Looking into 2013: The year of building

01 February 2013 Rob Rusconi, Lombard Life

It’s always risky looking into the future: the seer always suffers unexpected and unplanned events. We have a few arrows on the direction of the insurance industry, however, that make this exercise a little easier. 2013 will go down as a year of consolidation, particularly in SAM and TCF - not of significant change.

SAM and its advance guard

The Solvency Assessment & Management (SAM) system has a messenger. The Insurance Laws Amendment Bill (ILAB), which should be passed in the first half of 2013, lays a foundation for SAM by putting in place a number of the governance requirements.

The ILAB sets out requirements of the boards of long-term insurers and their audit committees. It mandates minimum standards of risk management. It requires control systems to be put in place, covering not only risk management, but also compliance, the actuarial life cycle and the internal audit function.

Looking at SAM and Pillar II

This sounds like red tape, you say. Surely insurers, aware of the guidelines in the corporate governance world, would be putting this into place anyway? Many of them may be, but the best way to understand these requirements is to look forward to the emerging dictates of SAM, Pillar II in particular.

SAM requires insurers to determine and report their capital requirement in a way that pays due regard to the risks that the insurer incurs. Pillar I gets the actuaries to run complicated models, and to make sure that capital actually held exceeds minimum requirements. The obligations to Pillar III are to publish the numbers publically and to the regulator.

Taking unique aspects into account

The tricky stuff is in the middle. Pillar II requires of the insurer that it apply its (collective) mind to the question, of whether the capital requirements produced by the number-crunchers are indeed adequate, to the needs of the insurer.

This means taking into account unique aspects of the insurer that might not fit the standard formula used under Pillar I. It also means making sure that all risk-management and governance ducks are properly in a row, and that the house is swept clean and properly in order.

ILAB just gets that ball rolling, setting out some minimum standards of cleanliness to prepare the way for the SAM-related requirements to come.

What about SAM?

SAM’s European forerunner, called Solvency II, appears to be foundering on the rocks of technical detail and political will. It may well not see the light of day before 2016. South Africa’s regulators are pushing bravely forward – putting the brakes on the process now is risky – and it looks as if we will be fully up and running in 2015.

Next year, we are likely to run SAM on a trial basis while continuing to report results on the current basis.

TCF the real change

It is quite easy to find SAM daunting, with the enormous complexity and volume that it introduces. Many suggest, however, that the real challenge for 2014 is in TCF, the Treating Customers Fairly regime. The six objectives, upon which TCF is founded, are not in themselves unduly onerous. The challenge is demonstrating that they have been met.

Difficult to demonstrate

Customers may be confident that they are dealing with firms in which TCF is central to the company culture. Demonstrating that this is true is not easy. Proving that the advice that customers receive is both suitable and takes account of their circumstances, and that customers do not face unreasonable post-sale barriers to change their product? That’s a tall order.

Changes like these probably do not leave tremendous capacity for market innovation, but there is always space for unexpected development in closely-related fields. Uncertainty around the National Healthcare Insurance and ongoing pension reform discussion should keep things interesting.

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