Small SA insurers exposed to risk by not participating in solvency projects

South Africa’s smaller insurance companies have so far failed to participate in assessment projects regarding the Financial Services Board’s (FSB) forthcoming Solvency Assessment and Management (SAM) initiative, leaving themselves exposed to significant r

According to Lance Moroney, Business Unit Head of Non-Life at Aon Hewitt South Africa, approximately 90% of the insurance industry participated in QIS 1 in terms of volume, yet only 50% of companies actually took the test, which suggests that many smaller South African insurance companies have so far not participated. “This is understandable, given the time and resources that need to be spent in taking part in the QIS projects, yet by not doing so; these companies could be exposing themselves to a far higher degree of risk.”

The FSB’s first Quantitative Impact Study (QIS 1), to test the industry model that will be used to calculate solvency capital under the ultimate SAM regime, was conducted last year and showed that technically some insurers would be insolvent under the new SAM framework. “The principle behind these studies is to ascertain how SAM will impact on local insurance companies and while some may have been technically insolvent, by understanding the changes in capital requirements, these insurers will have the opportunity over the interim period to increase their solvency ratios. However, these results relate to the larger insurance players, who were involved in the process, so we still need to determine how SAM will impact on the smaller industry players.”

He says that QIS 2, which is being run from June 2012, provides another opportunity for these players to involve themselves in the process. “The QIS 2 test is not compulsory but by participating companies are able to develop an understanding of the data that is required to comply with SAM and understand how such results may impact on their business.”

He says that while QIS 1 tested the solvency of a company by quantifying capital and reserves, QIS 2 will be more reflective of the final structure of the model under SAM. QIS2 will also focus on the data required to complete the exercise.

Moroney says larger insurance companies generally have well-formulated risk policies in terms of their approach to governance due to their higher resource capabilities, whereas smaller companies are likely to face a bigger challenge in meeting these qualitative requirements. “However, there is always an aspect of proportionality that will apply, meaning that the requirements will be appropriate to the nature of the business and of the risks involved. Therefore the solutions for larger companies tend be more complex than those for smaller insurance companies.