Issues and Insights

Insurance Industry

Insurance Industry Round Table Discussion - 2012

On the 5thApril 2012, Nkonki hosted its second successful Insurance Industry Round Table Discussion. The guest speakers at this Insurance Round Table Discussion were Mr Jonathan Dixon, The Registrar of Insurance Companies, who was also our guest speaker at the last Round Table Discussions in March 2011, and Mr Ian Marshall, Head of the SAM Unit at the FSB. The focus of this year's discussion was the Solvency Assessment and Management framework (SAM),the risk based supervisory regime being implementedfor the prudential regulation of both long-term and short-term insurers to be in line with international standards based on Solvency II.

In his opening remarks, The Registrar re-emphasised the intention behind SAM, which is to develop a robust system of regulation that is based on the following three pillars in financial regulation:

1. Capital Adequacy,
2. Systems of governance and risk management
3. Reporting and disclosure requirements

Implementation of the SAM Road Map is quite advanced and 2012 is considered a "crunch" year. Considering the profound impact SAM is likely to have in the Insurance Industry, the FSB has taken a partnership and extensive consultative approach to implementing SAM. The Registrar's general request to Industry players is to "get involved" in shaping this process.

The issue of proportionality, according to the Registrar, is very important to the FSB. It has become apparent that smaller players face greater challenges than big players in meeting the requirements of SAM.

SAM Road Map Update

Full implementation of SAM has been changed to January 2015. In 2014 there will be a parallel run for insurers. Insurers will be expected to submit statutory returns on the current basis as well as on the SA QIS 3 basis, which is the last impact study before full implementation of SAM in 2015. On the development of a legal framework to support the successful implementation of SAM, the Registrar indicated that the Insurance Law Amendment Bill is expected to be effective from the beginning of 2013.

Outcome of the SA Quantitative Impact Study 1 (QIS 1) Undertaken in 2011

The Head of the SAM Unit, Ian Marshall's presentation gave an indication of SA QIS 1 as an exercise that was quite extensive and that has given the FSB an understanding of the readiness of the industry for SAM, the challenges being faced in meeting requirements under pillar 1 and areas that require further focus in the subsequent quantitative impact study.

There was large scale participation by the industry in the exercise which Marshall saw as positive. 35 life insurers, 50 non-life insurers, 5 life reinsurers and 5 non-life reinsurers representing over 90% of the South African insurance industry by premium volume participated in the study.

The study as presented indicates that:

• The majority of insurers have shown an increase in both the available capital as well as the capital requirement under SAM.
• For two thirds of the life insurers, this increase in available capital is more than the increase in the capital requirement which results in a larger free surplus making them better off under SAM. The non-life insurers on the other hand had lower free surplus.
• Insurers overall, however, showed a decrease in capital coverage ratio under SAM. The Capital Coverage Ratio of the Industry dropped from 3.1 to 1.7 under SAM. Although this may look negative, according to the Registrar European countries are looking for coverage of between 1.5 to 2 and in this context South Africa is comparable.
• In total, there were 4 insurers that did not meet the Minimum Capital Requirement (MCR) and 13 additional insurers that were not able to meet the SCR under SA QIS 1
• The economic balance sheet approach which underpins SAM and which is said to facilitate a greater level of comparability across insurers, values liabilities at best estimate basis which may mean lower technical provisions for many insurers.

According to Marshall, SA QIS 1 has revealed certain areas in which further technical work is necessary. These will be addressed in SA QIS 2 to be undertaken in 2012 and include:the impact on groups;ring-fenced funds; contract boundaries and the treatment of tax liabilities.

Marshall's presentation showed that one of the key challenges also faced under SA QIS 1 is that some insurers experienced problems in obtaining the necessary data and inputs for the study. The Round Table deliberated extensively on concerns around the costs of participating in QIS 1 especially for small players. The primary concern is that the unintended consequences of SAM might be to drive some small players out of the Industry which would be contrary to the spirit of public interest and Government's focus on promoting SME's as a cornerstone of job creation and economic growth. Both The Registrar and Head of the SAM Unit sought to allay these fears by indicating that the Economic Impact Study that is going to be undertaken in 2012 and which is led by National Treasury will look at the economic impact of SAM so that any negative consequences can be addressed. The other safety net for smaller insurance companies is the micro insurance policy initiative that aims to safeguard the existence of the micro insurance industry and to broaden access to insurance.

The key messages from these deliberations to the FSB can be summarised as follows:

• The FSB should continue to broaden its consultative process so ensure that all views are considered.
• Efforts between the FSB and the Insurance Industry should continue to simplify the process of implementation of SAM and to resolve the technical issues that exist.
• The SAM Technical Team should continue to have a flexible approach to the implementation of the Road Map to accommodate results from the Economic Impact Study and the outcomes of the continuing industry consultative process.

Aside from the mentioned initiatives for 2012, other priorities mentioned for the year include:

• Undertaking a pillar two readiness survey that will assess the Industry's internal risk management structure and systems for SAM.
• Working with EIOPA and the European Commission on possible transitional arrangements for 3rd country equivalence for South Africa.
• Continuing with the Internal Model Approval Process (IMAP) for those Insurers who have opted to use their own models as opposed to the standard formula.

The deliberations of thisround table were very positive as they showed a committed Regulator that is working very closely with the Industry to ensure the successful implementation of SAM.

CLICK HERE TO DOWNLOAD "SAM Quantitative Impact Studies (QIS) QIS1" Document

[Go Back]