7. South African Regulatory Environment Flashcards
Two regulators as per Financial Sector Regulation (FSR) of 2017:
PA does macro prudential regulation
FSCA does market conduct regulation
Interpretation and Objective of Act
Conducting Insurance Business and Insurance Group Business
Key Persons and Significant Owners
Licencing, Suspension and Withdrawal of Licence
Compromise, Arrangement, Amalgamation, Demutualisation and Transfer
Governance
Reporting and Public Disclosures
Transfers of Business and Other Significant Transactions
Resolution
Administration of Act
General Provisions
An insurer’s actuarial function is responsible for expressing an opinion to the board of directors on the reliability and adequacy of the calculations of the insurer’s technical provisions, and minimum and solvency capital requirements, including on:
The appropriateness of the methodologies and underlying models used and assumptions made.
The sufficiency and quality of the data used in actuarial calculations.
Best estimates and associated assumptions against experience when evaluating technical provisions.
The accuracy of the calculations.
The appropriateness of and impact of assumed future management actions and the effect of risk mitigation instruments.
The appropriateness of approximations or judgments used in the calculations due to insufficient data of appropriate quality.
An insurer’s actuarial function is responsible for expressing an opinion to the board of directors on:
The appropriateness of the following policies of the insurer:
Asset-liability Management Policy.
Underwriting Policy.
Reinsurance and Other Forms of Risk Transfer Policy.
The adequacy of reinsurance and other forms of risk transfer arrangements.
An insurer’s actuarial function is responsible for evaluating and providing advice to the board of directors, senior management and other control functions (where relevant) on:
Where the insurer uses the standardised formula to assess its risks, why that regulatory capital model is an accurate reflection of the insurer’s own risk profile, taking into account the board-approved risk appetite (and related risk limits), and business strategy.
The development and use of internal models for internal actuarial or financial projections, or for own solvency projections as in the ORSA.
The insurer’s investment policy.
The financial soundness position of the insurer, including the impact of any proposed dividend declaration or payment.
The actuarial-related matters in the ORSA such as the economic capital requirements, the forward-looking projections of the economic and regulatory financial soundness positions, the stress-, sensitivity-, and scenario testing, and the assumed management actions.
The internal controls relevant to actuarial matters referred to under this section 14.
The awarding of a bonus or similar benefit to participating policyholders in accordance with the principles and practices of financial management of the insurer.
The actuarial soundness of the terms and conditions of insurance contracts.
The heads of the insurer’s risk management, compliance and actuarial functions are responsible for providing input and expressing an opinion to the board of directors about the operations, efficiency and effectiveness of the components of the systems for risk management and internal controls relevant to their respective areas of responsibility
Heads of control functions must be fit and proper (see GOI 4: Fitness and Propriety of Key Persons and Significant Owners of Insurers).
There must be adequate policies and procedures relating to the appointment, dismissal, and succession of heads of control functions, and the board of directors must be actively involved in such processes.
The appointment, performance assessment, remuneration, disciplining, and dismissal of the head of each control function (other than the head of the internal audit function) must be done with the approval of, or after consultation with, the board of directors or relevant board committee.
The appointment, performance assessment, remuneration, disciplining, and dismissal of the head of the internal audit function must be done by the board of directors, its chairperson, or the audit committee.
The remuneration of heads of control functions must not be predominantly linked to the financial performance of the insurer and must not be inconsistent with the long-term strategy and the financial soundness of the insurer. In addition, or where this function is outsourced, the remuneration should be commensurate with the services provided.
Heads of control functions must have appropriate segregation of duties from operational business line responsibilities. The board of directors must ensure that the segregation is observed.
An insurer may, where appropriate, in light of the nature, scale, and complexity of the insurer’s business and risks, and with the prior approval of the Prudential Authority, appoint a person as the head of more than one control function (other than the head of the internal audit function). Despite the aforementioned, the Prudential Authority may direct the insurer to appoint another or a dedicated person as the head of that control function, if the Prudential Authority is of the opinion that the person is not a suitable head for more than one control function.
