Insurance Industry
Insurance Industry Round Table Discussion
Nkonki hosted a successful CEO Roundtable, Friday, 11 March 2011. The guest speaker at the Insurance Industry Round Table Discussion was Mr Jonathan Dixon, the Deputy Executive Officer: Insurance at the Financial Services Board (FSB).
Dixon’s presentation revealed a picture of a regulator that is evolving from a compliance focused approach to regulation to a risk-based one.
“The view of the FSB is that regulation is no longer just a compliance function, but one that needs to be led from the top, namely by the board and senior management”.
Dixon added that this evolution will also result in the shift of the regulator from one of tick-box compliance, to one of also making judgement calls especially after the global financial crisis and the increasing complex global financial system.
Effective regulation is critical for economic growth and financial stability. Dixon shared three key initiatives directed at strengthening the financial regulatory system:
Initiative 1: Solvency assessment and management (SAM)
SAM is the programme set up by the FSB to re-evaluate insurers’ solvency. It started in November 2009 and should be completed towards the end of 2014. SAM is based on Solvency 2, the capital adequacy regime for the European insurance industry to ensure that the South African insurance sector remains in line with international best practice. The programme looks at real risks and exposures as well as the risk time horizon and having appropriate levels of capital. The three pillars are:
“SAM is different from Solvency 2 in that internal models are not used as the end in themselves, but rather as tools. The primary purpose is to improve the protection of policyholders and beneficiaries by aligning capital requirements with their underlying risks”.
Initiative 2: Treat Customer Fairly (TCF)
The ‘Treat Customer Fairly’ legislation is similar to the Consumer Protection Act. The TCF initiative launched by the FSB is anticipated to improve the quality of consumer protection for customers of financial services. “The primary objective of TCF is to achieve fair outcomes for consumers by bringing about enduring culture change in firms by assisting to convert good intentions to fair outcomes.” Dixon said that FSB is adopting a pro-active and pre-emptive approach to supervision and re-iterated that the board and senior management will remain accountable under this tough regime. The challenge is to create the right dis-incentives.
Initiative 3: Micro-Insurance
“Micro-insurance regulation is intended to broaden access by catalysing the market provision of risk management tools for poor households. As a result of the inherent complexity of insurance and the vulnerability of the low-income earners target market, there is a risk of potential abuse and mis-selling. Therefore a balance needs to be achieved between market development and consumer protection”.
South Africa will be shifting towards a twin peak model for financial regulation characterised by separate prudential and market conduct regulators which is broadly modeled on countries such as the UK, Australia and Canada. Prudential regulation is designed to maintain safety, soundness and solvency of financial institutions or funds, whilst market conduct regulation requires the perspective of a customer.
The CEO Insurance Industry Round Table Discussion debated extensively the issue of skills required under this new regime, both in the industry and within the regulator. Dixon emphasised the need for a balanced approach in the regulatory function because South Africa had historically neglected market conduct regulation which ensures transparency, market integrity and consumer protection and emphasised prudential concerns.
The Insurance Industry Round Table Discussion ended with Mr Dixon encouraging ongoing engagement with the industry and a commitment that the FSB will be working with boards and senior management to walk together into this transparent, risk-based approach to regulation and enduring cultural changes in financial institutions.