Stress-tested: insurers in focus
Strong capital management, effective risk oversight and customer-centric regulation have become essential pillars of a resilient insurance sector.
FAnews spoke to the South African Reserve Bank (SARB) and the Financial Sector Conduct Authority (FSCA) to understand how insurers and intermediaries can strengthen resilience, align with regulatory expectations, and prepare for a rapidly evolving risk environment.
IFRS 17 and the regulatory divide
The implementation of International Financial Reporting Standard 17 (IFRS 17) marked one of the most significant changes to insurance financial reporting in decades. While the standard has transformed how insurers report their financial performance, the SARB is clear that prudential supervision remains focused on solvency and policyholder protection.
According to the SARB, IFRS 17 is “a financial reporting standard aimed at supporting decision-making by providing users of financial statements with relevant information on an entity's financial position, performance and cash flows insofar as it relates to insurance contracts.”
The Prudential Authority (PA), meanwhile, “is a prudential supervisor and regulator that primarily focuses on solvency to ensure insurers are adequately capitalised to absorb unexpected losses and meet their obligations to policyholders.”
The regulator explains that because IFRS reporting forms an important part of its supervisory assessment, “the PA had a direct interest in ensuring that the principles of IFRS 17 were appropriately implemented and that ongoing application of the standard reflects its objectives.”
Prior to implementation, the PA conducted “an impact assessment, surveys, ongoing discussions with industry and updates to the regulatory reporting templates” to assess and support IFRS 17 readiness.
Importantly, the SARB emphasises that “insurers' regulatory capital requirements are not dependent on IFRS 17.” Instead, “the PA uses Solvency Assessment and Management (SAM) as its regulatory framework to ensure insurers are adequately capitalised.”
The FSCA approaches the issue from a different perspective. The regulator notes that “from a conduct perspective, the FSCA does not assess capital adequacy, but considers whether insurers can meet obligations to policyholders, including paying claims and providing ongoing service.”
Together, these perspectives illustrate the complementary nature of South Africa's Twin Peaks regulatory model, with prudential oversight focused on financial soundness and conduct supervision centred on customer outcomes.
Emerging risks demand more sophisticated stress testing
As insurers navigate increasing uncertainty, regulators expect risk management frameworks to evolve beyond traditional approaches. The SARB says it expects “insurance firms' stress-testing frameworks to systematically incorporate emerging risks, such as climate change, cyber threats and interest rate risk within a formalised risk identification and scenario design process.”
Furthermore, this process should “combine rigorous quantitative analysis with expert judgment to identify key global and domestic vulnerabilities.”
Rather than treating emerging risks as standalone issues, the regulator says these risks “must be fully integrated into core scenario design, rather than assessed in isolation, and translated into coherent macro financial shocks through well-defined transmission channels.”
While SARB stress-testing is “explicitly macroprudential, focusing on sector wide resilience through consistent scenarios and a strong emphasis on capital adequacy and systemic vulnerabilities,” insurers are also expected to incorporate these risks into their Own Risk and Solvency Assessments (ORSA).
According to the SARB, insurers must demonstrate “robust and transparent methodologies, supported by high quality data and strong model governance, with clear linkages between risk drivers and financial outcomes.”
The regulator notes that it has “progressively strengthened its approach by embedding emerging risks through both standalone and integrated exercises.” These include “dedicated climate stress tests, climate add ons and interest rate shocks within common scenario frameworks.”
Importantly, insurers are expected to move beyond a compliance mindset. The SARB says firms should be “actively interpreting these outcomes and using them to enhance risk management practices, inform strategic decision making and support forward looking capital planning.”
ORSA, internal models and the global capital landscape
The PA's risk-based supervisory framework places significant emphasis on insurers understanding and managing their unique risk profiles.
The SARB explains that in 2018, the PA introduced “a risk-based regulatory framework to ensure insurers are equipped with robust governance structures and risk management systems tailored to their unique risk profiles.”
In line with regulatory requirements, “the PA expects insurers to use ORSA analyses and internal models to demonstrate a clear, forward-looking link between their risk profile, capital adequacy and business strategy, ensuring they remain financially sound under both normal and stressed conditions.”
