Chapter 1: The SA general insurance market Flashcards
1
Q
The value of gross written premiums written by SA short-term insurers in 2012
A
R94.5 billion
2
Q
Legislation governing short-term insurance
A
Short-term Insurance Act of 1998
3
Q
8 Short-term insurance policy types
A
- Property
- Transportation
- Motor
- Accident and Health
- Guarantee
- Liability
- Engineering
- Miscellaneous
4
Q
2012 Proportion of SA GWP:
Property
A
33.4%
5
Q
2012 Proportion of SA GWP:
Liability
A
4.7%
6
Q
2012 Proportion of SA GWP:
Motor
A
43.1%
7
Q
6 Major providers of short-term insurance in SA
A
- direct insurers
- reinsurers
- self-retention groups
- Lloyd’s of London
- Sasria (South African Special Risks Insurance Association)
- RAF (Road Accident Fund)
8
Q
6 Possible Requirements that have to be met for FSB authorisation
A
- minimum capital requirements
- a detailed reinsurance programme
- auditors
- organogram of company structure
- proposed management
- detailed business plan
9
Q
Lloyd’s was incorporated by which legislation
A
The Lloyd’s Act of 1871 in the UK.
10
Q
Lloyd’s
A
Provides a market framework (premises, resources, etc) within which insurance may be conducted by the members.
It does not act as an insurer in its own right and, therefore, carries no insurance risk.
The actual business is insured directly with the members (a.k.a. Names or underwriting members).
11
Q
Lloyd’s syndicates
A
Members are grouped into syndicates.
The members of a syndicate share the risks written by the syndicate’s underwriters. Liabilities or profits are allocated to the members on a “several basis” in proportion to their agreed participation at the start of the year.
12
Q
Lloyd’s syndicate managing agent
A
A company appointed to manage the affairs of the syndicate, appoint the underwriter, and provide technical and administrative services.
13
Q
Funds at Lloyd’s
A
If a member defaults on their liabilities, the other members of the syndicate are not responsible for them - there is no joint liability.
Because of this, each member is required to provide capital as security to support their total Lloyd’s underwriting business. These funds are held by Lloyd’s in trust and Lloyd’s has absolute authority to use it to pay claims or other liabilities arising from the member’s activities at Lloyd’s.
14
Q
Lloyd’s Member’s agents
A
Look after the interests of individual members
- introduce members to syndicates
- advise members on how to spread their capital among different syndicates
- responsible for the regular audit of a member’s wealth
- responsible for submitting all financial statements to Lloyd’s
15
Q
How long must a syndicate’s year of account must remain open (at minimum)
A
3 years
16
Q
Reinsurance to close (RITC)
A
(not really reinsurance)
A transfer of assets and liabilities from one group of members (the ceding syndicate) to another (the receiving syndicate).
17
Q
6 Reasons for setting up captives
A
- to FILL GAPS in insurance cover that may not be available from the traditional insurance market.
- to MANAGE THE INSURANCE SPEND of large companies
- to FOCUS EFFORT on risk management
- to reduce the impact of market cycles on risk pricing
- to gain TAX / LEGISLATIVE / REGULATORY ADVANTAGES
- to gain ACCESS TO REINSURANCE (directly)
18
Q
Authorised captive
A
Free to provide insurance to risks other than those of its parent,
provided that this does not change its main purpose.
19
Q
Disadvantages of owning a captive
A
- there may be a lack of risk transfer and the captive may suffer from a concentration of risk
- lack of know-how when dealing with more complicated claims.
20
Q
Cell captive
A
Cell captive insurers have a corporate structure that allows them to
…. pass isolated and identified profits
… resulting from subsets of their insurance operations
… to parties other than their ordinary shareholders.
This allows cell captive insurers
… to “rent out” their insurance licence
… to companies looking to take advantage of the benefits of the captive insurance arrangement,
… but which cannot afford the captive insurance approach themselves.
21
Q
Structure of a cell captive
A
A registered insurer (cell insurer) issues a specific class of shares to a corporate (cell shareholder).
Each of the specific classes of shares forms an individual ring-fenced cell.
Individual cells are represented by a separate class of ordinary shares with specified dividend rights that allow clients access to surplus profits in their cells.
The cell participant is responsible for the funding of the cell and the cell should be maintained at such levels as may be required by the shareholder’s agreement entered into.
22
Q
Role of the cell captive company
A
- administration
- claims handling
- investment
services
23
Q
8 Key characteristics of cell captive structures
A
- The cell shareholder EARNS INVESTMENT RETURN on the assets that arise from the shares being issued and the insurance business introduced.
