Implementation of Solvency Assessment Management – Two Years Away
By Gareth van Deventer
South African Insurance Association
The halfway mark on the epic journey towards the final Solvency Assessment and Management (SAM) implementation has come and gone, and rather swiftly at that. Three years down and two to go, before insurers and reinsurers doing business in South Africa become subject to a new solvency regime better known as SAM.
Despite three years of dedicated hard work by all stakeholders involved within the SAM structure a great deal still needs to be achieved within the remaining two years. The year 2013 will certainly test and challenge insurers, reinsurers and the FSB alike with regards to the achievement of crucial milestones in preparation for the implementation of SAM on 1 January 2015.
The FSB are expected to release a SAM 2013 update shortly setting out the objectives to be achieved as well as what insurers can expect in 2013. In preparation of this significant year the SAIA SAM Project Support Office has identified a few important areas on which insurers and reinsurers should be focussing energy and attention on throughout 2013.
Nevertheless before directing our thoughts to these important SAM focal points for 2013, let us pause for a moment and reflect on the milestones that have been successfully achieved thus far in the design of SAM.
Milestones achieved thus far in the design of SAM?
SA QIS1 and SA QIS2 (South African Quantitative Impact Studies)
Two extremely important quantitative impact studies have been undertaken and completed by the FSB and the insurance industry.
These impact studies provided crucial information and input to the FSB in assisting with the calibration of the Standard Formula, which all registered insurers and reinsurers will be required to apply in order to calculate their Solvency Capital Requirement, should they elect not to build and use their own internal model for this purpose.
FSB Board Notice 169 of 2011
Board Notice 169 of 2011 setting out the new prescribed interim measures for the calculation of the value of the assets, liabilities and capital adequacy requirement of short-term insurers, took effect on 1 January 2012.
These interim measures provide the first stepping stone for short-term insurers as they migrate from the current capital adequacy requirement regime (CAR) to the more advanced risk based method of calculating their regulatory capital requirement.
The internal model approval process (IMAP) is now in full swing with the successful completion of the first two window periods. These window periods afforded insurers, who desire to calculate their solvency capital requirement through the use of their own internal model as opposed to the Standard Formula, with the opportunity to enter the lengthy process for the regulatory approval of their internal models.
Insurance Laws Amendment Bill (ILAB) at Parliament
The objective of the Insurance Laws Amendment Bill (ILAB) is to amend the Short-term Insurance Act, 1998, so as to define certain terms, to extend the powers of the FSB, to provide for explicit governance, risk management and internal control requirements of insurers and to provide for the supervision of insurance groups.
The Bill forms part of the SAM Interim Measures that will be applied to Insurance Groups, Governance, Risk Management and Internal Controls.
The ILAB is currently in the parliamentary process and is expected to take full effect on 1 January 2014.
The SAIA is likely to call for a workshop on a revised version before submission to Parliament during quarter 1 of 2013.
Primary and Subordinate SAM Legislation
The second draft of the Primary Legislation and the first draft of the Subordinate Legislation have been circulated to the various task groups operating under the FSB SAM Governance Structure for comment and further deliberation. Despite substantially more work required, the initial foundation on which SAM will be built has subtly been laid.
Reinsurance Regulatory Review - Survey
The FSB, with the assistance of PricewaterhouseCoopers (PwC) have completed their survey of the reinsurance landscape in South Africa. The output generated by the survey will culminate in a research paper for use by the FSB. The paper will be used as a reference document in the legislation drafting process for the regulatory framework applying to reinsurers under SAM.
Where should the focus be in 2013?
The third and final quantitative impact study is scheduled to take place in 2013 and will require compulsory participation by all insurers and reinsurers in South Africa. The importance of this decisive quantitative impact study should not be underestimated as it will provide the final opportunity for industry to influence the Standard Formula.
2014 Interim Measures
It is expected that the ILAB will be subject to one more round of public consultation before being adopted in 2014. Insurers and reinsurers are advised to carefully study this Bill as soon as it becomes available in order to adequately prepare in advance for these new requirements.
Economic Impact Study
Insurers and reinsurers should actively follow developments as they unfold pertaining to the economic impact study. The outcome of the impact study is expected to uncover the potential impact that SAM will have on the macro-economic environment in South Africa.
Pillar II and III Requirements
Particular attention should be given to the design and further development of the insurers and reinsurers Own Risk and Solvency Assessment (ORSA) process.
An important aspect to add to insurers and reinsurers 2013 SAM Radar would be the proposals emanating from the Pillar III Reporting and Disclosure Task Group. A large number of reporting templates are currently being developed and proposed for use in the SAM regime. These templates require careful scrutiny and consideration by insurers and reinsurers.
2014 Parallel Run
Industry eagerly awaits further guidance from the FSB as to the proposed SAM Parallel Run expected to take place in 2014. Details remain sketchy and with one year to go before the parallel run, it would be in the best interest of insurers and reinsurers to gather further information pertaining thereto.
The principle of proportionality should be further examined, refined and probed by insurers and reinsurers in 2013, particularly the smaller, specialized and niche insurers. The SAIA has already established the Proportionality Interest Group specifically to address the manner in which the FSB will apply this principle across all three pillars of the SAM governance structure.
In essence the notion of the term transitional arrangements should assist insurers and reinsurers in achieving a “smooth” changeover to compliance with the requirements of SAM.
Insurers and reinsurers should work together with the FSB in 2013 to bed down transitional arrangements thereby ensuring that their viability and business sustainability are not adversely threatened when SAM takes effect.
Gathering of information pertaining to transitional arrangements should be one of the most important objectives pursued by insurers and reinsurers throughout 2013.
Commenting on Legislation
During 2013 it can be expected that the Primary and Subordinate SAM legislation will advance with significant progress. The SAIA SAM Project Support Office will be surveying these developments with a keen interest and shall call for workshops at the appointed time to scrutinise these proposals.
The active involvement in the provision of comments on the draft SAM legislation by all our SAIA members is fundamentally important to the SAIA. In order for the commentary process to be a resounding success, insurers are requested to involve their subject matter experts to contribute in this process.
The abovementioned focus points are by no means intended to be the only areas of emphasis for insurers and reinsurers in 2013. Rather these areas are considered crucial by the SAIA SAM Project Support Office for insurers and reinsurers if they are to be adequately prepared for the SAM implementation date.
The current commitment and momentum generated by all stakeholders within the SAM structure should not be derailed but should instead be accelerated in 2013, as the insurance industry rapidly approaches the final countdown to SAM.
South African Insurance Association
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