2013 SAM NEWS SA QIS3 The Final Countdown SA QIS3 draft Technical Specification approved for public comment Extended SA QIS3 submission deadline 30 April 2014 SA QIS3 will test less scenarios and be as close to the final calibration as possible ILAB Public comments directly to National Treasury The FSB s Reinsurance Regulatory Review Report expected soon Pillar II Readiness Review Report Released The Economic Impact Study gets traction with the release of a compulsory survey from the FSB to all insurers and reinsurers A Publication of the South African Insurance Association Issue 4 / 2013
Table of Contents SAM Snippets... 2 SAM Coordinators Corner... 5 SAIA Survey: SA QIS2 Challenges and Simplifications for SA QIS3... 6 Gearing up for SA QIS3... 8 SA QIS3 What to expect in the SCR and MCR... 9 The SAIA SAM Project Support Office (PSO) Team... 13 1
SAM Snippets Economic Impact Study (EIS) 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 economic impact of SAM on the South African economy. As part of this process, KPMG has developed a survey which was sent to all insurers and reinsurers on the 29 July 2013. The completion of this survey is compulsory, and insurers and reinsurers 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/reinsurer. In addition to the survey, selected insurers/reinsurers as well as other stakeholders will be asked to participate in interviews to discuss some of the impacts of SAM in more detail. Pillar II Readiness Report Towards the end of June 2013 the FSB released the much anticipated Pillar II Readiness Review Report to the insurance industry for consideration. The survey was aimed at gauging the extent of development work done by insurers and reinsurers in preparing themselves for the Pillar II requirements of the new proposed SAM regime. The compulsory survey questionnaire posed a number of closed and open-ended questions pertaining to the Pillar II aspects of the composition of the board, board functions, risk management, own risk and solvency assessment, internal control, control functions and outsourcing. Insurers and Reinsurers were encouraged to provide comments and suggestions after each section on the principle of proportionality and its application. Despite this request the responses in general were rather pedestrian. The SAIA SAM Project Support Office continues with the work done to date by the SAIA SAM Proportionality Interest Group pertaining to the Principle of Proportionality. The Group have already addressed a number of the Pillar II requirements which will be presented to the FSB for consideration when drafting the final SAM legislation. 2
The Pillar III Readiness Report provides a useful mechanism by which insurers and reinsurers are able to benchmark their respective preparations with that of the industry as a whole. An area of particular importance and concern is the current level of preparedness pertaining to the ORSA (Own Risk and Solvency Assessment) requirements. The overwhelming majority of respondents indicated that their ORSA preparations are currently weak requiring improvement. In response to this concerning statistic the FSB included a section within the report entitled Demystifying the ORSA in an attempt to provide further clarity to insurers and reinsurers as they development their ORSA programmes. Members are reminded that a full mock ORSA will be required during the compulsory comprehensive parallel run period taking place from the 1 January 2015 until the 31 December 2015. A copy of the Pillar II Readiness Review Report can be found on the SAIA SAM webpage. Should you require any further information pertaining to the report please do so by contacting the SAIA SAM Project Support Office. Insurance Laws Amendment Bill (ILAB) The Insurance Laws Amendment Bill ( ILAB ) was released by National Treasury on the 26 June 2013 inviting public comment. The closing date for submission of public comment was the 31 July 2013. The focal objectives of the 2013 Insurance Laws Amendment Bill are to act as a mechanism whereby insurers and reinsurers are able to build towards compliance with the final SAM requirements following a phased-in approach, as well as to improve current shortcomings identified in the Short-term Insurance Act (Act No. 53 of 1998). The SAIA SAM Project Support Office arranged two successful workshops during the month of July 2013 to scrutinise and generate comments on the ILAB. The workshops were well attended with well in excess of fifty attendees present at each workshop. Comments generated at the workshops were consolidated and refined before being submitted to the National Treasury ( NT ) for their consideration. The FSB, NT and the SAIA will engage in a high-level meeting to discuss the fundamental concerns identified by the SAIA members prior to the commencement of the public hearings applicable to the ILAB that will take place in Parliament. Primary and Secondary Legislation The FSB are currently finalising the third draft of the Primary Legislation and the second draft of the Subordinate Legislation and are expected to release these towards the end of August 2013. 3
