The Solvency Assessment and Management (SAM) regime currently overseen by the Financial Services Board (FSB) promises to bring the insurance sector a wide array of potential benefits. Rising industry confidence, increased professionalism in risk management and greater capital efficiency are all reasons many welcome the initiative. The scheme also brings challenges, including greater compliance burdens at a time when insurers face a raft of regulatory changes. However, market imperatives at both the domestic and international level make SAM inevitable. The coming three years will see the industry’s focus on its final implementation gradually sharpen.
DRIVERS FOR CHANGE: Some of the impetus behind SAM derives from recognition within South Africa that current regulations do not adequately account for risk exposures or management practices. To many in the industry, certain market techniques, such as paying commissions upfront or pricing some insurance products according to a sales strategy, do not sit well in an environment where underlying business logic has traditionally been appropriate risk adjustment.
Much of the reform impulse comes from abroad, arising from South Africa’s history of staying abreast of global regulatory changes and its position in the international economic system. In 1999 it was admitted into the G20, and in 2009 was granted a seat on the global Financial Stability Board. While South Africa’s place in the international economy is bringing challenging reforms to its banking sector (in the form of Basel III), it is also bringing changes to the insurance sector, albeit on a voluntary basis.
In this respect, the key change drivers are guidance from the International Association of Insurance Supervisors (IAIS), of which the FSB is a member, and the Solvency II Directive regulatory movement, which has dominated the European insurance sector for many years. A replacement for Solvency I’s more formulaic approach, the risk-based Solvency II model, from which SAM is largely derived, is being emulated in jurisdictions across the globe. SAM’s implementation, therefore, is designed to maintain South Africa’s alignment with international best practice.
A GOOD FIT: An interesting anomaly lies at the heart of South Africa’s ongoing regulatory reform efforts. Despite being part of the rapidly developing Brazil, Russia, India, China and South Africa (BRICS) economic bloc, and sharing a number of the economic commonalties that underpin the BRICS semi-formal alliance, South Africa looks to the developed European market for inspiration in its regulatory approach. “We are the only African country that is a member of the G20,” Barry Scott, the CEO of the South African Insurance Association (SAIA), told OBG. “We are therefore importing first-world regulatory standards into an emerging economy, and it’s being done at a very rapid rate.”
Both the scope and timeframe of the SAM regulations represent major industry challenges. While Europe has been working towards the January 2014 full implementation of its Solvency II regime for nearly a decade, South Africa has set a target date for the implementation of SAM for only one year later, despite having embarked on the process just over two years ago. The 2010 biannual PwC survey of the local insurance industry placed regulation as the top concern of the 30 insurers within its coverage. While the National Credit Act was the primary concern in 2008, SAM implementation is now coming into focus as a major industry preoccupation. In an effort to allay industry fears and ensure a smooth implementation of new regulations, the FSB has established a SAM governance structure emphasising consultation. A primary steering committee sits over three sub-committees, each covering one of the three pillars which form the regulations’ structure. Beneath the committee level, a number of task groups are responsible for the detail of SAM regulations, from capital requirements and internal models to corporate governance and reporting. An economic impact sub-committee reporting to the Steering Committee will focus on the wider implications of SAM and a Tax Task Group also reporting directly to the Steering Committee has been put in place to consider tax issues.
The FSB has also taken steps to ensure the insurance industry is well represented among stakeholders participating in the SAM forum structures: “We included the smaller short- and long-term insurers in the process, not just the large ones,” Jo-Ann Ferreira, a member of the FSB’s regulatory framework division, told OBG. Other stakeholders include SAIA, the Association for Savings and Investment (ASISA), the Actuarial Society of South Africa, the National Treasury, the South African Institute of Chartered Accountants, the South Africa Revenue Service and the Independent Regulatory Board for Auditors. The consultation process for stakeholders involves documents being drafted at the working group level, and passed to the steering sub-committee of the relevant pillar and to the primary steering committee, before being released as a position paper. By the end of 2011, the SAM implementation process had generated some 85 position papers, 31 of which were released for comment.
CHALLENGES: Both insurers and their representatives, SAIA and, feel the strain of keeping pace with the SAM process. “While consultation is thorough, the fact that legislation is implemented in batches in a staggered approach makes alignment difficult,” Suzette Strydom, the general manager (technical) at SAIA told OBG. The effects of SAM are being felt ahead of implementation since the current regulatory regime does not comply with all the requirements listed in the Insurance Core Principles of the IAIS.
“For this reason, as a stepping stone prior to full implementation, the FSB is introducing several interim measures,” said Nico Esterhuizen, programme manager for SAM implementation at SAIA. The interim measures, which will be fast-tracked through an insurance bill amendment in 2012, underwent the consultative process in 2011. They include a revised approach in calculating provisions and capital requirements to a more risk-based approach for short-term insurers; an enhancement of requirements for governance, internal control and risk management; and legislation for more insurance group supervision. The latter innovation improves on the previous regime, in which the FSB’s ability to assess contagion risk was hindered because it was restricted to supervising group companies as individual entities only.
Interim SAM-related regulations also come in the form of subordinate legislative measures which, though causing less industry debate, carry procedural implications. For example, on January 1, 2012 a board notice enacted a change in which the valuation of assets and liabilities for the short-term segment were aligned with those of the long term.
IMMEDIATE IMPLICATIONS: The changes to capital adequacy rules, risk management, governance structures and reporting requirements introduced in 2012 are a preview of what will come with SAM’s full implementation in 2015. The industry is acutely aware of this; participants in PwC’s most recent insurance industry survey indicated that the transition to meet SAM requirements would trigger major shifts in the sector. “SAM is a noble and important regulatory tool to protect our industry,” Randolph Moses, the managing director of Hannover Re (South Africa), told OBG. “Although companies are trying to close the gap in terms of limited actuarial resources with appropriate skills, this remains a challenge for the industry.” The regulatory burden is also expected to be costly, which might cause consolidation as smaller players may lack the resources to handle those costs.
CAPITAL REQUIREMENTS: While long-term insurers are expected to find implementation less challenging due to their closer affinity to the risk-based approach SAM introduces, both sides of the industry will incur monetary and resource costs as the deadline approaches. In the meantime, insurers are already being faced with SAM-related strategic decisions. Regarding capital requirements, a prominent issue, companies have three windows of opportunity before 2015 in which they can choose between calculating capital requirements according to their own internal model or according to a standard model prescribed by the FSB. The 2011 window, which saw the FSB launch its Internal Model Approval Process (IMAP), resulted in only 10 companies of an industry total of around 200 opting to use their own models, probably due to the extra work and costs involved with proprietary modelling, according to Esterhuizen.
Clarity concerning SAM’s final implementation will come in the short term. According to the FSB’s roadmap, the first half of 2012 will see the creation of drafts of the primary legislation and the first draft of secondary legislation. Stakeholders will have time to make their voices heard on both the draft and the subordinate supplemental legislation before the final implementation date. Both the SAM-related interim measures and the ongoing process surrounding its implementation will be occupying minds in South Africa’s insurance industry for the foreseeable future.
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