The Financial Services Board (FSB) is continuing to develop its new risk-based solvency regime for South African short-term and long-term insurers, known as the Solvency Assessment and Management regime (SAM). Under this regime, insurers may calculate their Solvency Capital Requirement (SCR) using either a standard formula, an internal model or a combination of the two.
The FSB has released a guide yesterday to explain the full and partial internal model approval process (IMAP) that will apply to all South African regulated insurers and insurance groups.
The guide is focussed on the approval process and does not cover the detailed internal model requirements.
The internal model approval process is split into two phases, namely the pre-application phase and the formal application phase.
An insurer wishing to apply for internal model approval is required to complete the pre-application phase prior to beginning the formal application phase. Successful completion of pre-application does not, however, guarantee that the model will be approved.
The pre-application phase begins with an insurer completing and submitting the pre-application qualifying criteria (PAQC) template that will be issued as part of the IMAP. Only those insurers meeting the pre-application qualifying criteria will be allowed to begin the pre-application process. This template will enable the FSB to assess the likely readiness of an insurer to meet the approval standards prior to beginning a more detailed review.
The first pre-application phase will begin in September 2011. The pre-application window will close at the end of November 2011. The second pre-application phase for insurers still wishing to use their internal models by 2014 will begin in April 2012 and close at the end of June 2012. Within one month of receiving an insurer’s PAQC template, the FSB will notify them whether they may start the pre-application process. The pre-application phase is an interactive process between the FSB and insurers and consists of nine steps which are explained in detail within the guide. The pre-application process is expected to take around 18 months to complete depending on the readiness of each insurer to fulfil the formal application documentation requirements.
Pre-application increases the likelihood of successfully completing the internal model approval process, as the FSB will already have developed a view of the model methodology and application of the internal model in decision making, as well as internal model output being available for model validation.
Formal applications may be submitted at any time from 1 March 2013, subject to the successful completion of the pre-application phase. As the approval phase will take at least six months, an insurer should allow for this when deciding on its formal application submission date.
The FSB would like to remind all insurers that intend to apply for the use of an internal model to calculate their SCR that participation in all South African Quantitative Impact Studies (SA QIS) is a mandatory requirement. Insurers who do not participate in the impact studies will not have their internal models considered for approval. The SA QIS will elicit both quantitative and qualitative information to evaluate the capital and non-capital costs likely to be incurred by insurers.
The IMAP has been developed based on the results of research into other regulatory internal model approval processes within the insurance and banking industry. The two main influences on the chosen method are the publically available IMAP guide produced by the Financial Services Authority (FSA) - the supervisory authority for the UK, and the European Insurance and Occupational Pensions Authority (EIOPA) level II guidance (former Consultation Papers).
Insurers who intend to apply for approval of their internal models are required to study this guide carefully to ensure that they understand and comply with the stringent requirements of each phase during the internal model approval process.
The IMAP is available on the website of the FSB at http://www.fsb.co.za/.
Get the latest issue of FAnews