SA insurers urged to prepare for new solvency requirements

South Africa’s insurers must ensure that they fully participate in upcoming quantitative impact studies (QIS) regarding the implementation of the FSB’s new risk-based regulatory regime, Solvency Assessment and Management (SAM), as this new framework will have far reaching consequences for their businesses and the wider industry.

According to Lance Moroney, Non-Life consulting actuary at Aon South Africa, it is essential for insurers to take part in the process in order to fully understand what impact SAM may have on their business. “It is important that insurers understand what preparations are required in order to comply with SAM and these quantitative impact studies provide the perfect opportunity. However, perhaps even more importantly, these forums might raise the need to voice any concerns over the new regime within the FSB’s SAM project.”

Moroney says that given the likely similarities between SAM and Europe’s Solvency II model, South African insurance companies should start familiarizing themselves with the structure of the European QIS5 standard model now to adequately prepare themselves. “We would recommend that insurers start investigating the Solvency II QIS5 standard model, as this implies a recalculation of liabilities and capital requirements.

“Insurers who perform a Solvency II QIS5 study will gain insight into how they will be required to calculate solvency capital under SAM. They will also be better prepared to influence, within the SAM project task groups, the content of the South African study to be launched later this year.”

The FSB announced in November 2010, following the launch of its SAM Roadmap, that it intends to launch the first South African Quantitative Impact Study (SA QIS1) in July 2011, which will be based on the initial proposals of the various SAM task groups.

Moroney says that while much about SAM is yet to be finalised, it is expected to be based on the Solvency II approach. SAM will be based on an economic balance sheet and the same three pillar structure of capital adequacy (Pillar 1), systems of governance (Pillar 2), and reporting requirements (Pillar 3).

He says there are some key areas that insurers should start working on now with regards to the requirements involved. “Firstly insurers must aim to raise awareness and understanding of the requirements of the SAM regime among their own organisations, particularly with regards to the responsibilities of directors and senior managers. However, it is also important to filter this down through the company including arranging internal presentations, attending workshops hosted by the FSB and allocating internal resources to develop awareness of the changes.”

He says, however, that the approach taken by each insurer will vary depending on the company’s resources. “In practice it is difficult for smaller insurers to allocate resources to the numerous SAM project committees that exist. Most of the Pillar 1 task groups have mainly actuarial representation and some insurers will not have sufficient internal actuarial resources to be able to participate.”

“As a result many insurers may rely on their consultants to keep them updated, carry out any assessments and to present each insurer’s views in the task groups.”

The FSB has announced that SAM will be implemented in 2014. However, interim measures for Non-Life insurers are to be implemented much earlier in 2012.

Moroney says short-term insurers must therefore ensure that they are fully prepared for these interim requirements from next year. “It is anticipated that these requirements will not impact the overall capital requirement of the industry. However, the impact on an individual insurer could be more pronounced.”

He says, however, that transition mechanisms are likely to be put in place for insurers that are significantly impacted by the new measures.