Lists

Question 1

Reasons for monitoring ongoing solvency

Answer 1

1. The company would want to be confident of their solvency as a going concern into the future.
2. To perform cost of capital calculations.
3. To assess available capital to fund growth through:
   a. new business;
   b. acquiring other companies or blocks of business.
4. To satisfy (and report on) the regulatory capital requirements as set out in the Insurance Act (2017) and the associated prudential standards.
5. To demonstrate their financial soundness / strength to the public at large, including current and future policyholders and investors.
6. Companies that write with-profits business would want to ensure that their solvency position allows them to:
   a. support the with-profits bonuses and its smoothing;
   b. understand if they are at risk of not meeting their policyholders’ reasonable benefit expectations.
7. To assess their ability to:
   a. support a riskier investment strategy;
   b. weather periods of adverse experience;
   c. fund overheads and developmental costs.
8. To check whether any cost of capital incorporated into benefit pricing is still sufficient.

Question 2

Reasons life insurers need capital

Answer 2

1. Satisfying solvency valuation requirements
2. Providing protection against adverse experience
3. Supporting a riskier investment strategy
4. Funding new business
5. Acquiring other companies and or blocks of business
6. Supporting with-profits bonuses and their smoothing
7. Funding overheads and developmental costs such as upgrading and or purchasing computer hardware and software, product development, refurbishment and or building head office and branch premises, and regional and international expansion initiatives
8. Providing day to day working capital

Question 3

Reasons for analysing surplus

Answer 3

1. The analysis may assist in the distribution of surplus by identifying items of surplus that are unlikely to recur.
2. Various elements of the process can provide powerful checks on the valuation data and results, including the checking of items of surplus for reasonability as well as various consistency checks.
3. The trends in the items of surplus may give useful information on trends in the experience of the company.
4. To analyse the effect of policy alterations.
5. New items identified in the analysis may be used to inform the risk identification process.
6. To show the financial effect of divergences between actual experience and assumed in the valuation basis (also financial effect of writing new business).
7. It is required as part of the statutory returns.
8. To assist in setting future assumptions.
9. To assist in decisions such as derisking the balance sheet to protect solvency levels.

Question 4

Common sources of surplus

Answer 4

1. Change in valuation assumptions
2. Expected profit margin on group products (IFRS only)
3. New business
4. Exercise of options and guarantees
5. Changes in maturity guarantee reserves
6. Release of compulsory or discretionary margins (IFRS only)
7. Other policy alterations / changes
8. Release of risk margin (prudential supervision reporting basis only)
9. Actual vs expected:
   a. Mortality
   b. Other risk benefits (e.g. retrenchment)
   c. Charges under unit-linked and unitised with-profits contracts
   d. Sickness/morbidity/disability
   e. Expenses
   f. Withdrawals
   g. Investment return
   h. Tax

Question 5

Reasons to analyse change in shareholders’ interest in the company

Answer 5

1. Improve management’s understanding of the business
2. Assist in the revision of assumptions by comparing actual experience against expected
3. Assist in the calculation of management incentive schemes
4. APN 107 requires change from previous to current calculation date to be disclosed and split into ANW, PVIF and CoRC.
5. Assist in checking the calculation of the EV
6. Identify the individual sources of EV profit and loss, and so indicate areas where management action may be desirable or required
7. Provide management with the value of the new business written in the year
8. Provide investment analysts with a realistic picture of true underlying sources of additional value creation
9. Identify unprofitable contracts so that they can be redesigned, re-priced or cancelled

Question 6

Components of EV earnings

Answer 6

1. Embedded value operating return
   a. VNB at point of sale
   i. Adj end of period non-economic assumptions
   b. Expected return on covered business
   c. Expected profit transfer
   d. Operating experience variances (relative to opening assumptions)
   e. Operating assumption and model changes
   f. Extraordinary non-recurring expenses / development costs
   g. Expected return on ANW
   h. Change in minority interest
2. Investment return variances on in-force covered business
3. Investment return variances on ANW
4. Effect of foreign currency movements
5. Effect of economic assumption changes
6. Effect of tax changes
7. Exceptional items (Dividends accrued or paid, share capital raised, etc.)

