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class > Chapter 1- South African General Business Environment > Flashcards

Chapter 1- South African General Business Environment Flashcards

1
Q

List the 7 main factors in the general business environment that influences Life insurance companies?

A

• New business volumes
• Wider competitive environment (non-life savings vs. traditional life savings)
• Operational risk
• Corporate finance and securitisation
• Mergers and acquisitions
• Demutualisation
• Cell captives (interesting)

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2
Q

List the 7 sub-factors in the general business environment regarding writing new business that influences Life insurance companies?

A

• Regulation
• Tax (policyholder)
• Economic conditions
• Publicity
• Technology
• Target markets
• Micro-insurance

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3
Q

How does the Insurance Act and long-term insurance Act (regulation) impact the writing of new business (6)

A

• Authorisation: Life insurance licence which allows the company to sell a particular type of business (9 types in total)

• Commission: Limit on commission payable (Regulation 3 Section 49 LTA)

• Product design: minimum surrender values (or maximum penalties)

• Solvency valuation and capital adequacy requirements –> increases company costs and hence premium rate

• Reporting requirements –> increases company costs and hence premium rate

• Statutory actuary must be satisfied that the premiums, benefits and other values of a policy are actuarially sound

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4
Q

How does the Other regulation and FAIS Act impact the writing of new business? (5)

A

• Policy quotation: Governances around info to be provided in policy quotation so as to reduce risk of misleading policyholders (ASISA)

• Restrictions on Rating factors. e.g. HIV status, DNA testing
• TCF guidelines
• Marketing and admin of living annuities

• The representatives and independent brokers needs to be FAIS compliant e.g. certifications and conducting a needs analysis

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5
Q

How does taxation impact the writing of new business?

A

• Beneficial tax treatment is a key incentive for people to choose life insurance savings products over other options

• Companies aim to design products to take advantage of tax rules

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6
Q

How does the state of the economy influence writing new business? (1)

A

• Affects new business levels and retention of existing policyholders

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7
Q

How has new business been affected by poor publicity in the past? (4)

A

• Poor surrender values

• Brokers promoting living annuities instead of life annuities (lack of disclosure)

• Benefit projections on policy quotations were shown using unrealistically high investment returns

• Financial advisers encouraged policyholders to surrender one policy in favour of another, to the detriment of policyholder value

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8
Q

How does technology influence writing new business? (3)

A

• Marketing through texts and the internet have increased significantly

• The internet allows prospective policyholders to compare price quickly resulting in additional competition

• Policies could be purchased online

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9
Q

How does target market influence writing new business? (4)

A

• Affects: distribution method & type of product sold

• Wide range in RSA (high-earning, low-earning, rural areas)

• Rural areas with limited infrastructure:
Partner with a bank or retailer to sell products
Gives insurer access to many smaller areas while keeping costs low
Simple risk products

• Affluent market:
Complex products
sold through brokers and company branches

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10
Q

How does mirco-insurance influence writing new business? (2)

A

• New category of insurers
Permitted to sell only simple risk products of limited size

• These insurers will have reduced regulatory and capital requirements
to produce lower cost risk products
and compete in the low-income market

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11
Q

List the financial instruments impacting the competitive environment for savings products? (6)

A

Banks and investment managers sell unit trusts and capital guarantee investment products which compete in insurance savings products and guaranteed return products.

Examples of non-life savings products:
• Unit trusts
• Fixed term and call deposits
• Money market accounts
• Exchange traded funds (“closed ended” investment trust of index funds)
• Guaranteed investment in the market
• Direct Investment in the market

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12
Q

What tax advantages do insurance savings products have over non-life savings products? (4)

A

• High net worth individuals taxed at lower rate
taxed at rate applied to the Individual Policyholder Fund (IPF) 30%,
likely lower than their marginal rate

• Excess E (XSE) position in IPF (for some insuers)
due to relatively low reserves (and hence investment income) compared to expenses
provide tax-free investment income on savings products

• Retirement annuities (EET)
Tax-free savings for retirement
Premiums are tax-deductible
Income at retirement is taxable (but now in lower income bracket less tax)
& part of proceeds can be taken as tax-free lump sum