- The insurer accounts for the shares, underwriting, investment activities and claims of EACH CELL SHAREHOLDER SEPARATELY.
- It is common for a cell to have an EXTENSIVE REINSURANCE program designed to consider the cell owner’s risk appetite and the nature of the risks underwritten.
- The policies issued by the cell insurer meet the definition of an insurance contract as set out by accounting standards for insurance contracts.
- A cell is NOT AN INCORPORATED ENTITY and has no legal status. The insurer is, therefore, the contracting party with the insured.
….. Only the financial consequences of the insurance and investment transactions are attributed to the cell.
….. The insurer charges an ADMINISTRATION FEE for providing the cell facility. - The assets of the cell are owned by the insurer as the cell has no legal status. All investment decisions rest with the insurer but the investment return is allocated to the cell.
- The insurer has a claim against the cell shareholder for any losses incurred in the cell (net of reinsurance recoveries) in excess of the accumulated net assets of that cell.
- Dividends are payable to the cell shareholder at the discretion of the insurer during the normal operations of the cell. If the cell facility is terminated, any accumulated net assets in the cell are remitted to the cell shareholder as a final dividend.
24
Q
3 Cell captive structures available in south africa
A
- First party cells
- Third party cells
- Combined party cells
25
First party cells
Where the insurance business introduced relates to the cell shareholder's own risks and that of their subsidiaries.
26
Third party cells
Where the insurance business introduced relates to third parties (usually the clients of the cell shareholder whereby the insurance offering is complementary to a product or service already provided by the cell shareholder)
27
Combined party cells
Where the insurance business introduced relates to own risks as well as to third parties.
28
The FSB 2013 discussion paper: "Review of 3rd party cell captive insurance and similar arrangements"
aimed to address 3 CONCERNS:
- different standard registration conditions that apply for different 3rd party cell captive insurers
- licensing conditions that may not be fully effective
- potential conflicts of interest inherent in third party cell captive arrangements where cell owners are intermediaries or related parties of an independent intermediaries
29
The FSB 2013 discussion paper: "Review of 3rd party cell captive insurance and similar arrangements"
made 14 NOTABLE PROPOSALS:
- the requirement that cells may only be owned by a binder holder (either an underwriting manager or a non-mandated intermediary in terms of an approved affinity scheme)
- prohibition on cell arrangements with independent intermediaries due to conflicts of interest
- allowance for cell arrangements with affinity schemes under certain conditions
- similar arrangements to be converted to cell arrangements
- prohibition on cell captive insurers doing any business other than cell arrangements
- prohibition on a mix of first party and third party cell business in one cell or arrangement
- prohibition on captive insurers conducting third party business
- MCR to be prescribed for each cell
- recapitalisation by cell owner must be conditional and included in the shareholder agreement
- proportional share of risk between cell owner and insurer: Insurer to assess the credit worthiness of the cell owner to determine upfront the proportional risk sharing arrangements
- prior approval from the Registrar for cells provided to affinity schemes
- prior notification to the Registrar for all other cell arrangements
- specific reporting requirements
- standard licensing conditions for various third party cell captive insurers
30
Affinity scheme
A third party cell captive arrangement where insurance business is ancillary to the primary business activity of the cell owner.
31
Protection and Indemnity (P&I) clubs
P&I clubs exist in the UK and were originally formed to cater for certain types of marine risks that could not be covered at an acceptable price under a commercial marine policy, for example:
- indemnity of liability in respect of claims for loss of life or personal injury resulting from accidents
- indemnity of liability for damage to harbours, wreck removal and pollution
32
P&I clubs share of the world's shipping coverage against liability claims
90%
33
When did Sasria come into being?
25 January 1979
34
Sasria company structure
Sasria is a limited company with government being its sole shareholder.
35
Reason for Sasria being formed
To provide insurance for
- politically motivated acts
- political riots
- terrorism
The cover that Sasria provided was extended in 1998 to include non-political perils such as strikes and labour disturbances.
36
Sasria's 5 objectives
- to protect assets against certain defined events, being primarily politically motivated acts, riots, strikes, terrorism, civil commotion and public disorder.
- to promote community interests
- to provide cover in respect of loss or damage caused by non-political riot, strike and public disorder
- to provide consequential loss cover for standing charges and working expenses of commercial enterprises arising from an insured event.
37
Sasria consequential loss definition:
| Standing charges
A business expense that does not diminish with a reduction in turnover following interruption or interference with the business (e.g. salaries or wages).
38
Sasria consequential loss definition:
| Working expenses
An expense that can be reduced, without detriment to the business, proportionately with a reduction in turnover (e.g. electricity costs).