Question 7

Key principles underlying the framework for financial soundness

Answer 7

1. The risk tolerance of the PA that informs the regulatory minimum financial soundness requirements should be defined in terms of insurers being able to maintain regulatory solvency in the face of a range of adverse scenarios.
2. Insurers must hold own funds of sufficient quality and quantity to absorb significant unforeseen losses arising from the risks associated with an insurer’s activities.
3. In determining eligible own funds, both assets and liabilities must be valued on a basis consistent with the market-based methodologies, unless otherwise specified.
4. The level of capital required for regulatory purposes should address the risk areas to which insurers are exposed and should be proportionate to the nature, scale and complexity of the business involved.
5. The level of capital required for regulatory purposes should take reasonable account of correlations between risks, including the benefits of diversification.
6. The regulatory approach to determining eligible own funds and measuring the required level of capital for financial soundness should be risk-based and forward-looking.
7. The financial soundness framework should include trigger levels of eligible own funds relative to the required capital, below which regulatory intervention will occur.

Question 8

Applicable Professional Guidance

Answer 8

1. SAP 104: Calculation of the value of assets, liabilities and SCR for long-term insurers
2. APN 105: Minimum requirements for deriving AIDS extra mortality rates
3. APN 106/403: HAF for South African Insurers
4. APN 107: Embedded value reporting
5. APN 108: Transfer of long-term business of a registered insurer: role of the independent actuary
6. APN 109: Life insurance company takeovers
7. APN 110: Allowance for embedded investment derivatives
8. APN 111: HAF for South African insurance groups
9. APN 112: IFRS 17 Insurance Contracts
10. APN 113: Estimating future expense cash flow for TPs and/or SCR
11. APN 901: General Actuarial Practice
12. APN 904: Market Conduct and TCF

Question 9

Factors to consider when determining whether a particular contract design is suitable

Answer 9

1. Data - does the company have the necessary data to price and reserve.
2. Lapse and re-entry risk, for changes made to existing products
3. Regulatory and industry requirements - the product design should reflect the current regulatory (including taxation) and industry requirements.
4. Marketability - is it likely to be attractive to potential policyholders & intermediaries? It should meet the real and perceived needs of both target markets, at a cost comparable to other companies.
5. Financing - The risks involved (in particular guarantees and options) must be acceptable to shareholders or policyholders providing capital. In particular they must not subject the life office to a significant risk of insolvency.
6. Administration - the life offices systems must be able to cater for all of the specific product features. Can it handle the proposed design? Costs associated with any underwriting, claims and admin system changes.
7. The company’s reputation - the life office should also consider the potential reputation risks associated with the proposed product design. The company’s underwriting and claims philosophy will influence this risk and should be considered in the product design.
8. The Treating Customers Fairly (TCF) initiative in particular has significant implications for product design and pricing.
9. Need for training of operational staff and sales staff.
10. Reinsurance - if reinsurance is required, reinsurance terms and capacity will be important factors to consider.
11. Distribution method - for example, if the product is to be marketed through intermediaries, then it will be important to take commission regulations into account. For products sold directly to end consumers, simplified design may be the key requirement.
12. Profitability - The expected profitability of the product should yield a return on investment greater than the life office’s hurdle rate, after allowing for the risk-adjusted cost of capital. Profit testing should also highlight the sensitivity of profit to various levels of sales, surrenders and mortality experience. The sensitivity of profit may also be a factor that needs to be considered.

