Actuarial regulations critical for SA's insurance industry
New regulations requiring non-life insurance companies to have an actuarial function within their businesses is a necessary development in order to help insurers improve the accuracy of their financial statements and better reflect the true capital that they need to hold.
According to Lance Moroney, Business Unit Head of Non-Life at Aon Hewitt South Africa, insurers will be required to hold capital commensurate with the actual risk profile of the company. “Under previous regulations, it didn’t matter what the insurer’s line of business was – aviation, a diversified portfolio, property or motor – the capital requirements would have been be the same. However, under the soon to be implemented Solvency Assessment and Management (SAM) legislation, these requirements will now be in line with the actual risk of the company.
“The valuation of technical provisions and risk capital assessment is a complex but important function that leads to a more accurate balance sheet. If a company does not use an actuarial team they are at risk of making errors in their financial statements. Insurers will be required to have an actuarial function in place for this purpose under SAM regulation.”
He says an actuary is essential in determining the accuracy of the company’s financial figures, which is critical for an insurance company. “If there are issues within the financial system these can accumulate over a number of years without being detected. Some companies have subsequently discovered significant misstatements and been forced to make recalculations in terms of their balance sheets. In extreme cases, if the stated profits were incorrect the company may have unwittingly been making underwriting losses whilst reporting profits.
“The benefit of an actuarial function within an insurance company is not just centred on the capital requirements, however, but can also extend to providing insightful analysis of the financial results, including whether loss ratios have gone up or down and whether the results are in line with the business’ predictions, such as whether overall claim levels are deteriorating or whether this can be attributed to one-off large claims.”
“The analysis that an actuary can provide is almost limitless in terms of a company’s underwriting results and can result in substantial improvements being made to the operations by providing information that can be used for management decisions as well as a better understanding of the underlying drivers of the business.”
He says that in addition, an actuary also provides insight into pricing structures. “This is becoming essential for many companies operating within South Africa as it enables them to price their business a lot more accurately and in more detail. The expected requirement in terms of SAM regulation is that the actuarial function will need to provide an opinion on the underwriting policy including the sufficiency of premium rates.
“In essence, the actuarial function of an insurance business assists in creating a more level playing field for companies under new SAM regulations and provides a more accurate reflection of the true solvency position of a company, which importantly for consumers also prevents the threat of non-payments of claims.”