39
Sasria cover is offered in 6 classes of insurance business
- Material damage
- Business Interruption
- Money
- Goods in transit
- Motor
- Construction risk
40
How is Sasria financed?
By way of premiums for policies or coupons, issued to protect motor vehicles and private and commercial property, including loss of rent.
After payment of administration and acquisition costs, plus claims, the balance builds up a fund for future losses.
Sufficient reinsurance is purchased in both the local and international markets.
41
Sasria conditions
- underlying fire policy covering conventional insurance risks must be in place.
- Standard SAIA exceptions must be included within the policy
- Sasria cover is non-cancellable and non-refusable
- Sasria caps losses and imposes a loss limit in the interests of maintaining an adequate fund for the benefit of all policyholders
- A holding company and all of its subsidiaries will be entitled to a loss limit of R500 million per calendar year for Material Damage, Standing Charges and Working Expenses cover.
- Companies with insured values in excess of this are entitled to a loss limit discount which is calculated on a sliding scale.
42
How can Sasria cover be acquired
A person or company that wishes to acquire the Sasria cover will approach the conventional insurer (sometimes through their broker) who will then issue a Sasria coupon in conjunction with their own fire cover or a standalone Sasria policy, in the case of vehicle insurance.
Premium is collected by the agent companies and submitted to Sasria after deduction of administration fees.
By the same token, claims are reported, to member companies. Where the member company is of the view that the claim is excluded in terms of the SAIA exceptions, the claim is then submitted to Sasria.
43
Road Accident Fund (RAF)
The instrument by which the SA government compensates victims of motor vehicle accidents for bodily injuries or loss of support suffered following the death of breadwinners.
Does not cover liability incurred due to damage of property.
Funded by a fuel levy.
44
RAF Act
The Road Accident Fund Act 56 of 1996 came into effect on 1 May 1997.
The Act established the present Road Accident Fund to pay compensation in accordance with applicable statutes for personal loss or damage wrongfully caused by the driving of motor vehicles.
45
RAF coverage
The RAF only indemnifies the driver or owners to compensate for losses suffered due to bodily injuries sustained or the death of a person, and not also for liabilities which the driver may incur for damage to property.
Damage to 3rd party property is commonly covered as part of an insured's motor policy.
46
Aims of a draft policy on a no-fault system for the RAF
The requirement of proving fault generates significant additional administration and legal costs to the RAF.
A draft policy to change the RAF to a no-fault system was published for public comment in February 2010.
This will also enable the RAF to reduce long delays in the settlement of claims by not distinguishing benefits between various parties involved in an insured incident.
The implementation period of the no fault system of compensation is not final and will not be retrospective in its application.
47
RAF attends to claims under 5 headings
MEDICAL EXPENSES
- actual medical costs incurred from the date of the accident until settlement of the claim for accident-related injuries and costs of ongoing medical care or future medical interventions as the result of accident-related injuries.
LOSS OF INCOME and reduced earning capacity
LOSS OF SUPPORT suffered by dependants, in the case of death of a breadwinner.
FUNERAL EXPENSES
GENERAL DAMAGES
- the non-financial loss for pain, suffering, disfigurement and loss of amenities of life.
48
4 Areas of shortcomings in the current RAF compensation delivery system
- The RAF has been under-funded for many years
- Settlement costs are high (attorneys, advocates, medical doctors and service providers, accident investigators and actuaries)
- Settlement delays are long (18 to 36 months)
- Inconsistent and illogical claims settlement.
49
Funding of the RAF
The RAF is mainly funded by a levy on fuel sold.
To assist with computation, the levy is expressed at a rate per litre of fuel sold.
Additional income is generated from investments on assets held by the RAF.
50
10 Key changes of the RAF Amendment Act
Effective as of 1 August 2008:
- to remove the limitation of the liability of the Fund in respect of the claims of passengers
- to make the payment of compensation in respect of prospective costs and losses obligatory
- to facilitate payment by instalments in respect of prospective loss of income or support claims
- to provide for the payments of compensation directly to the entitled recipients
- to proscribe the right of medical suppliers to claim directly from the fund
- to provide for the application of managed health-care to claims
- to introduce deductibles to prevent double compensation
- to limit the liability for loss of income/earnings and loss of support claims to an amount of R160 000 per annum (limit increased quarterly to allow for inflation)
- to exclude liability in terms of psychiatric injury arising from observing the injury or death of a victim of a road accident (general damages)
- to provide for resolution procedures
51
draft Road Accident Benefit Scheme (RABS) bill
February 2013 draft RABS Bill on proposed changes to the RAF legislation was released.
