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FCR deadline looms for short-term insurers

03 August 2007 Gareth Stokes

Short-term insurers have been operating under a blanket 25% capital solvency requirement for a number of years now. The Regulator for Short-term Insurance requires each insurance company to hold 25% of net written premiums in reserve, regardless of its ri

The FCR provides a number of models which will be used by individual insurance companies to determine more appropriate levels of capital reserve for the risks inherent in their particular insurance fields.

In a recent press release, Anton Reinke, actuarial consultant for Centriq discussed some of the important aspects relating to FCR. "In a nutshell, FCR considers the underlying risk of the insurer to determine the capital levels needed. FCR forces insurers to put rigorous risk-management strategies into practice and to consider all the risks that may affect their business, not only the underwriting risk."

Financial Condition Reporting (FCR) in practice

The Centriq press release also mentions that insurers will have to choose between one of three models to establish their required capital reserve levels. These models include the Prescribed Model, the Certified Model and the Internal Model. Insurance companies will most likely select the model which best meets their requirements based on "costs, the complexity of the business written, the availability of skills and resources [to implement the model] and the accessibility of reliable data."

It is important to note the FCR is not simply a technical document, but should become an integral part of the business activities of the insurance company concerned. The FCR will guide and even dictate various strategic decisions on risk and capital in the business going forward.

"The insurer must demonstrate in the report that all significant risks have been taken into account and that adequate capital is available so that the insurer's potential for financial failure is minimised," explains Reinke.  Once implemented, the insurance company will have to submit a copy of its FCR to the Registrar for Short-term Insurance on an annual basis.

Ensuring a proper implementation

There is still some time for the short-term insurance industry to come to terms with all the business and process changes required in FCR. A major stumbling block to a quick and painless FCR implementation is the industry's heavy reliance on information technology. Insurance companies hoping to have their solutions in place by the 2009 deadline should already have started planning the required modifications to their accounting and reporting systems.

Could the industry be facing an implementation 'crunch' so common in the regulated financial services environment? It is difficult to make changes to business systems while the final format and requirements of the FCR are still being negotiated. The Financial Services Board (FSB) published a comprehensive paper on FCR earlier this year and invited public comment until 31 May 2007. Issues raised by various commentators have not yet been released for further discussion and will certainly result in changes to FCR.

The good news is there seems to be marked progress since the last time FAnews Online covered this issue. Once comments to the May 2007 paper are published, the industry should be able to move swiftly to thrash out final conditions for the FCR.

Technical issues overemphasised

At their June 2007 Board meeting, the South African Insurance Association (SAIA) voiced concerns that preparations for FCR have been too technical. They are concerned that too little is being done to prepare insurance companies for the change at a strategic business levels. To this end, SAIA intends forming a high level delegation to interact with the Financial Services Board on the matter.

The following plan of action was adopted after the SAIA FSB Workgroup met to discuss and evaluate the proposed FCR model:
A sub-group of the FSB Workgroup would be formed to determine what adjustments might be required to the current FCR model to make it more accessible to insurers. Any recommendations made by this sub-group would be forwarded to the FCR Prescribed Model workgroup for feedback.

Clearly a great deal of discussion must still take place before FCR is finalised. Insurance companies are probably best served readying themselves for FCR as currently envisioned, and making final modifications closer to the 2009 deadline.

Editor's thoughts:
A great deal has been written about the impact of the 25% reserve requirement for Medical Schemes. Many industry analysts believe that the blanket application of this reserve requirement to all schemes is inappropriate. The proposals in FCR appear to do away with the "one size fits all" approach used in the medical industry. Will FCR require short-term insurers to hold less than or more than the 25% of net written premium currently demanded? Send your comments to

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