SA insurers must consider solvency requirements for Africa expansion

Incoming capital requirements legislated by the FSB as part of its Solvency Assessment and Management (SAM) framework could pose serious challenges for South African insurance companies that are looking to expand their operations into other African territ

This is according to Lance Moroney,Business Unit Head: Non-Lif eat Aon Hewitt South Africa, who says that the new requirements being legislated may apply to insurance companies from a Group level. “This legislation will mean that while South Africa has more stringent solvency requirements for all insurance companies operating in the country; companies may also need to ensure that all of their subsidiaries comply from an overall group perspective.”

He says that if this is the case, SAM may require an insurance company to have higher capital requirements in African territories than local companies also operating in those regions. As a result, this means South African companies operating in these areas are likely to be at a competitive disadvantage to their counterparts.

“South Africa is no longer the gateway to the rest of the continent. In fact, many other regions are looking to take advantage of opportunities across Africa and may be able to do so with far less onerous solvency requirements.”

The FSB has already embarked on Quantitative Impact Study (QIS) projects, to assess the industry’s current solvency levels and to gain a better understanding of how SAM will impact on various role players. “QIS 1 was an assessment based only on South African entities but QIS 2 is now looking at South African entities, including additional calculations at a group level that take into account subsidiaries in other regions.”

Moroney notes that South African insurers that opt to do business in other African regions could therefore be impacted by such a requirement. “While achieving satisfactory solvency levels is the main objective of SAM, the new regulation may also require similar levels of governance in subsidiaries as well as improved risk management structures that may not apply to other competitors in those regions.”

He says that while the rules surrounding SAM are still being finalised, discussion documents have already noted the fact that the SAM requirements for African subsidiaries might impose higher capital requirements. “If another country has a similar regime to SAM then the FSB is likely to see that as being adequate; however, the reality is that African countries are generally behind the curve in implementing a risk-based regulatory regime such as Solvency 2, so there are likely to be few countries that will be operating under a similar regime in the near future.”

South African registered individual insurance companies have until 15 October to submit their QIS2 assessments on their solo requirements (i.e.: individual insurance legal entities) and by the 5 November insurance companies must submit a QSI2 assessment calculated at a Group level. “The FSB has not yet finalised how companies will be assessed from the Group level and is currently looking at a number of alternative approaches. The information gathered from these latest assessments will therefore determine its final approach.”

Moroney says that following the QIS2 submissions, the FSB is expected to report its findings to the industry early in 2013, with the final SAM framework only being implemented in 2015.

“Ultimately, SAM provides a far more detailed approach to the consideration and understanding of the risks of insurance companies, with the primary purpose being the protection of policyholders; yet for South African registered insurers looking to capitalise on booming growth across the continent, the next findings from the FSB, and its final approach to Insurance Group calculations, will play a major role in their expansion ambitions,” concludes Moroney.