In May 2014, a revised draft bill was released.
The RABS aims to replace the third party compensation system currently administered by the RAF with a new scheme that is reasonable, equitable, affordable and sustainable in the long term.
52
Proposed RABS system
a new no-fault benefit system - which will absolve the affected driver from civil liability.
The RABS will provide DEFINED BENEFITS to eligible victims on a NO-FAULT BASIS, with no penalties for the injured person's own negligence which might have contributed to, or caused the accident.
53
4 categories of benefits under RABS provision
HEALTHCARE services reasonably required for the treatment, care and rehabilitation of an injured person
INCOME SUPPORT for an injured person
FAMILY SUPPORT for the dependants of a deceased breadwinner, based on pre-accident income.
FUNERAL EXPENSES of a deceased person, capped at R10 000.
54
conditions of Income support under RABS
- may be temporary or long-term
- for South African residents only
- subject to prescribed thresholds (currently R200 000 p.a.)
- only 75% of a 100% disabled victim's income being paid.
55
4 Conditions of RABS provision
- No payments will be made for compensation for general damages, such as pain and suffering, loss of amenities of life or disfigurement.
- Payments will be made directly to medical service providers and beneficiaries. The process will be designed to be simple and accessible, and it is expected that claimants would be able to administer their claims themselves WITHOUT THE HELP OF AN ATTORNEY.
- The RABS would be able, from time to time, to review, revise and terminate the claimant's benefits by reviewing the victim's medical assessments.
- Personal or private occupational insurance will be encouraged because it could supplement the limited benefits provided by the RABS.
56
AMA medical disability rating scale classes (5)
CLASS 1
- no impairment
- 0% rating
CLASS 2
- mild impairment
- 10% - 20% rating
CLASS 3
- moderate impairment
- 25% - 50% rating
CLASS 4
- marked impairment
- 55% - 75% rating
CLASS 5
- extreme impairment
- 75% + rating
57
8 Types of insurers active in the London Market
- Lloyd's syndicates
- a large number of UK subsidiaries or branches of overseas insurance companies
- a large number of UK subsidiaries or branches of overseas reinsurance companies
- the "home foreign" or reinsurance departments of UK composite companies, or reinsurance subsidiaries of such companies
- small professional reinsurance companies set up by large broking firms for the specific purpose of transacting London market business
- captive companies owned by UK or overseas industrial or commercial companies
- P&I clubs and other mutuals
- pools, or companies owned by a group of insurance or reinsurance companies.
58
Insurance business is obtained through 3 channels:
INTERMEDIARIES
- brokers
- banks
- underwriting managers
STAFF DIRECTLY EMPLOYED by the insurance provider
TELESALES, internet, post, off-the-page
59
Underwriting Management Agency (UMA)
An INTERMEDIARY as per Section 48(2) of the Short-term Insurance Act (STIA).
It differs from an insurance broker:
- authorised agent of a particular insurer or insurers
- remunerated in a form OTHER THAN COMMISSION.
Typically a UMA is an expert or specialist in their product or field.
Their staff, systems and distribution channel are tailor made to manage, pay claims and distribute their specific product.
60
How does an insurer incentivise an UMA?
Administration fee and in some cases a share of the profit.
An insurer cannot pass underwriting losses to the UMA, but can carry forward the losses in future year's profit calculations.
```
The profit is typically calculated as:
net premium
- UMA's fees
- claims
- reserves
- a licence fee
- expenses
```
61
How might a UMA act outside of its mandate?
For example, a UMA might accept risk outside the agreed limits or the reinsurance arrangement,
or it might pay claims outside the agreement.
62
How would an insurer mitigate the risk of a UMA acting outside its mandate?
- profit share incentive
- close involvement in the running of the business
- requiring the UMA to take out Professional Indemnity Insurance (with "Breach of Mandate" covered under the policy)
63
6 duties of a UMA
- Package insurance products with the assistance of an insurance company or package insurance products on the terms and conditions set by an insurer.
- Underwrite risks and accept or decline business on behalf of insurance companies.
- Issue policies.
- Receive and accept applications from brokers.
- If it has obtained an Intermediaries Guarantee Facility (IGF), then it can collect premiums on the underwriter's behalf, it will then deduct its fee from the client's premium before paying the balance over to the insurer. If no IGF is in place, then the client pays the premiums directly to the insurer. The insurer then pays the UMA an administration fee.
- Manage and pay claims.
64
Binder agreement
An outsourcing agreement between an insurer and a third party (typically a broker, administrator or underwriter).
