This blog was co-authored with Maano Manavhela, Candidate Attorney.
In this case, the applicant (Eskom’s captive non-life insurer) applied to the Financial Services Tribunal for the reconsideration of a R5 million penalty imposed by the Prudential Authority. The insurer was fined R5 million for contravening the Insurance Act and two of the Prudential Authority Standards issued in terms of the Act, of which R3 million was suspended. The contravention identified by the Prudential Authority related to declaration of the dividend by the insurer of R600 million to the shareholder in July 2021.
In 2021, Eskom had serious liquidity problems and asked the insurer to invest R600 million in it. The insurer decided instead to declare and pay a dividend in that amount. Prior to the payment, the board of the insurer met, and their actuarial head prepared an opinion based on a hypothetical R600 million dividend payment. The report related to the interim financial position based on the quarterly quantitative reporting template. The board consequently advised that the R600 million pay-out would not result in a drop in the solvency ratio below solvency requirements. It was the incorrect ratio reported by the actuarial report that led to the dividend declaration that resulted in a dividend which adversely affected the solvency ratios.
The insurer set out four reasons why the penalty should be reconsidered. First, the insurer at all times cooperated with the Prudential Authority. Secondly, it put measures in place to prevent the occurrence of such an event in the future. Thirdly, the industry generally relies on quarterly reports for its important decisions. And finally, the board in taking the decisions was not reckless in following the commonly accepted approach.
The Tribunal found that the penalty amount was fair and even lenient. There was no evidence that industry practice is to declare dividends based on quarterly reports and the board did not in fact rely on the quarterly reports but on the actuarial head’s report. Further the board did not take sufficient heed of the qualifications and the conclusion, which “he carefully drafted in negative terms”, namely “as far as the duties of the Head of Finance is concerned, that there are no obvious reasons for me to advise the board against the hypothetical payment of a R600m dividend at this time”.
In its conclusion the Tribunal held that the board took “a calculated risk” by taking a decision based on the Head of Finance’s report that potentially could have put policyholders at risk. The ultimate responsibility for the declaration, as the report stated, was that of the board, the Tribunal said. The Tribunal declined to reconsider the penalty.