Insurers gear up for new solvency regime

Gareth Stokes, FAnews Online Editor

South African insurance companies have less than two years to finalise preparations for the Solvency Assessment and Management (SAM) regime. The regulation, planned for 1 January 2014, addresses capital adequacy issues at both short and long-term insurers

“The FSB says the primary purpose of the SAM regime is the protection of policyholders and beneficiaries,” said Chris de Klerk, Executive Director: Actuarial & Technical at PPS Insurance. His presentation at the PPS Insurance Media Seminar on the Insurance Sector dealt with local insurers’ capital adequacy (post-SAM) and the likely impact of the regulation on insurance consumers.

Treasury defines SAM as “a risk-based regulatory framework which sets out strengthened capital requirements for insurers as well as guidelines on governance, risk management and disclosure.” It is the local industry’s response to the European Solvency II standards, due for implementation on the same date. “Solvency II has been spoken about in Europe for many years,” observed De Klerk, “whereas SAM, in South Africa, has only been on the agenda since 2009.” Lessons from the Euro-zone have made it possible to fast track South Africa’s solution! It is hoped that by January 2014 our industry will be wholly aligned with the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS). De Klerk noted that adherence to these principles ensured third country equivalence – a “must” if South Africa wants to keep its place among the G20 group of nations.

Get used to hearing about “principles-based” regulation

The catch phrase of 21^st Century financial services regulation is “principles-based”. Local stakeholders had their first taste of the shift from rules-based to principles-based legislation when the FSB announced their adoption of Treating Customers Fairly (TCF) regulations. And although the concept is new to the South African institutional capital space, the rest of the world has been heading in this direction for some time. The reason: Rules-based systems cannot be written to “cover” every imaginable scenario, whereas principles-based systems inform decision makers of acceptable practice regardless of the scenario.

Local insurers have made steady progress toward the SAM implementation. In October 2011 half of the country’s insurers (90% by premium) took part in a voluntary survey (QIS 1). The FSB received valuable feedback from survey respondents with regards their ability to meet the new capital adequacy requirements. According to De Klerk 27 out of the 40 insurers in the survey showed a higher free surplus under SAM than they show at present. So SAM is not all bad news for insurers!

The survey singled out  market risk (or equity market returns) as the biggest risk to overall insurer solvency, while lapse risk emerged as the largest life underwriting risk. “You would think that mortality risk would have a bigger impact on the life insurance industry,” commented De Klerk, before explaining the finding. Most life insurance companies expect a policy to stay on their books for between 8 and 12 years – a lapse after two to three years has a huge impact on solvency assumptions. Changes to industry lapse rates stem from increased competition and high-impact events such as the Statement of Intent (SOI) issued by the life industry some years ago.

Life insurance under SAM

Most life insurers seem on track to meet the capital requirements introduced by the new legislation. Once SAM is implemented it will be up to management to take the actions necessary to ensure they maintain acceptable capital levels. Insurers might, for example, make changes to the assets backing their “with profit” policies, do away with discretionary bonuses or decrease their “smoothing” reserves to improve balance sheets. But insurers will have to consider the benefit expectations of their policyholders when doing so. The new regulation will mean that insurers price their policies more accurately than before… They will also have to tackle uncertainty around their long-term financial obligations by addressing the cross-subsidisation of policyholders and enforcing tighter policy terms.

What about the benefits to other stakeholders? SAM should make it possible for insurers to release surplus capital to, and improve the return on capital for, shareholders and policyholders. Consumers (and brokers) can also look forward to transparent communication from their life companies going forward. For their part, insurers will have to spend more time managing consumer expectations. “You should expect to see tighter definitions and criteria in policy documents – less gray areas about when the policy will perform or not – and more detail on risk management in annual reports,” said De Klerk. He also had some specific advice for policyholders...

Policyholders (and insurance brokers) shouldn’t tolerate insurers increasing their premium rates and worsening policy terms due to SAM. The SAM framework will improve insurers’ capital positions and strengthen their businesses. He added that the new solvency framework was not a bad thing for insurers… So don’t let them use it as an excuse to the detriment of your client, the policyholder! You shouldn’t tolerate insurers complaining about SAM implementation specifics and timelines either. QIS 1 showed that insurers are well prepared and capable to handle the regime.

Towards a stronger insurance sector

South Africa’s insurance market is already well regulated. SAM will ensure that concerns over capital adequacy are addressed, thereby instilling greater confidence in the sector’s ability to weather future financial shocks. Tomorrow’s insurer will be better placed to meet policy obligations, deliver on their sales promise, offer sustainable and appropriate products, understand and cater for their target markets and manage the key risks of the insurance business

Editor’s thoughts: The regulators believe SAM will be of benefit to consumers… We cannot fault their reasoning and agree that improvements in industry capitalisation rates will help insurers to weather future financial upheaval. We wonder whether the tougher requirements will impact negatively at policyholder level. Do you think life premiums will come under pressure as insurers implement SAM? Add your comment below, or send it to gareth@fanews.co.za