These drafts of the SAM legislation will be confined to the various members of the FSB SAM Governance Structure and not released for public comment at this stage. It is anticipated that the next respective versions of the primary and subordinate legislation will be released for public comment in May 2014. The drafting and release of these two pieces of proposed SAM legislation have been better aligned, allowing greater fluency for members of the SAM task groups when considering the proposals presented. The Third South African Quantitative Impact Study (SA QIS3) The set timelines for SA QIS3 are as follows: End-July 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 May 2014: Production of SA QIS3 report SA QIS3 remains compulsory for all insurers and reinsurers as previously communicated * The FSB has extended the deadline for submission of the SA QIS3 from 31 March 2014 to the 30 April 2014. Discussion Documents and Position Papers The following Discussion Documents and Position Papers have been approved for public comment by the FSB SAM Steering Committee. Discussion Documents Discussion Document Number Title of the Document 4 Date Approved for Public Comment Industry Comments Due Date 29 Authorisation classes of business under SAM 6 June 2013 22 July 2013 (Closed) 45 Currency Risk 6 June 2013 12 August 2013 70 Property Risk 6 June 2013 12 August 2013 91 Quantitative Reporting Templates (QRTs) Life Technical Provisions Template 6 June 2013 22 July 2013 (Closed) 94 Interest Rate Risk 6 June 2013 12 August 2013 96 General Stress Testing Guidance for Insurance Companies 1 August 2013 Still to be published 97 Group considerations for Stress 1 August 2013 Still to be published
107 Position Papers Testing Own Risk and Solvency Assessment - Further Guidance 1 August 2013 Still to be published Position Paper Number 34 Title of the Document Errata to Position Paper 34 - Own Risk and Solvency Assessment Date Approved for Public Comment Industry Comments Due Date 1 August 2013 Still to be published 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 30 Counterparty default adjustment for reinsurance contracts and SPVs 6 June 2013 54 Internal Models: Model Governance 6 June 2013 Date Approved ***** SAM Coordinators Corner This section of the SAM NEWS is dedicated to assist SAIA SAM Coordinators with a brief snapshot of noteworthy events and information: The next Quantitative Reporting Template (QRT) due to be released for public comment will be the Non-Life Technical Provision Template. Members are encouraged to provide comments on the template once released as a matter of urgency. The Economic Impact Study Survey requiring compulsory participation by all insurers and reinsurers was issued to all public officers on the 29 July 2013. The survey must be completed and submitted to the FSB by the 26 th August 2013 5
The FSB have indicated that they intend hosting a SAM workshop towards the end of the year to inform stakeholders on the key developments within the SAM project. These workshops will assist insurers and reinsurers in their preparations for SAM as we move closer to implementation of the SAM project. The proposed dates are as follows: Region Proposed Dates Pretoria 01 November 2013 Cape Town 22 November 2013 Members are encouraged to save these dates and ensure that these important workshops are well supported. SAIA SAM workshops planned for the month of August 2013 on the draft SA QIS3 Technical Specifications document. Details will be communicated shortly. ***** SAIA Survey: SA QIS2 Challenges and Simplifications for SA QIS3 RESULTS OF A HIGH-LEVEL SAIA SAM SURVEY ON THE SA QIS2 WORKBOOK AND SA QIS3 SIMPLIFICATIONS Background At the request of the FSB the SAIA SAM Project Support Office (PSO) conducted a brief survey amongst its members regarding specific challenges identified in the Pillar 1 environment of the Solvency Assessment and Management project. An electronic survey was conducted through the use of a well-recognised and reputable online survey tool. The survey was sent to all the SAIA member s SAM Coordinators and produced a couple of interesting and useful responses. Questions The following two questions were posed in the survey: Questions 1: Please provide a short explanation of the preparation work undertaken by your SA QIS Team in order for them to have completed the Non-Life Underwriting Risk (NLUR) workbook used in SA QIS2 6
