Chapter 2: Taxation & Supervision Flashcards
What type of profit are short-term insurers taxed on?
What does this profit consist of? [2]
Operating profit
Operating profit consists of underwriting profit and investment income
What do underwriting profits consist of? [6]
+ Premium income
- Reinsurance premium
- Claims incurred
+ Claim recoveries
- Expenses incurred (as per Income Tax Act)
+ Change in reserves
The change in reserves item only considers a subset of the reserves for tax purposes. Which reserves are allowed for? [3]
- IBNR
- Outstanding reported claims + IBNER
- UPR
URR, AURR and other reserves not allowed
What is investment income comprised of and how is it taxed? [3]
- Interest (taxed at income rate, 27%)
- Capital gains (effective tax is 22.4% for companies)
- Dividends tax (20% withholding tax)
Operating profit and taxable income may differ. What are the possible reasons for this? [6]
- Determination of technical reserves
- Dividend income
- Disallowed expenditure or exempt income in terms of the Income Tax Act
- Assessed tax losses (previous losses incurred by the company and allowed as set-off against future profits by the South African Revenue Services)
- Unrealised gains or losses on assets due to fair value accounting adjustments
- Any IFRS adjustments included in operating income or expenses
How does VAT impact a short-term insurer?
Short-term insurance is a vatable supply and as such premium received, ri & commission payments/receipts from SA sources are subject to VAT.
A portion (15/115) of claim payments can be deducted for input tax
What are the contents by section in the Insurance Act (2017)?
[11]
The sections are as follows:
- 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
What are the 4 things that must be known from the Insurance Act for the exam?
- The powers, duties and obligations of the Head of the Actuarial Function.
- The requirements that the insurer must be financially sound
- The limitation on the amount of dividend that may be paid by an insurance company
- The returns to be submitted
Requirements that an insurer must be financially sound?
- Insurers must maintain financial stability by holding funds equal to the greater of the minimum capital or solvency capital requirements.
- Controlling companies must similarly ensure their insurance group’s financial stability by meeting group solvency capital requirements.
- Both insurers and controlling companies need systems to detect financial risks.
- In case of failures in holding or investing assets, or in addressing liabilities as prescribed, immediate notification to the Prudential Authority is mandatory, along with reasons and corrective measures. The Prudential Authority can then take appropriate actions.
- Immediate notification to the Prudential Authority is also required if insurers or controlling companies foresee potential failures in meeting their respective capital requirements within three months
How can the PA ensure the value used for financial soundness is appropriate?
If the Prudential Authority doubts the financial soundness value reported by an insurer or controlling company:
- They may direct the entity to appoint an approved expert to determine a reasonable value at the entity’s cost
- They can specify how the value should be recalculated.
If the Prudential Authority questions the methodologies or models an insurer or controlling company uses for its financial soundness, they can direct the entity to have an independent review done by an approved individual, again at the entity’s cost.
The Prudential Authority has the authority to instruct insurers, controlling companies, or their key personnel to modify or improve their financial soundness methodologies or models.
Achieved through the FSIs and GOIs
The PA can require an insurer to hold additional capital over the prescribed amount. Why would this be done and how it apply?
The regulator has the authority to mandate insurers to maintain extra capital beyond what’s prescribed by the Prudential Standards. This can be done under the following conditions:
- If the risk profile of the insurer or insurance group significantly differs from the assumptions used in the solvency capital requirement calculations.
- If the governance framework of an insurer or its controlling company considerably deviates from the Act’s requirements.
For the first scenario, the additional capital must ensure that the solvency capital requirement aligns with the initial assumptions of the solvency capital requirement. For the second scenario, the additional capital should represent the significance of the deviation from the Act’s governance requirements.
If an insurer’s minimum capital surpasses its solvency capital requirement, the regulator can apply the extra capital to the insurer’s minimum capital requirement.
The regulator must review any imposed extra capital annually and can remove it once the insurer or controlling company addresses the issues that caused its imposition.
Limitation on the amount of dividend that may be paid by an insurance company?
The limitation placed on divided is based on the requirement of maintaining financial soundness.
Insurers are prohibited from:
- Declaring or disbursing a dividend if they fail or likely to fail the financially sound condition requirements
- Taking such actions would result in failing or likely to fail the financially sound condition requirements
What should a governance framework do and what can the PA subscribe?
Insurers and controlling companies must establish a governance framework that:
- Ensures prudent management and oversight of their respective businesses.
- Adequately protects the interests of policyholders.
This governance framework should:
- Be tailored to the specific scale, nature, and risk of the insurance business.
- Contain effective corporate governance, risk management, and internal controls.
- Address and incorporate prescribed matters.
The Prudential Authority can set governance standards concerning:
- Commitment fulfillment as stated in specific sections and schedules.
- Board composition, governance, roles, responsibilities, duties, and structure.
- Risk management, including the establishment of a system, strategy, policy, and solvency assessments.
- Internal controls and the related systems.
- Control functions, including requirements, roles, and responsibilities.
- Outsourcing policies, compliance, and restrictions. This encompasses rules for contracts, non-permissible outsourcing, required notifications, and limitations on sub-outsourcing.
What is the purpose of the SCR? [4]
- Reducing the risk that an insurer will be unable to meet claims
- Reducing the losses that policyholders will incur in the event that an insurer is unable to fully meet all claims
- Providing supervisors with early warning of impending problems so they will be able to intervene promptly if capital falls below the required level
- Promoting confidence in the financial stability of the insurance sector.
What is a factor based capital regime?
What are the advantages and disadvantages of this approach?
Applies factors to accounting positions in order to arrive at the amount of capital required. It is usually determined as a proportion of the business written
based either on premiums received, claims incurred or reserves brought forward.
Advantanges
+ It takes into account each company’s individual experience
+ It is simple to administer
Disadvantages
- It penalises companies that hold adequate reserves and/or those that charge adequate
premiums compared with those that do not
- It does not distinguish between companies that write similar volumes but different
mixes of business
- It does not distinguish, other than in a broad way, between high risk and low risk companies
- It can be significantly circumvented by reinsuring outstanding claims portfolios.
