UPDATE ON PROGRESS WITH THE SOLVENCY ASSESSMENT AND MANAGEMENT (SAM) PROJECT

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1 Riverwalk Office Park Block B 41 Matroosberg Road Ashlea Gardens Extension 6 Pretoria South Africa 0081 PO Box Menlo Park Pretoria South Africa 0102 Tel Fax info@fsb.co.za Toll free / Website: ENQUIRIES: Jonathan Dixon D. DIALLING NO.: OUR REF: FAX: DATE: 12 July Jonathan.Dixon@fsb.co.za UPDATE ON PROGRESS WITH THE SOLVENCY ASSESSMENT AND MANAGEMENT (SAM) PROJECT Introduction This newsletter has been compiled by the SAM Communication Task Group to promote awareness amongst stakeholders of important developments in the SAM project as well as of progress made by the Financial Services Board (FSB) and the SAM Task Groups on key issues. FSB SAM 2013 Update On 27 March 2013 the FSB released the SAM 2013 Update. Following consultation with a range of key stakeholders on preparations for the implementation of SAM, the Update provides further clarity to the insurance industry on the SAM project and timelines. To ensure a smooth transition to the new SAM regime the decision has been made to extend the SAM implementation phase and defer full implementation of SAM to 1 January It is important to note that the key changes relate to the SAM implementation timelines, rather than the SAM development timelines. The FSB is of the view that a prudent timetable should be followed to ensure that both insurers and the supervisor achieve a smooth transition to the new framework. In order to facilitate a smooth transition to the new regime, the SAM parallel run will now be extended and will consist of two phases: A light phase whereby reporting will be largely based on the quantitative impact study templates, with simplified specifications in some areas. This part of the parallel run will be conducted during the second half of A comprehensive phase consisting of the completion of the full set of quantitative reporting templates along with a mock-orsa exercise, to be conducted throughout The FSB SAM 2013 Update addresses several timelines and topics in greater detail and provides a comprehensive motivation and explanation as to the rationale behind the new proposed changes. The FSB SAM 2013 Update has been published on the FSB s website ( Board Members: AM Sithole (Chairperson) H Wilton (Deputy Chairperson) Z Bassa JV Mogadime Prof PJ Sutherland FE Groepe D Turpin HMH Ratshefola D Msomi I Momoniat O Makhubela (Alternate) Executive Officer: DP Tshidi

2 The Third South African Quantitative Impact Study (SA QIS3) SA QIS3 will run from October 2013 until the end of April Insurers and reinsurers will thus have seven months in which to complete the SA QIS3. This new timeline allows more time for completion of the exercise than the previous two QIS exercises. Please note that the deadline for completion of the SA QIS3 study has been moved out for a month, based on feedback received on the SAM 2013 Update. The adjusted timing of the SA QIS3 exercise has been aligned with the project plan for the SAM Economic Impact Study. This will allow early findings of the qualitative phase of the Economic Impact Study to be used in designing SA QIS3, and will also allow the SA QIS3 results to be considered within the final, economic modelling phase of Economic Impact Study. The reporting date of the data to be used in the calculations for SA QIS3 is flexible. Insurers are encouraged to use the reporting date that is most suitable for them, taking into account resource constraints, data availability and their existing SAM implementation work plans. The timelines for SA QIS3 are as follows: Start of August 2013: Draft SA QIS3 specification to be produced for public comment August 2013: Public comment on the draft SA QIS3 specification September 2013: Final SA QIS3 specification to be produced October 2013 to April 2014: Completion of SA QIS3 by insurers June 2014: Production of SA QIS3 report SA QIS3 will reflect the latest thinking from the Task Groups, as well as a review undertaken by the FSB. As such, SA QIS3 is expected to provide a good guide as to what would be expected in the final SAM framework. Stakeholders are encouraged to participate in the consultation process to ensure that their concerns are considered in the final SA QIS3 technical specification. SA QIS3 remains compulsory for all insurers and reinsurers as previously communicated Insurance Laws Amendment Bill (ILAB) The ILAB introduces changes to the existing Long-term and Short-term Insurance Acts, primarily in relation to enhanced governance, risk management and internal control requirements, as well as to facilitate the introduction of a formal supervisory framework for insurance groups. The ILAB was approved by Cabinet at its meeting of 29 May 2013 and tabled in Parliament on 21 June National Treasury has requested any comments on the ILAB to be sent directly to National Treasury by 31 July National Treasury will then facilitate the process of collating comments and arranging follow-up discussions with key stakeholders. It is expected that Parliament will also request public comments be sent to it directly. The ILAB, along with a media statement, an explanatory document of the changes put forward by the ILAB and supporting Discussion Documents have been published on the FSB s website ( It is anticipated that the ILAB will go through the parliamentary process in 2013, and will take effect from the beginning of Discussion Documents and Position Papers The following Discussion Documents and Position Papers have been approved for public comment by the FSB SAM Steering Committee: 2

