The SAIA SAM Financial Impact Survey
By Gareth van Deventer
During the month of March 2012 the SAIA SAM Project Support Office (PSO) conducted a high-level telephonic survey among our members to gage their perception of the potential financial impact that SAM would have on their companies.
The survey began on the 6th of March 2012 and was concluded by the 30th of March 2012. Within this brief period of time 64% of our SAIA members participated in our survey.
Our survey was conducted post the SA QIS1, and as such additional positive and negative financial effects that SAM may have on our members companies might be further identified after the conclusion of the SA QIS2, scheduled to take place in the second half of 2012.
o Close to 86% of respondents believe that there will be an increase in merger and acquisition activity due to SAM
o Approximately 77% of insurers and reinsurers surveyed have indicated that they will not be fundamentally altering their asset spread under the SAM regime
o Approximately 94% of those surveyed have no intention to remove, discontinue or alter any of their current product-offering at this early stage in SAM‟s development
o A resounding 80% of respondents surveyed indicated that they foresee an overall increase in the costs associated with maintaining their current product offering due to SAM
o 54% of respondents believe that policyholders will be better off under the new SAM regime
Most respondents shared the view that SAM will bring advantages to larger insurers and reinsurers as they increase their dominance while the smaller insurers and reinsurers will stand disadvantaged becoming less competitive under the regime.
Some respondents felt that SAM will be a regime more suited to a typical insurer and that niche and mono-line insurers will find it extremely difficult to continue to remain competitive.
There was a particular concern that SAM will threaten the survival of insurers writing guarantee insurance as their core business offering due to the large capital holding that is required.
It was the belief of some that SAM might create greater barriers of entry for new competition in the insurance sector thereby limiting further competition.
From an international perspective most agreed that SAM would put the South Africa insurance market on an equal footing with Europe, thereby improving South Africa as an investment destination and a more attractive stable market for international companies.
In general most respondents felt that competition within the South African short-term insurance sector would be negatively affected due to SAM.
Some insurers had taken steps to divest from equities and high risk investments some time ago as a consequence of the global financial crisis and not in anticipation of the proposed SAM regime.
The results were neck and neck throughout the duration of the survey but in the end, 54% of respondents believe that the use of an approved internal model or partial internal model will not give insurers or reinsurers a significant capital and competitive advantage over those using the Standard Formula.
Given the rather conservative investment strategies that short-term insurers currently have in place and the high degree of respondents that will not be changing their asset spread under SAM, a 66% majority of those surveyed believe that they will be able to maintain their current return on capital under the new SAM regime.
Due to the current uncertainty encompassing SAM, 94% of insurers and reinsurers surveyed will not be removing, discontinuing or changing any of their current product offering at this early stage in SAM‟s development. Most insurers and reinsurers acknowledge that SAM will have some kind of effect on product development with 37% of those surveyed indicating that SAM will limit or affect their ability to develop new insurance products.
A resounding 80% of insurers and reinsurers surveyed indicated that they foresee an overall increase in the costs associated with maintaining their current product offering. These costs were primarily attributed to the recruitment of further skilled resources as well as the cost of compliance and preparing information technology systems equipped and suited to SAM.
Close to 49% of those surveyed indicated that they expect their premiums to increase under SAM. Of these, a 63% majority expect the increase to be in the region of between 0 - 5%, while 25% expect premiums to increase between 5 - 10% with a further 12% foreseeing increases of between 10 - 15%. No insurer expected an increase in their premiums in excess of 15%.
Much work is still required to be undertaken in refining and calibrating the Standard Formula as well as ironing out a number of identified challenges, before the new SAM regime becomes suitable to insurers in South Africa.
Potential unintended financial consequences of SAM need to be identified and closely monitored at an early stage, to ensure that these do not have an adverse effect on the current competitiveness and stability of the short-term insurance industry.
The SAIA SAM Project Support Office sincerely appreciates the participation and support received by those of our members who took part in our high level SAM Financial Impact Survey.
South African Insurance Association (SAIA)
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