Local long-term and short-term insurers are preparing for a new set of South African regulatory requirements. The Solvency Assessment and Management (SAM) regime will ensure the local insurance industry is in line with international standards. It must be formally implemented by January 2014, but considerable work has to be completed before then.
“Mutual & Federal is progressing very well in terms of preparation for SAM, and we are already benefitting from this groundwork,” says Edward Paul, general manager of Products, Actuarial and Reinsurance at Mutual & Federal, one of South Africa’s leading short-term insurers.
The company now has significant insight into the intricacies of the new regulations, as well as tangible implementation plans under the ownership of the Risk Management division, some of which have already been delivered.
“One of the major benefits of our preparatory work has been the enhancement and formalisation of our risk management framework, resulting in significantly better insight into our risk exposure,” says Paul. This has led to increasingly efficient use of capital.
“Better understanding of the risks we write gives greater insight into our product mix,” says Paul. “We have a clearer understanding of which products are capital hungry or capital efficient, as well as our risks of preference – those we want to avoid, and those we want to attract. We also know which products should be written in combination for more direct benefit.”
The SAM regime is aimed at promoting a sound local insurance industry and is based on the principles of the Solvency II Directive, Europe’s regulatory requirements for the industry. SAM will ensure that South African insurers meet the requirements of third country equivalence under the European regulations.
Solvency II is based on three pillars. The first is quantitative and requires insurers to develop internal models to quantify their capital requirements. The second pillar is qualitative and includes risk management as well as governance, while the third is concerned with reporting and disclosure.
“SAM is not merely about compliance, but focuses on making a real difference in day-to-day operations,” says Paul. “There is huge emphasis on risk management, governance and the responsibility of Boards to understand and own the process. Key for regulators is that the principles be truly understood and embedded into the organisation’s thinking.”
SAM lets companies choose to embrace the new regulations and scale efforts accordingly by building an internal model route, or go a low regulation route and use the ‘Standard Formula’. Whilst being computationally less onerous, it is likely that the Standard Formula will result in those companies having to hold higher capital reserves.
“Mutual & Federal chose to take advantage of the opportunities offered by the new regulations, and to follow the internal model route,” says Paul.
Well before the Financial Services Board (FSB) announced the SAM regime, the company had already embarked on developing an internal model to quantify the capital reserve requirements of the business, recognising its use in understanding risk.
By the time the Solvency II Directive was adopted by the European Parliament, Mutual & Federal had a robust quantitative model in operation.
“When the new regulatory framework came along, we already had the first chunk in place,” says Paul.
Mutual & Federal was then brought into its parent company’s comprehensive group-wide governance framework project which had been initiated in preparation for Solvency II and SAM.
“We were already part of the leading pack in terms of preparing our capital model, and then, through Old Mutual, were thrust into the forefront of preparing for the qualitative aspects of SAM as well,” says Paul.
Through Old Mutual, Mutual & Federal was one of only a very small number of South African short-term insurers to participate in the latest round of Quantitative Impact Studies (QIS) undertaken by the European regulators in preparation for Solvency II.
The company is also well advanced in terms of educating its Board members, senior management and the organisation at large about the upcoming regulations. All have been taken through an early change management process.
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