Upon the conclusion of a binder agreement of an insurer mandates a third party (or binder holder) to perform certain functions for and on its behalf.
65
5 Activities that constitute binder functions
- Enter into, vary or renew a policy (other than a reinsurance policy).
- Determine the wording of a policy.
- Determine premiums under a policy.
- Determine the value of policy benefits.
- Settle claims under a policy.
66
Binder regulations
govern the manner in which insurers outsource binder functions.
The regulations specify who may be a binder holder as well as what such a person may and may not do.
E.g.
- a binder holder may not further delegate binder functions
- fees have to be commensurate with the actual costs incurred by the binder holder in fulfilling its function, with a reasonable rate of return.
- fees cannot be linked to profits
- a binder holder cannot hold a general mandate to act on its client's behalf.
67
Reinsurance broker
Provide technical expertise, modelling capacity and knowledge of the reinsurance market to the insurer.
For the majority of reinsurance programmes, brokers continue to be remunerated through reinsurance commission paid by the reinsurer.
In some cases insurers with large existing reinsurance programs follow a tender process and contractually agree the remuneration with the successful broker in advance of placement.
68
Slip system
Co-insurance in the London Market has traditionally been arranged using the slip system.
This is a face-to-face approach under which proposed risks are described by a broker on a standard form (known as a "slip").
Terms and the premium rate are added after negotiation with a lead underwriter (who also signs for a certain proportion of the risk), before the slip is circulated by the broker among other underwriters who sign the slip to confirm the proportion of risk that they will accept.
The broker will aim to over-place the risk - to receive offers for more than 100% of the risk.
If this happens, then in agreement with the insured, the shares of the underwriters are reduced so that they total 100%.
69
The South African Insurance Association (SAIA)
Represents the industry at all levels and with all stakeholders, to ensure a sustainable and dynamic short-term insurance industry for the benefit of all South Africans.
The SAIA represents almost all of the short-term insurance companies and is authorised to negotiate on their behalf. It has the majority of South African insurers as members, with a chairman and vice-chairman elected from its Board, which governs the Association.
Members abide by the SAIA Code of Conduct.
Members participate in the Office of the Ombudsman and contribute to the costs thereof.
70
The SAIA's 5 key priority areas
- transformation and social risks
- governance risks
- insurance risks
- operations
- stakeholder relations
71
8 core functions of the SAIA
representation of its members' interests to:
- THE PUBLIC
- GOVERNMENT
- other relevant bodies
- THE MEDIA
- a DISCUSSION FORUM for the common interests in the short-term insurance industry
- the facilitation of INFORMATION FLOW among its members
- interaction with all associations operating within the insurance industry, both locally and abroad
- interaction with all relevant organisations and entities especially in the key priority areas
- the setting of APPROPRIATE TECHNICAL STANDARDS for the industry
72
2 partners of SAIA
- the Association of Marine Underwriters in South Africa (AMUSA)
- the South African Machinery Insurance Association (SAMIA)
73
The SAIA administers: (2)
- the South African Pool for the Insurance of Nuclear Risks
| - the Intermediaries Guarantee Facility Limited (IGF)
74
Institute of Risk Management South Africa
| IRMSA
IRMSA is a non-profit institute which was established in September 2003 following a merger of The Society of Risk Managers and The South African Risk and Insurance Association.
IRMSA has 400 individual members and 65 corporate members all involved in the risk management discipline in various ways.
75
7 Key objectives of IRMSA
- to promote the common interests of persons carrying on the risk management profession
- to advance the theory and practice of risk management
- to provide a forum for discussion on subjects of interests to persons engaged in enterprise risk management
- to preserve the independence of members of the risk management profession
- to insist upon a high standard of professional behaviour on the part of members and to preserve and maintain the integrity and status of the risk management profession
- to consider and pass comment on actual or impending legislation which impacts on the activities of the profession and to apply for, petition for or promote any legislation desirable for the betterment or enhancement of the profession of risk management
- to provide for research into risk management matters and to provide members with information on developments in professional though and methods.
76
South African Special Risks Insurance Association (Sasria)
Government owned company that is the only insurer in SA allowed to cover certain types of perils (e.g. riots, terrorism, strikes, labour disturbances).
Conventional insurers sell policies, collect premiums and provide administration on behalf of Sasria.
A basic precondition for Sasria is that an underlying fire policy covering the conventional Insurance risks (non-motor) must be in place.
Sasria cover cannot be refused or cancelled.
77
Captives
Captives are insurance companies that are set up with the primary purpose of providing insurance to a parent company.