3 Discussion Document Title Date Approved Comments Due Number 71 System of Governance 14 March June (v 3) Quantitative Reporting Templates (QRTs) Assets 8 April May 2013 Template 48 SCR Standard Formula Correlations 63 Life SCR Expense Risk 64 Life SCR Longevity Risk 66 Life SCR Mortality Risk 67 Life SCR Revision Risk 75 Treatment of risk-mitigation techniques in the SCR 76 Loss absorbing capacity of Technical Provisions 102 Life SCR Structure and Correlations 61 SCR Standard Formula: Operational Risk 19 April July Authorisation classes of business under SAM 7 June July Currency Risk 7 June August Life SCR: Lapse Risk 7 June August Property Risk 7 June August (v 4) Quantitative Reporting Templates (QRTs) Life 7 June July 2013 Technical Provisions Template 94 Interest Rate Risk 7 June August 2013 Position Paper Number Title Date Approved Comments Due 27 Group own funds 28 Treatment of Expected Profits Included in Future Cash flows as a Capital Resources 37 Risk Margin 41 Contract boundaries 85 Treatment of relevant operations (in non-equivalent jurisdictions), of SA parents under the final measures to regulate the solvency of Insurance Groups ( Groups ) 89 Calculation of SCR on total balance sheet 92 Assessment of group solvency 3

4 Final Position Papers Final Position Papers have been subjected to a comprehensive public comment process and as such do not require any further industry input. These papers will now be regarded by the FSB as the final input from the SAM Governance Structures for the design of the SAM secondary legislation. The following Position Papers have been accepted and approved as Final Position Papers by the members of the FSB SAM Steering Committee: Final Position Paper Number Title Date Approved 35 Use Test 14 March Own Funds Supervisory approval of 19 April 2013 ancillary own funds 32 Methods and approaches to best estimate 19 April 2013 liabilities 39 Assets and other Liabilities 19 April Treatment of new business in SCR 19 April Removal of Health SCR Module in SAM 19 April Counterparty default adjustment for reinsurance contracts and SPV s 6 June Internal Models: Model Governance 6 June 2013 NB - Insurers and reinsurers are kindly requested to note that the commentary period allowed per Discussion Document and Position Paper has been reduced to 30 days. This decision has been made in light of the current timelines and due to the volume of Discussion Documents and Position Papers expected to be released for public comment within the next few months. Pillar II Readiness Review Report The FSB published the Pillar II Readiness Review Report on 28 June The report sets out the findings from the exercise conducted by the FSB in which all insurers (apart from those closed to new business) completed a survey, and a selection of insurers participated in interviews, focused on gaining a better understanding of how insurers are preparing themselves for the requirements of Pillar II. The report is based on the factual findings of the surveys and interviews and does not represent the FSB s views. The report provides useful context to the current consultations on the ILAB, as well as on Discussion Document 71 dealing with the governance requirements for insurers under the SAM regime. It is envisaged that a follow-up exercise will be conducted, especially to focus on some of the areas highlighted by the report as needing further work. The Report is available on the FSB s website ( Reinsurance Regulatory Review As part of the SAM project, the FSB is reviewing the regulatory framework for the conduct of reinsurance business in South Africa. A consultant (PWC) was contracted to assist with the analysis, which consisted of an international scan and a survey of the local reinsurance market. The consultants are currently finalising a report on the analysis, which will be published once finalised. 4