Question 2: Please provide us with your opinion as to where in the SCR (only), excluding the NLUR module, simplifications should be considered. For example: Interest Rate Shock simplifications for Short-term Insurers. (How and Where) Feedback on Question 1: The feedback undoubtedly highlighted the fact that insurers and reinsurers devoted a considerable amount of their resources in preparing for the NLUR workbook. Data remains one of the most challenging areas for Pillar 1. Many insurers and reinsurers spent a substantial amount of time in collating and arranging data into the correct format, which for some included manual procedures in preparing for the completion of the workbook. For those respondents that had data available it required adjustments to the data for use in the NLUR workbook. Only a handful of insurers indicated that they could extract the data with relative ease, however all respondents indicated that they spent a significant amount of time on SA QIS2. Concerns pertaining to the reinsurance section were also raised by the majority of respondents. Comments included amongst others that insurer-specific reinsurance structures were not catered for and hence required simplifications. Insurers also indicated that their reinsurance data was adjusted to "tailor" to the NLUR workbook including reclassifying non-proportional into proportional reinsurance. Feedback on Question 2: Surprisingly only a few areas in the SA QIS2 Technical Specifications were mentioned by respondents where simplifications were required or could be considered. Interest rate shocks was the main area highlighted that required simplifications. In general respondents agreed that interest rate risk is sufficiently addressed by an upward and downward shock of the real and nominal rates. A few insurers made mention that proportionality must be addressed as certain risks for many insurers are relatively minor and therefore a simplified methodology should be suitable. Conclusion The SAIA SAM Project Support Office is grateful to all those insurers and reinsurers that participated in the survey. The results of the survey were collated and sent to the Financial Services Board (FSB) and the appropriate SAM Task Groups and Work Groups for consideration. The PSO will continue our contribution towards addressing simplifications by arranging workshops during the month of August 2013. These workshops will consider the draft SA QIS3 Technical Specifications with the intention to comment on and develop proposals pertaining to the Pillar I Simplifications. 7
Gearing up for SA QIS3 It is mind boggling to think that half the year is already up and even more astonishing is the fact that the draft SA QIS3 Technical Specifications document, is upon us. SAM Task Groups, the FSB, Industry Associations and various Stakeholders are frantically chasing the clock as the insurance industry gears up for the third and undoubtedly final South African Quantitative Impact Study (SA QIS3). The SA QIS3 exercise is significant in the sense that it will be the first compulsory quantitative impact study applicable to all insurers and reinsurers operating in South Africa. Due to this compulsory participation requirement it is expected that the results produced should be more reflective of the impact of the Standard Formula on the entire insurance industry, than the previous two quantitative impact studies. The exercise itself is intended to replicate as close to the final calibration of the Standard Formula that insurers and reinsurers can expect when SAM goes live on 1 January 2016. Various discussions and initiatives have been put in motion within the SAM structures in order to influence and assist with the design of the SA QIS3 Technical Specifications. One such initiative was the Non-Life Underwriting Risk Workshop hosted by the SAIA and the FSB on the 13 June 2013 at the Country Club Johannesburg Auckland Park. The purpose of the workshop was to afford members of the Non-Life Underwriting Risk Working Group (NLUR WG) an opportunity to gain a better understanding of the issues faced by industry during SA QIS2 and for the NLUR WG to explain its current thinking and proposals. The workshop was well supported and resulted in active debate and discussion around various key issues which the Chairperson of the NLUR WG took back to the working group for further deliberation. One particular area that is of great importance to the SAIA is the aspect of simplifications applicable to the Pillar I requirements. The SAIA SAM Project Support Office undertook a high level survey with the objective to gauge the amount of preparation time that was incurred by insurers and reinsurers for the completion of the NLUR workbook used in SA QIS2, as well as to gather further suggestions as to where simplifications in the SCR should be considered, other than in the NLUR module. Simplifications in the Pillar I requirements should be probed and thoroughly considered by insurers and reinsurers within the next month, in order to ensure that the Standard Formula has been calibrated in a manner that is most fair to all insurers and reinsurers. SAIA members are encouraged to contact the SAIA SAM Project Support Office with any comments, suggestions and recommendations pertaining to Pillar I simplifications, in order for the SAIA to feed these back to the relevant SAM task groups for their consideration. 