweigh the costs and potential risks.
- An insurer must, before entering into an outsourcing arrangement, consider where the service provider has multiple outsourcing arrangements with other insurers whether these multiple outsourcing arrangements are likely to increase the risks as set out in the Joint Standard, for the insurer.
- An insurer may not enter into or maintain an outsourcing arrangement where the key persons of that service provider do not meet the fit and proper requirements relating to competence and integrity, as provided for in Prudential Standard GOI 4 which deals with the fitness and propriety of key persons of insurers.
Notification of material outsourcing is required to be made both to the PA and the FSCA at least 30 days prior to entering into an outsourcing arrangement. The notification must include certain information and be accompanied by a confirmation that the outsourcing arrangement is compliant with the insurer’s outsourcing policy and within the risk appetite set by the board of directors of the insurer.
When an outsourcing agreement is terminated, within seven days of the date of termination, the insurer will also be required to notify the PA and the FSCA. The notice of termination will be required to provide specific information to the PA and the FSCA.
Where there are outsourcing arrangements entered into before 1 December 2024. These arrangements must comply with the Joint Standard within 24 months of 1 December 2024 (you have until 31 November 2026 to comply) or you must comply with the Joint Standard upon the renewal or renegotiation of the outsourcing arrangement, whichever comes first.
Insurers are required to comply with the Joint Standard within six months from 1 December 2024 but in that period must continue to comply with Prudential Standard GOI 5 as if it had not been repealed.
Insurers will also need to ensure that their outsourcing policies are aligned to the Joint Standard and must ensure that the outsourcing policy is approved by their board.
The Joint Standard and supporting documents are accessible here.