• With-profit and smooth bonus products have offered:
Policyholder returns with lower volatility than the equity market
Possible profits on other business lines

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13
Q

What tax disadvantages do insurance savings products have over non-life savings products? (4)

A

• Access to savings and guarantee return products offered by banks / investment managers has vastly improved
o Internet
o Target customers and distributors more effectively

• Insurers have higher expense loadings to cover costs unique to insurers
Regulatory reserves and SCR
Training and regulation of the sales force – although FAIS requirements for non-insurance also
Additional regulatory requirements
(e.g. statutory actuary to review premium rates)

• Life savings products less flexible
inability to adjust premiums and benefit withdrawals without incurring penalties
Commission and acquisition expenses are typically allocated to policies upfront,  reduce policy value for early terminations

• With-profit and smooth bonus have become less popular due to lack of transparency in the return achieved

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14
Q

How does operational risks influence life insurers?

A

• Assessment of Oprisk included in SCR calculation
Require input from all areas of business
If approx. methods inadequate then dedicated oprisk model may be needed

• If the risk cannot be mitigated, then capital held to cover the potential cost

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15
Q

Provide examples of operational risk? (7)

A

• Mis-selling
• Mis-pricing
• Administrative errors
• IT failures
• Data issues
• Standards of policy service (poor) ( lead to reduced NB)
• Staff retention (poor)

Additional causes third party dependencies, poor internal controls, human error, security breach, staff resources

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16
Q

Corporate finance and securitisation

List sources of capital for life insurer? (6)

A

• Sources of capital to insurers:
o equity rights issue
o bond & other debt instrument issue
o subordinate debt
o securitisation
o financial reinsurance
o contingent loans

17
Q

Describe:

(1) Securitisation

(2) Financial reinsurance

(3) Contigent loan/surbordinated debt

A

Securitisation:

• Sale of future profits expected on in-force business
• Insurer receives payment for these profits which immediately improves solvency
• Purchaser of security will receive repayment of capital and interest only if sufficient profit emerges from a specified block of business

Financial reinsurance:

• Reinsurance which, in addition to some element of risk transfer, provides capital relief against new business strain through payment of initial commission from reinsurer to insurer

Contingent loans & subordinate debt:

• Debt instruments where the repayment is either
o contingent on surplus emerging or
o subordinated to (i.e. ranks beneath) the interest of policyholders

18
Q

List reason for mergers and acquisitions by insurance companies? (4)

A

• Number of life insurers have reduced because of:
o Increased cost of regulation
o Efficiencies and economies of scale
o Capital requirements not being met due to poor performance

• Trend for large insurers to expand into new markets through acquisitions

19
Q

Describe what are cell captives? (2)

A

• A mechanism by which companies/individuals (the cell owner) can perform the business of an insurer without obtaining their own insurance license

• An insurer (the cell captive) ‘rents out’ their insurance license to different cell owners in exchange for a fee

20
Q

Describe what are cell captives? (2/3/3)

A

• A mechanism by which companies/individuals (the cell owner) can perform the business of an insurer without obtaining their own insurance license

• An insurer (the cell captive) ‘rents out’ their insurance license to different cell owners in exchange for a fee

Cell owner:
• Provides capital to support business by holding a specific type of share in the cell captive
• Manages insurance business on behalf of the insurer
• Receives the profits from the business (through dividend payments)

Cell captive:
• Minimum services provided to cell owner: accounting and regulatory reporting services
• Specialized services to the cell owner: start-up assistance, pricing, underwriting, claims management, reinsurance and investment management
• May provide additional capital to a cell owner (for a fee)

21
Q

Describe regulations for cell captives? (2/-3)

A

• Same as other insurers except for additional reporting requirements

• Potential changes on legislation for:
o Structure
o Restrictions on who may own a third party cell
o Responsibilities of third party cell captive insurers
Wrt governance, risk management, market conduct, reporting, demonstrating financial soundness

22
Q

Described risks for policyholders of cell captives? (5)