Heads of control functions must report regularly to the board of directors or relevant committee.
The head of a control function must without delay report in writing to the board of directors or relevant committee any reasonable suspicion that any financial sector law relevant to its area that applies to the insurer has or is being contravened. Where the suspected contravention is of the Act or the Financial Sector Regulation Act, 2017, the head must also report immediately to the Prudential Authority if, in the opinion of the head, satisfactory steps to rectify the matter have not been taken within 30 days from the date of the board meeting at which the report is considered.
Sufficient seniority and authority to be effective.
Reporting lines that support their independence.
Unrestricted access to relevant information.
Direct access to the board of directors or relevant committee, without the presence of senior management if so requested, for the purpose of raising concerns about the effectiveness of the risk management system or system of internal controls.
The freedom to report to the board of directors or relevant committee without fear of retaliation from senior management.
Insurer must keep business in financially sound condition by holding eligible own funds >= MCR or SCR (whichever is greater)
Insurance groups: controlling company must hold >= SCR
Must have procedures to identify declining financial soundness that may cause failure to comply with section 36
Can’t declare or pay dividend or make surplus/profit distributions if:
Fails or likely to fail to comply with section 36
Declaration or payment would result in above point
Must notify PA of failure to meet MCR or SCR or risk of doing so in the next 3 months
Insurance groups: failure to meet SCR
PA can take measures if failure to:
Hold A or invest in A as per prescribed requirements, limitations or conditions or
Provide for TP or other L as prescribed and fails to notify PA timeously with no reasons of the failure and measures taken to comply with requirements
If PA reasonably believes calculated financial soundness value is not reasonable reflection then may:
Appoint suitably qualified person to determine value at cost of company (this value will stand)
Give company manner to determine value prescribed by PA (value will stand)
If PA reasonable believes principle, method, assumption, technique, adjustment, calibration, parameter, calculation or model used to determine financial soundness requires further investigation- can direct company to secure independent review at cost of company (person must be approved by PA)
PA may direct company, board, key persons to change, amend, strengthen or improve any principle, method, assumption, technique, adjustment, calibration, parameter, calculation or model used to determine financial soundness
PA may direct extra capital be held if reasonably believes:
Risk profile significantly deviates from assumptions underlying SCR calc or group SCR calc or
Governance framework deviates significantly from Act’s requirements
Capital add-on imposed must be so that SCR after add-on is inline with underlying assumptions in SCR requirement
Similarly, add-on must reflect significance of deviation of governance framework from Act’s requirements
If insurer’s MCR exceeds SCR, may direct capital add-on requirement is applied to MCR
PA can review the add-on at least once a year and remove if satisfied that deficiencies have been remedied
Companies must adopt, implement and document effective governance framework that provides prudent management and oversight of
Insurance business adequately protecting ph interests
Gov framework must:
Be proportionate to nature, scale and complexity of business + risks
Incl. effective systems of corp gov, risk management and internal controls
Address and provide for matters prescribed
Principles and requirements PA may prescribe composition of governance of BoD incl. matters related to independence. E.G.
Roles and responsibilities over and above what’s in Company’s Act
Directors’ duties
BoD structure, incl. committees to be established
Risk management i.e., system, strategy, policy, ORSA
Internal controls
Control functions- which, requirements, roles and responsibilities
Outsourcing
Policy and what must be in policy
Principles + requirements + remuneration paid
Functions that can’t be outsourced / which require PA approval
Limitations on / requirements for outsourcing
A+L are calced at consistent market values
Eligible own funds adjusted for certain items must be sufficient to cover SCR
Have “supervisory ladder of intervention”:
MCR is lower bound for required solvency capital- if below, can’t operate
If below SCR then trigger PA to intervene
SCR is primary measure and must be continuously maintained
Can use internal model but PA must approve and must meet certain tests
LTI must calc liquidity shortfall indicator: assesses magnitude of liquidity risk following an SCR event
Governance areas insurers must address:
Governance
RM + internal controls, incl. internal audit and AF
Fitness and proprietary of key persons responsible for critical functions and activities within insurer’s business, and significant owners
Oversight of outsourcing arrangements
Must use principle of proportionality
Must use “Embedment Test” or “Use Test” RM is embedded in business and in decision making
Key elements are ORSA and Supervisory Review Process (SRP)
Definition: Entirety of the processes and procedures employed to identify, assess, monitor, manage and report the long-term and short-term risks an insurance undertaking (and insurance group) faces or may face and ….