Question 10

Principles of determining surrender values

Answer 10

1. Take into account policyholders’ reasonable benefit expectations (RBEs) and particularly:
   a. Should be consistent with any illustrative values provided to policyholders
   b. At early durations, not appear too low compared with premiums paid, bearing in mind any projections given in market materials
   c. At later durations, be consistent with projected maturity values
2. Take into account Regulation 5 on early termination values, which forms part of the Long-Term Insurance Act and which applies to investment business.
3. Should not be excessively complicated to calculate, considering the company’s administrative capability.
4. Are based on smoothed earned asset shares, taking into account the company’s philosophy with regard to maturing contracts.
5. Take account of surrender values offered by competitors.
6. Take into account accrued and future profits from the surrendering policy. Note that any profits at surrender will be measured by the different between earned asset share and surrender value paid.
7. Should not be subject to frequent changes, unless necessitated by financial conditions.
8. Do not exceed earned asset shares, in aggregate over a reasonable time period.
9. Allow for the cost of effecting the surrender.
10. Are capable of being documented and explained to policyholders clearly.

Question 11

Principles of determining alteration values

Answer 11

1. Conversion to paid-up status
   a. Consistent with projected maturity values, at later durations, allowing for the premiums not received
   b. Supported by the earned asset share at the date of conversion on the basis of expected future experience
   c. Consistent with surrender values, i.e. the surrender values before and after conversion should be approximately equal.
2. Other alterations
   a. As with surrenders, most of the problems that arise with alterations derive from inconsistencies between future values and projected earned asset share.
   b. Some alterations are similar to other alterations, or to not altering the policy at all, or to taking out a new policy.
   c. These latter alterations, or “similar” alterations, are sometimes referred to as “boundary conditions”.
   d. Boundary conditions are a useful way of testing one’s proposals on how to alter a policy.
   i. Surrendering can be viewed as the limiting case of a reduction in policy term
   ii. A conversion to paid-up status can be viewed as the limiting case of a reduction in future premiums.
   iii. If the benefits are to be increased, this should be on terms consistent with the additional premium that would be charged for a new policy, with a sum assured equal to the proposed increase.
   iv. If the term is to be extended, the terms should reflect the current premium basis as far as the period of extension is concerned.
   e. Given this, there should be consistency between the terms offered for an alteration and those for another similar alteration.
   f. Consistency should also be achieved with other alterations that would achieve the same result for the policyholder.
   g. Any methods adopted should be stable in that small changes in benefits should result in small changes in premium, if expenses of alteration are ignored, in other words, an alteration method should ideally reproduce the existing terms if a policy is altered to itself.
   h. The terms offered after alteration should avoid encouraging lapse and re-entry.
   i. The terms after alteration should be supportable by the earned asset share at the date of alteration.

Question 12

Reasons to seek reinsurance

Answer 12

1. Reduce claim pay out fluctuations
2. Reduce new business strain and increase capacity to write more business
3. Receive technical assistance
4. Improve its capital and solvency position

Question 13

Factors affecting the choice of method of reinsurance

Answer 13

1. The choice of method of reinsurance will largely depend on:
   a. The needs of the ceding company
   b. The reinsurance cost
   c. The technical expertise offered by the reinsurer (for example, product design advice, underwriting support)
   d. The type of business
   e. The maturity of business
   f. The legal and tax conditions applying
   g. The forms of reinsurance coverage available
2. Reduce new business strain directly by means of original terms reinsurance or risk premium reinsurance with a financing commission arrangement.
3. Most companies would have some form of catastrophe reinsurance especially for group risk. Credit risk of reinsurer particularly important.