5 The analysis will be used by the FSB to draft a FSB Discussion Document, setting out draft proposals for the regulatory framework for reinsurers under the SAM regime. This discussion document will be open for public comment, and will feed into the legislative drafting process. Quantitative Reporting Template (QRT) Workshops The FSB, along with the Financial Reporting (FIRe) Task Group and the Reporting Task Group, have worked on developing proposals for the suite of QRTs which all insurers and reinsurers will be required to complete as part of the Pillar III reporting and disclosure requirements under SAM. The process for developing these proposals ensures that the FSB s requirements are taken into account while also getting input from the industry on the practicality of producing the reporting information. The proposed QRT s for Assets and Life Technical Provisions have already been published through Discussion Document 91 (v 3) and Discussion Document 91 (v 4) respectively. In addition to the publication of the proposed QRTs, the FSB has also hosted workshops to discuss the QRTs. The aim of the workshops is to assist insurers and reinsurers with a better understanding of the new proposed QRTs by taking delegates through the various components of the templates. On 26 and 29 April 2013 the FSB hosted two SAM QRT Workshops to inform participants on the proposed Assets QRTs approved by the FSB SAM Steering Committee for consultation. A workshop to discuss the Life Technical Provisions QRTs was held in Cape Town on 25 June 2013, with a further workshop planned in Pretoria on 15 July A number of QRT s are expected to be released for public comment throughout the year as set out in the FSB SAM 2013 Update document. It is the intention of the FSB to host similar informative workshops for each set of QRTs, as and when these are approved for public comment. Economic Impact Study The FSB and National Treasury are conducting an Economic Impact Study for the SAM project, with the assistance of a consultant (KPMG). The timelines for the project have been set up to align with the SA QIS3 exercise. The Economic Impact Study will not only consider the direct impact of introducing SAM, but will also consider the behavioural impacts of SAM. These findings will then be used to understand the potential overall impact of SAM on the South African economy. As part of this process, KPMG is developing a survey that will be sent to all insurers to complete. It is expected that this survey will be sent out before the end of July The completion of this survey will be made compulsory, and all insurers are kindly requested to complete this survey to the best of their ability, as it will form a critical input to the Economic Impact Study. The completed survey will be required to be signed-off by the Chief Executive Officer or equivalent of the insurer. In addition to the survey, selected insurers as well as other stakeholders will be asked to participate in interviews to discuss some of the impacts of SAM in more detail. Once again, cooperation from stakeholders in this respect would be greatly appreciated. Third-party Cell Captive Insurance Discussion Paper A Discussion Paper on the review of third-party cell captive insurance and similar arrangements was released on 11 June 2013 and is open for comments until 31 July

6 The Discussion Paper: Summarises the main findings of the review of existing arrangements; Evaluates the risks (to both financial soundness and fair conduct of business) for insurers, policyholders and effective supervision that may arise from such structures and business models; and Provides the FSB s regulatory policy proposals with respect to third-party cell captive insurance and similar arrangements, including high-level proposals on how the capital requirements for cell captive insurers will be calculated under SAM. SAM workshops A SAM workshop is planned to be held towards the end of the year to inform stakeholders on the key developments in the SAM project. These workshops will assist insurers in their preparations for SAM as we move closer to implementation of the SAM project. The dates for the workshops have been set as follows: Pretoria 1 November 2013 Cape Town 22 November 2013 J. DIXON DEPUTY EXECUTIVE OFFICER: INSURANCE 6