Adjusting short-comings within SAM
The finalisation of the Solvency Assessment and Management (SAM) Project is still pending and the Financial Services Board (FSB) considers it essential to introduce interim measures to address shortcomings in respect of appropriate guidance on corporate governance, risk management, and internal controls in the insurance sector.
Internal interim measures will take effect during 2014. The purpose of interim measures is to increase awareness of risk exposures, as well as improve the scrutiny and the management of these matters, for insurers and re-insurers.
Shifting the focus to effective leadership
The ongoing financial soundness and stability of an insurer is very dependent on the quality of its leadership, governance, and management teams, and on its risk management and internal control systems.
The FSB is concerned that not all insurers are meeting fundamental governance standards, while the Insurance Acts are currently somewhat silent as to governance requirements.
The proposed governance, risk management and internal controls interim requirements will be given effect through legislative changes in the form of the Insurance Laws Amendment Bill (ILAB). Insurers are required to establish and implement a corporate governance framework that provides for management and oversight of insurer’s business operations, and adequately protects the interests of policyholders.
The corporate governance framework must, amongst other things:
• promote development, implementation and effective oversight of policies;
• define roles and responsibilities of persons accountable for management;
• set requirements relating to how decisions and actions are taken;
• provide for communicating matters relating to management, conduct and oversight of insurer to stakeholders;
• oversee, controls or manage and
• provide for corrective actions to be taken for non-compliance.
Playing an important role
Board members should collectively and individually continue to ensure they are able to fulfil their roles by maintaining the necessary skills, knowledge and understanding of the insurer’s business.
This will include access to knowledge and understanding of:
• lines of insurance underwritten by the insurer;
• actuarial and underwriting risks;
• finance and accounting;
• role of the control functions;
• investment analysis; and
• portfolio management and obligations relating to Treating Customers Fairly.
Board members should meet suitability requirements, given the objective of adequate protection for policyholders. Insurers will be subject to the Companies Act, while some aspects of King III are to be entrenched in insurance legislation.
Board members may delegate some of the activities or tasks within their own roles and responsibilities, as long as:
• there is an appropriate process for delegation of authority from the Board to senior management, and throughout all levels of the organisation;
• the delegation is made under a clear mandate;
• there is no undue concentration of powers;
• it has the ability to monitor and require reports on delegated tasks; and
• it retains the ability to withdraw the delegation.
The insurer must establish and operate within an effective system of risk management and internal controls, including effective functions of risk management, compliance, actuarial matters, and internal audit.
Implementing an effective strategy
The abovementioned system includes strategies, policies and procedures for identifying, measuring, monitoring, managing, and reporting of risks to which the insurer may be exposed.
The risk management system should be adequate for the nature, scale and complexity of the insurer’s business risks and should at least include:
• a clearly defined and well documented risk management strategy;
• objectives, key principles and proper allocation of responsibilities for dealing with risk;
• a clearly defined risk appetite;
• written process defining the Board approval;
• written policies that include definition of risks;
• appropriate processes and tools for identifying, assessing, monitoring, managing and reporting of risks, contingency planning, business continuity, and crisis management;
• regular review of risk management system;
• attention to enterprise risk management for solvency; and
• an effective risk management function.
Board members must provide oversight in respect of design and implementation of sound risk management and internal control systems and functions and must also oversee effective implementation of policies and procedures.