A

• Risks of equivalent business sold through normal insurance structure

Although concerns:
• Insufficient controls over compliance
• Unfair treatment of policyholders by cell owner
• Conflicts of interest related to the profit share motive inherent in cell captive arrangements

• But, Ring-fencing cells –> cell owners unable to diversify cap requirements across product classes written in other cells –> higher capital requirements than traditional insurance

23
Q

Describe the risk to shareholders of cell captives? (4)

A

• Risks of equivalent business sold through normal insurance structure

• Exposure to losses on business written in other cells
o First party cells: losses are limited to the capital in respect of that cell
o (Limited via a recapitalisation requirement)
  risk to the other cell owners and the promoter cell is limited
o Third party cells: losses are first covered by the capital held in respect of the cell, then by capital held in the promoter cell, then by capital held in others cells (first and third party)
o If something like this happens, cell owners will likely start withdrawing from the cell captive
• Operational risk relating to functions outsourced to cell owners
• Reputational risk from actions of cell owners associated with the captive

24
Q

Describe the risk to shareholders of cell captives? (4)

A

• Risks of equivalent business sold through normal insurance structure

• Exposure to losses on business written in other cells
o First party cells: losses are limited to the capital in respect of that cell
o (Limited via a recapitalisation requirement)
 risk to the other cell owners and the promoter cell is limited
o Third party cells: losses are first covered by the capital held in
respect of the cell, then by capital held in the promoter cell, then by capital held in others cells (first and third party)
o If something like this happens, cell owners will likely start withdrawing from the cell captive

• Operational risk relating to functions outsourced to cell owners

• Reputational risk from actions of cell owners associated with the captive

25
Q

Challenges for cell captives? (4)

A

• Ensure that third party cell owners abide to FAIS Act and Long-term Insurance Act
o Stipulate this in the business relationship agreement

• Solvency position of each cell must be monitored to ensure remedial action (e.g. recapitalisation) when necessary
o Regular valuations

• How to allow for Risk diversification benefits across cells when the cell captive calculates required capital
o & understand how this affects cell owners
o In most arrangements  diversification not allowed

• Tax calculations performed at company level (ignoring internal cell division)
o Ensure equity by performing independent tax calculations for each cell
 Otherwise, e.g. one cell may receive tax relief on profits by offsetting losses occurring in other cells

26
Q

List 5 main syllabus objectives

A
  1. Demonstrate knowledge of the South African commercial and economic environment
  2. Specify the additional problems to those described in F102 that may arise in the operations of a South African life insurance company, and in particular describe the requirements of a surplus distribution system in South Africa
  3. Develop solutions to the problems faced by a South African life insurance company.
  4. Monitor the experience of a South African company and demonstrate how the analysis of experience can be used to feed back into the control cycle
  5. Produce coherent advice and recommendations for the overall financial management of a life insurance company
27
Q

Factors to consider in demonstration of the South African commercial and economic environment (8)

A
  1. Define the principal terms used in life insurance in South Africa - Glossary
  2. Describe the general business environment for life insurance companies in South Africa and risks involved in different commercial activities - Chapter 1
  3. Describe the major life insurance products of South African life insurance companies - Chapter 3
  4. Describe the concept of micro insurance and how it applies to the South African environment - Chpt 3
  5. Describe the main methods and marketing channels used by South African life insurance companies to sell their products - Chp 5
  6. Describe the South African regulatory environment as it affects life insurance companies (including material future developments) - Chp 7
  7. The requirements of the professional and regulatory guidance relevant to actuaries practising in or advising South African life insurance companies - Chp 8
  8. Describe the main factors affecting returns, inflation and the other economic and demographic factors involved in actuarial work in South Africa - Chp 2
28
Q

Actions involved in developing solutions to the problems faced by a South African life insurance company (12)