to determine the own funds necessary to ensure that insurers’ (and groups’) overall solvency needs are met at all times…
and are sufficient to achieve its business strategy…
over a suitably long time horizon and across a range of diverse scenarios.
In Section 4 and 6 of GOI 3.1
Maintenance of RM system
Demonstrating that ORSA is embedded in decision-making
Forward-looking capital planning and management
Stress and scenario testing
Emerging RM
Conducted annually and must be submitted within 2 weeks of board approval
Conduct self-assessment of risk and solvency if there’s material change in risk profile
Must include >= 3 year capital projection, and …
KPIs and KRIs …
consistent with economic scenario and growth assumptions made by board and senior management
HAF isn’t required to make statutory declarations re ORSA, but APN 106 has responsibilities of HAF re ORSA
PA uses it to assess ability of governance systems to identify, assess, monitor and manage risks and potential risks
Considerations:
Governance and risk assessment systems incl. ORSA
Technical provisions
Capital requirements
Investment rules
Quality and quantity of own funds
Use of full/partial internal models
Can use SRP to compel insurers to remedy deficiencies identified
In extreme cases may include capital-add on some instances until weaknesses are remedies
Goal of remedies- establish greater confidence in overall solvency position
IA and LTA require insurers to submit at least yearly, detailed info to PA, FSCA and public.
Groups must submit additional returns
Must also submit unaudited quarterly returns a month after the end of the quarter
SCR ratio
Eligible own funds
SCR
Total liabilities as set out in Financial Soundness Standards
Total assets as set out in Financial Soundness Standards
Basic own funds after adjustments and ancillary own funds
MCR
MCR ratio
Table of qualitative disclosures is in notes
PA prepares log files that provide guidance on completing forms
HAF must sign statement that below are in accordance with their interpretation of Financial Soundness Standards and log files associated with it:
OF1
TP1
SCR
MCR
Key return is Conduct of Business Return (CBR)
Exclusions from requirement:
Reinsurers
Captive insurers
Insurers only offering group risk, fund member and linked policies
Cell captive insurers must provide return for each 3rd party cell captive arrangement
Pre March 2020: CBR was on best effort basis and now must be complete and accurate
One month of end of quarter
Detailed info for each business class:
Commission, binder fees and other payment, split by sales channel and reason of payment
Advertising and marketing spend, split by marketing channel
Business composition, incl. # of benefits in force, new benefits issues and benefits cancelled, split by market segment and sales channel
Claims management, incl. reported, paid and repudiated claims in reporting period
Complaint handling, incl. complaints received for various reasons and results thereof
Add-on benefits offered + # of each benefit issued
Requirements for amalgamation, demutualisation or transfer of life business, incl. acquisitions or disposals is in:
Section 50 and 51 of IA
GOI 6
PA must approve material transactions
Will appoint independent actuary to report on desirability of transactions
APN 108 and APN 109
Administration of Act
Registration of LTI
Returns to authority
Business practice, policies and ph protection
Offences and penalties
Transitional and general provisions
Returns to be submitted
Requirement that policies must be actuarially sound
Limitation on remuneration to intermediaries
Requirements for MV where contractual changes made to savings policies
Product design restrictions (5 year rule)
Ph Protection Rules (PPR) requirements