Question 14

Factor affecting the choice of reinsurance retention limit

Answer 14

1. The company’s retention on its other products
2. The nature of any future increases in sum assured, or the addition of disability (including income) or sickness benefits
3. The level of the company’s free assets and the importance attached to stability of its profits and free asset ratio
4. The terms on which reinsurance can be obtained and the dependence of such terms on the retention limit
5. The level of familiarity of the company with underwriting the type of business involved
6. The average benefit level for the product and the expected distribution of the benefit
7. The effect of the regulatory and internal capital requirements on increasing or reducing the retention limit
8. The existence of a profit-sharing arrangement in the reinsurance treaty

Question 15

Underwriting cost-benefit analysis factors

Answer 15

1. The more detailed the underwriting, the greater the homogenisation of risk that may be achieved.
2. The interaction between the level of underwriting and the potential level of sales - the lower the level of underwriting, the lower the administration expenses but the higher the risk charge.
3. The levels at which competitors underwrite.
4. The extent, and in particular the financial significance, of any potential anti-selection risk.
5. Claims underwriting may deter people from taking up a contract, due to the uncertainty as to whether a claim may be accepted.
6. The effectiveness of the proposed underwriting - benefit exclusions may be difficult to police, or limiting medical evidence may make it difficult for staff to underwrite effectively.
7. The interaction between underwriting level and terms offered by the company’s reinsurers.
8. The effect of the Constitution and the Employment Equity Act on group policies in particular.
9. The expenses associated with the level of underwriting proposed.

Question 16

Elements of operational risk

Answer 16

• Mis-pricing
• Administrative errors
• Product mis-selling
• Data issues
• IT failures & business interruption
• Poor standards of policy service, which can lead to reducing new business
• Staff retention & non-compliance with employment laws

Question 17

Risks in life insurance

Answer 17

• Cross-subsidisation risk
• Lapse / Early termination risk
• Anti-selection risk
• Mortality and morbidity risk
• Medical advances risk
• Expense risk
• Risk of impact of economic cycle on disability
• Selective withdrawals risk
  _
• Pricing risk
• Legal risk
• Aggregation and concentration risks
• Tax risk
• Fraud risk
• Operational risk
• Reputational risk
• Market risk
  _
• Definition and underwriting risk
• Profit share risk
  _
• Moral hazard risk
• New business risk
• Reinsurance risk
• Regulatory risk
• Risks related to options and guarantees

Question 18

Objectives of the Micro-insurance framework in SA

Answer 18

• Enhance consumer protection within this market segment through appropriate prudential regulation and improved enforcement of compliance.
• Lower barriers to entry, which should encourage broader participation in the market and promote competition among insurers. This would further support poverty alleviation through economic growth and job creation, as well as provide increased access to protection against losses.
• Facilitate the formalisation of currently informal providers, and in the process promote the formation of regulated and well-capitalised insurers, as well as small business development.
• Facilitate effective supervision and enforcement, thereby supporting the integrity of the insurance market as a whole.

Question 19

Key risks related to micro-insurance

Answer 19

• Volume and expense risk
• Persistency risk
• Underwriting risk (claim and severity)
• Operational risk (fraud)
• Operational risk (non-fraud)
• Market conduct and value for money risk

Question 20

Main marketing channels

Answer 20

• Brokers
• Bancassurance
• Agents (Company agents)
• Direct Response Marketing
• Digital

Question 21

Classification of life insurance business for tax purposes

Answer 21

• Risk policy fund: All policies sold after 1 Jan 2016 which fall under the definition of a risk policy will be included in this fund, regardless of the owner of the policy, and assets having a market value equal to the value of liabilities of these policies will represent this fund.
• Untaxed policyholder fund: Fund is represented by assets having a market value equal to the value of liabilities of:
• Any policy not included in the risk policy fund that is owned by any pension, provident, retirement annuity, preservation funds or benefit fund.
• Any policy not included in the risk policy fund whose owner is exempt from tax.
• Any annuity contracts in respect of which annuities are being paid.
• Individual policyholder fund: Represented by assets having a market value equal to the value of liabilities of any policy not included in the risk policy fund nor untaxed policyholder fund, where the owner is any person other than a company.
• Company policyholder fund: Represented by assets having a market value equal to the value of liabilities of any policy not included in the risk policy fund nor the untaxed policyholder fund, where the owner is a company.
• Corporate fund: Represented by the assets (if any) held by the insurer other than those contemplated in the other four funds.