A
  1. Determine the design of the life insurance contract to be marketed in South Africa and appropriate methods and bases for pricing them - Chp 4
  2. Determine appropriate methods and bases for varying the non-linked life insurance contracts of South African life insurance companies on terms that are not guaranteed - Chp 14
  3. Determine
    - For the purpose of meeting supervisory requirements, appropriate methods and bases for valuing the liabilities of a South African life insurance company for financial soundness - chp 9
    - For the purpose of financial reporting, appropriate methods and bases for valuing the insurance liabilities of a South African life insurance company - chp 9
  4. Determine appropriate methods and bases for assessing and reporting the value of new business, embedded values and the profitability of the existing business of a South African life insurance company. - Chp 10
  5. Analyse appropriate ways of determining the surplus distribution policy of a South African life insurance company transaction with-profits business -Chp 15 and Chp 16
  6. Analyse the asset-liability matching requirements of a South African life insurance company and develop appropriate strategies - Chp 17
  7. Determine methods and appropriate bases for assessing the ongoing solvency of a South African life insurance company, bearing in mind the capital requirements of the company - Chp 13
  8. Analyse the risk management and controls requirements of a South African life insurance company including the coverage of 6 key risks - Chp 18
  9. Analyse the reinsurance and underwriting requirements of a South African life company, for the purpose of efficient risk management - Chp 18
  10. Describe how unit pricing, in respect of the internal unit-link funds of a South African life, can be a source of risk - Chp 18
  11. Describe the different valuation bases used in the valuation of a life insurance companies in South Africa and the use of such valuations - Chp 9
  12. Describe the principles and methods of determining the regulatory capital requirements of a South African life insurance company. - Chp 9 & 13
29
Q

Techniques of monitoring experience for life insurance company (2)

A
  1. Carry out an analysis of surplus in respect of a South African life insurance company and use the results to reassess the design of the company’s contracts or actuarial bases. - Chp 11
  2. Carry out an analysis of the change in the embedded value of a proprietary South African life insurance company and use the results to reassess the design of the company’s contracts or actuarial bases. - Chp 12
30
Q

Items associated with complex problems for a life insurer (7)

A
  1. Product design and pricing - chp 4
  2. Terms for varying and terminating contracts - chp 14
  3. Asset-liability matching and associated investment policy - chp 17
  4. Emergence of profit - chp 9
  5. Bonus policy - chp 16
  6. Reinsurance arrangements - chp 18
  7. Investment policy - chp 17
31
Q

Items to consider when describing the general business environment (7)

A
  1. New business
  2. The wider competitive environment, including major non-life savings products competing with traditional life savings products
  3. Operational risk
  4. Corporate finance and securitisation
  5. Mergers and acquisitions
  6. Demutualisations
  7. Cell captives
32
Q

Factors to include in the description of major life insurance products (3)

A
  1. The main types of products issued
  2. The benefits, guarantees and options that may be provided
  3. The purpose and risks of the products to the policyholder and insurer
33
Q

Items shaping the South African regulatory environment for life insurers (10)

A
  1. The taxation of the South African business of life insurance companies and the effect of taxation on the benefits and premiums paid under South African life insurance contracts
  2. The supervision of the South African business insurance companies under the long-term Insurance Act 52 of 1998, the Insurance Act no 18 of 2017, the regulations and Prudential Standards made under these Acts, and other directives or notices.
  3. Basic knowledge of the Financial Advisory and Intermediary Services Act, National Credit Act and Financial Intelligence Centre Act, and their impact on long-term insurance
  4. Knowledge of the Ombud system in South Africa as it applies in the life insurance industry
  5. The code of conduct of the Association for Savings and Investment South Africa (ASISA)
  6. Basic knowledge of the Insurance Core Principles and methodology of the International Association of Insurance Supervisors (IAIS)
  7. Awareness of Market Conduct (MC) developments
  8. Awareness of the Twin Peaks model of financial regulation, which is the basis for regulation in the South African market
  9. Knowledge of Principles and Practices of Financial Management (PPFM)
  10. Profit reporting under the International Financial Reporting Standards issued by the International Accounting Standards Boards.
34
Q

Items shaping the South African regulatory environment for life insurers (10)

A

TBU

35
Q

Supervision areas relevant for the actuarial work (10)

A

TBU

36
Q

Key risks to be covered by the risk management and controls (6)

A

TBU

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