Capital management vital for long-term insurers

The Financial Services Board (FSB) says the effective management of capital remains important to long-term insurers while at the same time the industry continues to face numerous challenges.

In the eighth annual report of the Registrar of Long-term insurance, the FSB says the importance to manage capital is seen from the number of applications for the issuing of subordinated debt instruments received from some of the major players in the long-term insurance industry.

The challenges continuing to face the long-term insurance industry are:

* Compliance with regulatory requirements
* Increased competition
* Financial Sector Charter
* International Financial Reporting Standards
* Addressing the needs of the low income market for appropriate products
* Technology
* Minimum early termination benefits of policies implementation of the Statement of Intent signed by the Minister of Finance and the major players in the long-term insurance industry
* Rebuilding public confidence
* Dealing with issues emanating from the determinations by the Pension Funds Adjudicator
* Consumerism
 
Generally the industry remains in a healthy state. Net premium income for primary insurers increased by 8.2% during 2005 (from R151.4m to R163.7m) compared to a decrease of 7% during 2004. The increase in premium income is attributable to the high levels of credit growth in the household sector where credit life policies are taken out as protection against credit arrangements.

Benefit payments decreased by 2.8% (from R165.2m to R160.5m) compared to a 5.6% increase for 2004.

The excess of income over expenditure for primary insurers increased from R2.8bn in 2004 to R26.3bn in 2005. Assets showed an increase of 16.5% (from R908.51m to R1.058bn). The increase in the assets of primary insurers was mainly due to the strengthening of equity markets.

The 2005-year reflected an increase in equity, debentures and loan stock investment by long-term insurers. The ratio of assets to liabilities for primary insurers remained at 1.10.

The number of policies that surrendered as a percentage of the number of new policies issued has shown a steady decline from 24.9% in 2001 to 11.9% in 2005. The number of policies that lapsed as a percentage of the number of new policies issued also reflects a drop from 29.3% in 2001 to 22.7% in 2005.

The Registrar undertook an investigation to gain a better understanding of the rules of a long-term insurer, as required in terms of section 53 of the Long-term Insurance Act,  to establish to what extent long-term insurers record profit or losses when policies are surrendered or lapsed. The outcome indicated that the cost structures of insurers need to be addressed.

A joint working group was established by the FSB and the National Treasury to conduct a study regarding commission regulation. It was accepted that the matter was complex and had no quick fix.

It also became evident that several aspects of the traditional business model followed by insurance companies in providing savings products had become outdated. New developments culminated in the signing of the Statement Of Intent between the Minister of Finance and major players in the long-term industry during December 2005. Although this statement primarily addresses issues of poor benefits in the event of early termination of contributions, the agreement also includes a commitment to examine other issues including commission structures, disclosure standards and consumer education.

As part of the FSB's supervision, a number of insurance companies were visited during 2005. The visits focused on the various risk areas of insurers and the ability of management to properly implement risk management procedures. The following are areas of concern identified during the on-site visits:

* Lack of corporate governance especially in small insurers
* Outsourcing arrangements
* The complexity of product design, specifically in linked investment products
* Undue reliance on individuals within companies, i.e. key staff
* IT systems
* Impact of the National Credit Act
* Assistance business insurers are concerned about the competition from unregistered entities.
 
The FSB is party to a number of bilateral Memorandum of Understanding with international supervisors. Its membership of international organizations includes the International Association of Insurance Supervisors.