Solvency regulations put SA insurers on par with global industry

The adoption by South Africa's insurance industry of new European solvency regulations and standards, governing capital requirements for short and long term insurers, will be vital in ensuring local players are on a level playing field with their international counterparts.

According to Adam Samie, CEO of Lion of Africa Insurance, the South African insurance industry is similar to the local banking sector in that it has an excellent record and has weathered the recent global financial crisis much better than European counterparts. "However, it is impossible to isolate the South African insurance industry from international peers. It can't be ignored that short term insurance is a global business, particularly for smaller companies that are required to do reinsurance with global companies."

"Therefore, initiatives like Solvency Assessment & Management (SAM) - which is based on Europe's Solvency II model and is expected to be introduced in 2014 - are important in putting us on a par with the rest of the world."

The three main pillars to SAM are quantitative capital requirements including both a Solvency Capital Requirement (SCR) and a Minimum Capital Requirement (MCR), a qualitative supervisory review with effective risk management and an internal audit, as well proper transparency and disclosure.

Samie says these new solvency regulations are a radical departure from the way the industry has operated in the past, as SAM is a much more careful measurement of risk. "These new solvency regulations will result in a more conscious protection of the balance sheet in favour of the insured."

He says SAM is a positive development for the insurance industry as it is a fairer system than that which is currently in use, bringing all participants into the loop, including other service providers to the industry, such as Captive Insurers and Underwriting Managers. "It also places a higher responsibility on the part of insurance companies to provide certainty for their customers with real consequences for poor practices.

Samie says, however, that there are still risks for companies adhering to the proposed new SAM framework. "Every insurer needs to complete an Own Risk and Solvency Assessment (ORSA) that will help to correctly assess all material risks to the business. However, if a company is not measuring all its liabilities, it could still be setting itself up for failure in the event of a single cataclysmic event or a series of smaller events."

He also says the idea that smaller insurers are more risky is a misnomer. "A large company that looks well capitalized may have little balance sheet protection through reinsurance, for example, so in the event of a run on large losses a company may get into trouble.

However, a smaller company might be forced, because of its size, to have a lot of reinsurance protection and would therefore better protected against big shocks."

Samie says it is important to remember that SAM is a new development for the entire insurance industry. "Some companies may have used actuarial techniques in pricing the risk in some classes of business before but this is the first time that we have all had to comply with such strict regulations.