South Africa

Details

  • Industry: Financial Services
  • Type: Business and industry issue
  • Date: 2014/07/15

SAM - analysis of the recent FSB update letter 

In April 2014 the Financial Services Board (“FSB”) released its Solvency Assessment and Management (“SAM”) update letter which is aimed at addressing four key topics:

 

  • SAM timelines;
  • the changing context of SAM;
  • finalising the development phase of SAM; and
  • moving to the implementation phase of SAM.

1. SAM timelines


The stepped implementation planned for SAM included three key phases. Firstly the interim measures for the valuation of the assets and technical provisions and the calculation of the capital requirement for short-term insurers, were designed to make the solvency basis more risk-based. This was implemented through Board Notice 169 of 2011.

Secondly governance, risk management and group supervision changes were to be introduced through the Insurance Laws Amendment Bill (“ILAB”). However with the 2014 general election the parliament to which the Bill was tabled has been dissolved and it is unlikely that the new parliament will approve the Bill in the near future. Hence these amendments will be introduced through Board Notices and the Twin Peaks Bill. The former will address the governance and risk management requirements, the latter group supervision. Both aspects are intended to be finalised in late 2014 or early 2015.

 

The third and final phase will see the legislative implementation of SAM through the primary and subordinate legislation. The new Insurance Act, will replace the existing Short and Long Term Insurance Acts. The targeted date for legislative implementation remains unchanged at 1 January 2016, with transitional arrangements to be finalised. At our recent SAM update training we gathered responses from our audience, which consisted of mainly middle management. The respondents had the following view of the timelines:

 

 

2. The changing context of SAM

 

Key features of the changing context relate to the parliamentary process referred to above. As a result of the ILAB being withdrawn, it is likely that SAM will come into effect under a Twin Peaks regulatory framework. Furthermore the microinsurance framework previously envisioned as a separate bill will now be rolled up into the greater Insurance Act. Changes proposed in the 2014 Budget to the taxation of life insurance risk business are also being watched closely, and will be factored into the SAM framework. Lastly the FSB commissioned a reinsurance regulatory review which will be used to inform the Insurance Bill.

 

3. Finalising the development phase of SAM

 

Key outstanding items which require finalisation by the FSB prior to 1 January 2016 include:

 

  • Considering the impact of the third quantitative impact study (“QIS 3”) and the Economic Impact Study on calibration for Pillar 1 calculations;
  • Factoring the findings of the Pillar 2 readiness survey follow up review into the final Pillar 2 framework;
  • Pillar 3 reporting frameworks including issues such as: asset spreading; quarterly reporting requirements; the extent of public versus private information; final quantitative templates (notably for insurance groups); and the external assurance requirements;
  • Consideration of the impact of the findings of the reinsurance regulatory review on the reinsurance regulatory framework; and
  • Clarifying transitional arrangements from the existing to the new capital regime.


4. Moving to the implementation phase of SAM

 

The implementation phase will see the light parallel run in the second half of 2014. In the light parallel run, insurers and insurance groups will be required to produce quarterly returns under the SAM basis, in addition to their normal reporting.

 

This will be followed by a comprehensive run in 2015. During this phase, insurers will be expected to complete quarterly as well as annual returns on the SAM basis in addition to their normal reporting. There will also be a mock Own Risk and Solvency Assessment (“ORSA”) exercise where insurers will be required to submit some ORSA information to the FSB.

 

Capital requirements under the comprehensive run will still be in line with the existing legislation, however following legislative implementation in 2016 there will be a transitional process to move insurance companies to the new regulatory requirements.

 

Below are respondents’ views on their own readiness for SAM implementation – where many felt they were largely ready for the light parallel run, few considered themselves ready for full SAM implementation:

 

 

Clearly there is still a lot of work to do. Key areas which stood out in the survey included the ORSA, pillar 2 generally and pillar 3. It appears that many organisations have bedded down the capital calculations and through the compulsory QIS3 exercise even smaller players have now worked through the details of the calculation.

 

 

 

5. The business of SAM

 

Insurers are still in business to provide a service and create returns for shareholders. We asked respondents their views on the benefits for organisations and policyholders as well as the associated costs.

 

 

Most respondents’ perceived benefits to be accrued under SAM for business and policyholders. Many respondents expressed the view that the pillar 2 improvements would be beneficial for the business and better capital management should ultimately strengthen the industry. The challenge which remained was to manage the cost side where certain respondents felt that aspects of SAM were unduly onerous on insurers, ultimately undermining the benefit for the industry.

 

The take away is to appropriately identify the business benefits for your organisations, inform the consumers of the improved protections they are receiving whilst managing the costs to an acceptable level.

 

How does the update letter affect your organisation now?

 

Your organisation could be impacted in many ways by these proposed changes:

 

  • the group supervision changes will directly impact insurance groups;
  • the board notices should be obtained when released and proactively managed;
  • the light and comprehensive parallel runs will put significant pressure on finance and reporting staff; and
  • the ORSA is intended to be a business wide endeavour and involvement across the business is required if the ORSA is to be successful and useful.
 

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Contact

Contact

Derek Vice
Manager
Tel: 082 711 2519
derek.Vice@kpmg.co.za

 

Irma Fourie

 

Irma Fourie

Director

Tel: +27 (0)83 419 8983

Irma.Fourie@kpmg.co.za