Getting to grips with FCR

01 March 2007 Gareth Stokes

Financial Condition Reporting (FCR) was proposed by the Financial Services Board (FSB) toward the end of 2004. The document was developed in conjunction with a sub-committee of the Actuarial Society of South Africa's Short-term Insurance Committee (STIC).

As with most regulatory issues, a great deal of time has passed without any finality. At this stage the FSB will proceed with its plans to change the way in which an insurer measures its security. The FSB requires insurers to migrate from a Minimum Solvency Margin approach to one based on Risk Based Capital.

The intention of FCR is to ensure that all insurers hold adequate capital in order to reasonably meet their obligations to policyholders. Jovan Stojakovic of CPI says, "Inevitably companies who do not develop internal capital models for approval by the FSB and by default report on the prescribed method, will undoubtedly have to increase capital."

Some flaws need to be worked out

FCR was discussed at a recent insurance symposium organised by CPI Workshops. Although the majority agreed that the change in reporting requirements were sensible, there were a number of conflicting viewpoints.

Robert Vivian, a professor of finance and insurance at Wits presented a paper at the SA International Insurance symposium. "The FSB, South Africa's insurance regulator proposes replacing the current, simple, 'solvency' regulations with a new system the Financial Condition Reporting (FCR) system. In this paper I will argue that FRC is conceptually flawed and if implemented will probably be disastrous."

Vivian went on to explain what he felt was the conceptual flaw in the proposal: "The heart and soul of FCR is capital. What is not necessarily clear, not even to persons in the short-term industry, is that shareholders capital is largely irrelevant to the well-being of a short-term company. Therein [the] major difference between banks and short-term insurers. Banks are concerned with the preservation of depositors capital, the nations savings; short-term insurers are not."
No time to waste

There is little time remaining for insurers who wish to implement their own internal modelling systems rather than going the proposed capital route. Although the FCR only requires changes to be implemented by 2009, the FSB is unlikely to approve an internal model that has not been in operation for at least a year. This means new systems might have to be in place as early as 2008!

The South African Insurance Association (SAIA) Board recently met to discuss FCR. One of the recommendations from this meeting was to "discuss an economically feasible Prescribed Model that is more widely accepted as a workable solution by the industry as a whole - similar to what has been achieved in Australia."

SAIA continues to engage the regulator on the matter. They are at pains to prevent the intended regulation from becoming too much of a burden on insurers. As such, they appealed to all insurers to respond to the Regulators Issues Paper which is currently in circulation. Such response is required by 31 May of this year.

A full response from the insurance industry will ensure the regulator has a clear understanding of the challenges facing the industry in complying with FCR.

Using regulation to improve the business

Business tends to resist change. Insurance companies would do well to use this pending regulatory issue as an opportunity to evaluate strategies and business processes. The negatives associated with additional burdens on time and resources should be balanced with gains made through system efficiencies.

Editor's thoughts:
The FCR was proposed as far back as 2004. Do you believe the consultation processes where new regulation is concerned are too long? Is such a long delay between proposal and implementation acceptable? Send your comment to

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