The regulator further states that insurers “must show that all material risks are comprehensively identified and assessed, that capital held is sufficient in both quantity and quality to absorb losses, and that modelling approaches are appropriate, risk-sensitive and well justified.”
Where insurers use internal models, the expectation is clear. Such models “should provide a more accurate reflection of the insurer's specific risk profile and be demonstrably integrated into risk management, capital assessment and decision-making processes.”
In addition, “ORSA outputs must be embedded in decision-making and capital planning, supported by robust stress-testing and credible management actions, with the overall framework underpinned by strong governance, independent validation and consistency across regulatory and internal views.”
Capital planning as a cornerstone of resilience
Few areas received as much emphasis from the SARB as capital planning. The regulator describes “proactive and agile capital planning” as forming “the cornerstone of any business aiming to achieve its strategic ambitions and long-term sustainability.” For insurers, this discipline is particularly important because it allows them “to harmonise their investment decisions, underwriting practices and operational activities with their broader objectives.”
According to the SARB, this alignment “not only facilitates growth during stable market conditions but also equips insurers to withstand and adapt to periods of uncertainty and volatility.”
The regulator argues that by “anticipating a range of possible scenarios – including adverse events – insurers can bolster their resilience and keep their strategic priorities firmly in view, even when confronted by unexpected challenges.”
Robust capital planning also enables insurers “to swiftly adjust its approach in response to shifts in financial markets or emerging risks, ensuring that resources are allocated efficiently and vulnerabilities are addressed before they escalate.”
To support these objectives, the SARB says it is “essential to implement comprehensive stress testing and scenario modelling frameworks.”
These frameworks act as “early warning systems, identifying critical areas that warrant attention and guiding necessary adjustments to capital deployment strategies.”
Ultimately, “by continually refining these frameworks and integrating them into decision-making processes, insurers position themselves to respond effectively to both current and future uncertainties, thereby safeguarding their long-term vision and operational stability.”
Collaboration, COFI and the road ahead
Both regulators stress that resilience depends not only on frameworks and models, but also on effective engagement across the insurance value chain.
The SARB notes that all insurers are allocated supervisory teams responsible for “holding regular prudential meetings and providing guidance on the application and interpretation of insurance regulatory framework and analysing all statutory submissions by insurers.”
The regulator says insurers can engage effectively through “proactive, transparent, and ongoing supervisory interaction on matters affecting their risk profile, governance, capital position, and business model.”
Furthermore, the PA's “formal supervisory interactions, on-site inspections and annual industry engagement sessions are designed to guide insurers in proactively managing risks and strengthening their risk management frameworks.”
Within South Africa's “principles-based, proportionate, risk-based and forward-looking prudential framework, such engagement is essential to promote a shared understanding of regulatory expectations and their practical application.”
From the FSCA's perspective, the future of regulation will increasingly be shaped by outcomes-based supervision. The regulator says its approach “is evolving toward a more outcomes-based framework through COFI, which will strengthen accountability for fair customer outcomes across the value chain.”
At the same time, recent Joint Standards issued with the Prudential Authority are reinforcing expectations around “IT governance and risk management, with clear accountability at board level”, “cybersecurity and cyber resilience, requiring robust risk management and response capabilities”, and “outsourcing, with strengthened governance and oversight of material service providers.”
The FSCA also highlights “an increased focus on governance and culture, sustainable finance, transformation within the industry, and customer vulnerability framework.”
Looking ahead, the regulator envisages collaboration becoming “more proactive and coordinated across insurers, intermediaries and the regulator.”
This includes “earlier engagement with industry to identify emerging risks”, “stronger alignment across the value chain to ensure fair customer outcomes”, and “ongoing coordination with the Prudential Authority where conduct and financial risks intersect.”
The message from both regulators is clear. The insurance sector's future resilience will depend on more than compliance. Success will require strong governance, sophisticated risk management, forward-looking capital planning, meaningful industry engagement and an unwavering focus on policyholder outcomes.
Writer’s Thoughts
Regulatory resilience depends on how effectively the industry continues to embed sound governance, risk awareness and customer-focused decision-making into everyday practices. As the risk landscape evolves, ongoing collaboration between insurers, intermediaries and regulators will be key to strengthening trust, sustainability and long-term outcomes for policyholders. Please comment below, interact with us on X at @fanews_online or email me your thoughts.