Question 22

TCF outcomes

Answer 22

• Customers are confident that they are dealing with firms where the fair treatment of customers is central to the firm’s culture.
• Customers do not face unreasonable post-sale barriers to change products, switch provider, submit a claim, or make a complaint.
• Customers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
• Customers are given clear information and are kept appropriately informed before, during and after the time of contacting.
• Products and services are designed to meet the needs of identified customer groups and are targeted accordingly.
• Where customers receive advice, the advice is suitable and takes account of their circumstances.

Question 23

Responsibilities of the actuarial function

Answer 23

• Express an opinion on the reliability and adequacy of the calculations of the insurer’s technical provisions, and minimum and solvency capital requirements incl:
• Methodologies, underlying models used and assumptions made
• Sufficiency and quality of data used
• Best estimates and associated assumptions against experience when evaluating technical provisions
• The accuracy of calculations
• Impact of assumed management actions and effect of risk mitigation instruments.
• Approximations and judgements used in the calculations due to insufficient data of appropriate quality
  _
• Express opinion on:
• Appropriateness of following policies
   Asset-liability Management Policy
   Underwriting Policy
   Reinsurance and Other Forms of Risk Transfer Policy
• Adequacy of reinsurance and other forms of risk transfer arrangements

Question 24

Requirements applicable to all control functions (actuarial, compliance, risk management, audit)

Answer 24

• 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 (HCFs) must be fit and proper
• Adequate policies and procedures relating to the appointment, dismissal and succession of HCFs; board of directors must be actively involved.
• Appointment, performance assessment, remuneration, disciplining and dismissal of a HCF (except 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.
• 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.
• Remuneration 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. Where this function is outsourced, the remuneration should be commensurate with the services provided.
• HCFs must have appropriate segregation of duties from operational business line responsibilities. The board of directors must ensure that the segregation is observed.
• HCFs must report regularly to the board of directors or relevant Committee
• HCFs 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. The head must also report immediately to the PA 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.

The HCFs must have:
* 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 systems or system of internal controls;
* the freedom to report to the board of directors or relevant Committee without fear of retaliation from senior management.

Question 25

Requirements of the Head of Actuarial Function

Answer 25

• Expressing an opinion to the board of directors regarding:
• the accuracy of the calculations and the appropriateness of the assumptions underlying:
  a) the valuation of the insurer’s technical provisions, and calculation of the insurer’s capital requirements.
  b) the capital requirements for market risk
  c) the capital requirement for life underwriting risk
  d) the approved internal model that is used to calculate the SCR
  e) the liquidity shortfall indicator
• the accuracy of the calculations underlying the MCR.
• the accuracy of the calculations to derive the SCR, including the appropriateness of the assumptions underlying the calculations.
• the valuation of insurance liabilities, and its impact on the overall financial soundness of the insurer.
• the calculation of the capital requirement for operational risk
• the soundness of the proposed action as far as the action relates to his or her functions as set out in GOI 3 (Risk Management and Internal Controls for Insurers)
• Must ensure that the effect of each eligible risk mitigation instrument on the SCR is materially reflective of the risk mitigating reduction that would be expected at a 99.5% confidence level.

Question 26

Factors to take into account in bonus declarations

Answer 26

• Insurance company balance sheet and solvency
• Bonus stabilisation reserve: Ideally, over time a fund could be maintained with a small positive BSR, in that way ensuring that it is financially sound, and that the bulk of the surplus has been distributed to policyholders.
• Free assets: higher level of free assets allows for more smoothing of benefits without endangering solvency.
• Returns on assets underlying the with-profits fund
• Investment strategy
• Competition
• Policyholders reasonable benefit expectations
• Allocation of profits between shareholders and policyholders