8
Despite the additional four months allocated for the completion of the SA QIS3 exercise a great deal of preparation and planning is still required on the part of insurers and reinsurers, especially for those firms that face the additional burden of finalising their company year-end requirements. The month of August will certainly be the final opportunity that industry will have to potentially influence the specifications required for SA QIS3. This opportunity should be embraced by industry with determination and with a renewed focus bearing in mind that SA QIS3 will be as close to the final calibration as it can get. Please feel free to contact the SAIA SAM Project Support Office should you require any further guidance or assistance as your firm gears up for SA QIS3. ***** SA QIS3 What to expect in the SCR and MCR The purpose of SA QIS3 The draft technical specifications for SA QIS3 are currently being prepared by the various Pillar 1 Task Groups, and will be available for public comment at the end of July / beginning of August. This will be the first compulsory QIS exercise, and it is intended to give companies a good idea of what the final Pillar 1 requirements under SAM may look like. As such there will be less focus on testing different options, instead the aim is to minimise the number of calculations required to complete the QIS exercise. This should reduce the effort required for all companies, and in particular those companies taking part in a QIS exercise for the first time. The Solvency Capital Requirement (SCR) and Minimum Capital Requirement (MCR) in the draft technical specifications for SA QIS3 will largely reflect the current proposals contained in the latest discussion documents, which have been prepared taking into account industry comments as well as the results and comments received from the previous two QIS exercises. In addition, the draft specifications will also be adjusted in specific areas to reflect steering provided by the FSB. It is possible that there may be additional changes made to the draft technical specifications following the public comment period. The changes highlighted below are those that are expected between SA QIS2 and the draft technical specifications for SA QIS3, based on current expectations. 9
Changes to the MCR The MCR is largely unchanged from SA QIS2. The main changes are: Changing the MCR for discretionary benefit business to use inputs already calculated as part of the adjustment for the loss absorbing capacity of discretionary benefits. This reduces the complexity of the calculation. Aligning the grouping of policies where the policyholder bears the investment risk used in the MCR calculation, to the segmentation of the liabilities. Changes to the SCR Although many aspects of the SCR are unchanged from SA QIS2, there are some important changes: General structure The basis for calculating the SCR has changed from considering the change in Net Asset Value to rather consider the change in Basic Own Funds. This removes the risk of double-counting items that are excluded from Basic Own Funds, whilst keeping everything else unchanged. The allowance for dynamic policyholder behaviour in the stressed conditions underlying the different risk modules has been clarified. Only policyholder behaviour where there is a direct causal relationship between the stress and policyholder behaviour should be allowed for. To assist companies in interpreting the different stresses in order to determine what management action would be applied, guidance has been given clarifying what proportion of the stress is assumed to be as a result of company-specific events, and what proportion is as a result of industry-wide events. Where a range is specified, companies need to assume the split that results in the higher capital requirement. For all sub-modules that make up more than 10% of the BSCR, the risk charge should be calculated both gross and net of an allowance for the loss absorbing capacity of discretionary benefits. The adjustment for elimination of double counting of the loss absorbing capacity of discretionary benefits should only be applied by those companies where the adjustment is significant. Guidance on how to determine the significance of the adjustment will be provided. Life underwriting risk Longevity risk: The stress has been changed to use a combination of a decrease in base mortality (10%) and an increase in the rate of mortality improvement (1% pa). Disability risk: The stresses applied may be updated following industry comment and additional analysis. Revision risk: This risk has been removed as it was immaterial in the South African industry. Retrenchment: The stress applied may be updated following industry comment and additional analysis. 10
Life catastrophe risk: The mortality catastrophe risk requirement will be unchanged. The morbidity catastrophe risk requirement may be updated following industry comment and additional analysis. Lapse risk: The lapse risk stress has been simplified to be the aggregated value of the level lapse risk and the mass lapse risk capital, using a correlation co-efficient of zero. In addition, following the mass lapse event, maintenance expenses are assumed to remain unchanged for the next two years. Expense risk: The stress for expense inflation should be the greater of a 20% increase in the base level of expense inflation, or an absolute addition of 2% to the base level of expense inflation. Intra-risk correlations: The correlation co-efficient between retrenchment risk and expense risk has been increased to 0.25. The correlation co-efficient between lapse risk and expense risk has been reduced to 0, as the risk of higher expenses following a lapse event has been explicitly allowed for in the lapse risk sub-module. Non-life underwriting risk Risk mitigation: The workbook will have greater flexibility in order to allow for different reinsurance structures. Premium and reserving risk: Most of the parameters will change based on the analysis of South African data. Natural catastrophe risk: The 10 and 20 year factors will be based on available South African data, should the data support this. Man-made catastrophe risk: There will be some structural changes to the methodology and possibly some updated factors, should the available data support this. Market risk Interest rate risk: Nominal interest rates and real interest rates will be stressed separately and assumed to have a 25% correlation. There will be single up and down stresses defined for both nominal and real interest rates. Currency risk: The downward stress is reduced slightly from SA QIS2. Equity and interest rate volatility risk: Equity and interest rate volatility stresses will be introduced. Illiquidity/matching premium: As the technical provisions will not allow for an illiquidity / matching premium, there will be no need for this capital requirement. Counterparty default risk associated with risk mitigation: The counterparty default risk associated with risk mitigants for non-life underwriting risk is unchanged from SA QIS2 (i.e. it should be included within the specific underwriting risk, as allowed for with the nonlife underwriting risk calculation tool). The counterparty default risk associated with risk mitigants for life underwriting risk should be included within a separate sub-module within the life underwriting risk module. This sub-module will be 100% correlated with all other sub-modules within life underwriting risk. Credit risk on illiquid bonds: The credit risk from these bonds should be allowed for using the spread approach, as used for liquid bonds. 11
Operational risk The basis for the operation risk capital requirement for business where policyholders bear the investment risk has been changed from referencing maintenance expenses to using assets under management. This should result in greater consistency between different companies. Editorial Note: Operational risk has subsequently changed. Assets under management have been removed and the use of expenses is re-included. Article courtesy of David Park: Director Actuarial & Insurance Solutions Johannesburg Deloitte & Touche and Chairperson of the SAM Capital Requirements Task Group ***** 12
The SAIA SAM Project Support Office (PSO) Team Nico Esterhuizen nico@saia.co.za Gareth van Deventer gareth@saia.co.za Tamara Stacey Jansen tamara@saia.co.za Follow us on Twitter: @NicoEsterhuizen @GarethvDeventer Contact details: The South African Insurance Association Ground floor, Willowbrook House, Lake Drive, Constantia Office Park, c/o 14 th Avenue and Hendrik Potgieter Street, Weltevreden Park 1709 P.O Box 5098 Weltevreden Park 1715 Tel: +27 11 726 5381 Cell: 082 344 0240 Telefax: +27 86 647 2275 Website: http://www.saia.co.za +111104 13