Reinsurance Regulatory Review Project: Local Questionnaire Financial Services Board Reinsurance Regulatory Review Project South African Questionnaire Introduction The Financial Services Board (FSB) has partnered with PricewaterhouseCoopers (PwC) to research and review the regulatory framework for reinsurance business in South Africa. The result of the project will be a research paper that will guide changes in both reinsurance and insurance legislation under the Solvency Assessment and Management (SAM) regulatory regime. One of the phases of this project is the completion of a questionnaire. The questionnaire is intended to obtain industry input and comments on key areas of reinsurance and insurance legislation as well as areas of potential regulatory change. We hope that you take this opportunity to substantially influence insurance legislation in South Africa. Responses Please provide your responses in the spreadsheet answer template distributed with this questionnaire. The answer template contains the structure for categorical responses requested as well as issues to consider in developing your response for each question. Please read the answer template in conjunction with the below questionnaire. Further Information PwC staff are available to clarify the questions and to assist in providing references to the relevant technical/solvency Assessment and Management related guidance. Please contact Jesvir Harkoo at jesvir.harkoo@za.pwc.com if you require any assistance in answering this questionnaire. Distributed: 20 November 2012
The columns to the right of the questions below are used to indicate which reinsurance stakeholder(s) each question is primarily intended for. The classifications used are: Entity Direct writer (including captives) Direct writer with inward reinsurance Reinsurer Reinsurance broker Abbreviation DW DWIR RI RB A. Regulatory and Supervisory Framework Insurance 1. Regulatory and Supervisory approach SAM aims to align both long-term and short-term industries into a principle based regulatory regime coupled with a risk based supervisory regime. 1.1 In which areas of reinsurance business do you feel significant strategic or operational concerns arise as a result of the implementation of SAM? Third-country equivalence to Solvency II is divided amongst the following categories: - Group solvency equivalence (Article 227 of Solvency II Directive) this is a test of whether an insurer in a third country owned by an EU insurer is subject to a supervisory regime equivalent to Solvency II. - Group supervision equivalence (Article 260 of Solvency II Directive) this deals with the supervision of a group, rather than individual, entity. Reliance is placed on the equivalent third country s group supervision. - Reinsurer equivalence (Article 172 of Solvency II Directive) whether the solvency requirements of a third country applicable to reinsurance activities of third country undertakings are equivalent to what is stipulated by the Solvency II Directive. 2
1.2 In which areas do you find that differences between South African and International practice (with regard to solvency regulations) place South African reinsurers at a disadvantage or similarly provide reinsurers with an advantage? To what extent will the above types of equivalence have a direct impact on your business? What benefit do you see equivalence to Solvency II will have on your business? 1.3 What will the impact be on your business if South Africa does not get Solvency II equivalence? B. Regulatory Framework Reinsurance 1. Reinsurance 1.1 Do you consider that current reinsurance legislation, legislation as per the Short-term and Long-term Insurance Acts results in inappropriate or conflicting legislative requirements for composite reinsurers? a) Please comment on the primary advantages and disadvantages of operating as a composite reinsurer in South Africa. 1.2 With regard to the concept and application of approved and non-approved reinsurance (generally in relation to the reduction of technical provisions), a) What are the advantages and disadvantages of approved and non-approved reinsurance? b) What are your views on the relative capital requirements/reductions for approved and non-approved reinsurance respectively? c) What are your views on the impact of using approved vs. non-approved reinsurance on the governance of your business? 1.3 In your experience, to what extent do the below parties make use of collateral arrangements for reinsurance? 3
1.3.1. Your company 1.3.2. Clients 1.3.3. Other counterparties 1.4 Please provide us with an overview of the types of collateral arrangements used for reinsurance business? A branch reinsurer is one which is not set up as a subsidiary, with potentially different levels of capital requirements and governance when compared to a distinct subsidiary. A branch does not have a legal personality unique to that of the parent reinsurer. 1.5 If you were to compare reinsurers operating as a branch against reinsurers operating as a subsidiary: a) What are the advantages and disadvantages of each option for your company? b) What are your views on the relative capital requirements for each option? c) As an insurer, how should governance requirements differ for your company if reinsurer counterparties were to operate on a branch basis? 2. Mutual recognition agreements As a reinsurer, how should governance requirements differ if your company were to operate on a branch basis? d) What are your views or expectations on the impact of different reporting requirements for each alternative? 1.6 Should foreign reinsurers operating in South Africa be encouraged to operate as a branch or subsidiary of parent companies? Why? For the following questions, the intended definition of third country equivalence is the recognition of South Africa s regulatory regime by EIOPA as similar or equivalent to Solvency II. Achievement of third country equivalence then allows for the insurers/reinsurers of South Africa to be treated as if they are regulated under the principles of Solvency II. 4
South Africa is aiming for mutual recognition (or third country equivalence in SAM terminology) with Solvency II and this section is intended to collect information on the process of mutual recognition and if it is popular among insurers, brokers and reinsurers. The UK, Switzerland and Ireland have some forms of mutual recognition for reinsurance. Bermuda is moving towards Solvency II type principles, which would lead to mutual recognition. The UK has some forms of mutual agreements with European insurers and Switzerland has mutuality with Liechtenstein and Ireland has some mutual recognition. 2.1 Do mutual recognition agreements have a direct impact on your reinsurance business? If so, could you please provide information around which areas of your business are affected (e.g. pricing, capital, operations, strategy)? 2.2 What are the perceived benefits of mutual recognition arrangements for your company? 2.3 What are the perceived risks of having mutual recognition arrangements? 2.4 To what extent does the lack of mutual recognition agreements result in barriers to entry in new markets? 2.5 Do you consider that your reinsurance offerings would be more competitive if we were to obtain mutual recognition agreements with other countries (through significant reduction in administrative efforts to be compliant with other regulatory frameworks)? 3. Reinsurance licensing options 3.1 Do you have any specific concerns relating to current differences between life and non-life reinsurance licensing requirements and regulation? 3.2 Should an insurer be allowed to take on inwards reinsurance business? Please justify your answer. 5
3.3 If of the view that direct insurers can take on inwards reinsurance business, should they be separately authorised to do so and should this be reported separately from the direct business? 4. Capital Requirement 4.1 Are you comfortable with the minimum level of capital required for reinsurers? If not, please provide reasons. 4.2 Where do you feel that SAM capital requirements (as per SA QIS II) for reinsurers could be improved? 4.3 What would the impact be of a pay as you pay clause on the capital requirements of direct insurers in comparison to that of the reinsurer? 4.4 If branches of foreign reinsurers were allowed to hold different levels of capital than local subsidiaries, how would this directly influence your business? 4.5 If branches of foreign reinsurers were not allowed to hold capital levels that are different to that of local subsidiaries, what primary aspects of operating on a branch basis would be beneficial to your business? Please consider the same definition for branches as given earlier in the questionnaire. 4.6 Please provide any comments that you may have on capital requirements for potential branch and subsidiary reinsurers. 5. Additional 5.1 Do you consider that local reinsurers will benefit requirements from having a local statutory actuary regardless of legal structure? If so why? 5.2 Do you consider that local reinsurers will benefit from having local governance requirements and risk management frameworks regardless of legal structure? If so why? 6
6. Treatment of nonproportional reinsurance 6.1 Do you have any specific concerns with the allowance for non-proportional reinsurance in the calculation of the technical provisions and in capital requirements for both the insurer as well as the reinsurer as proposed under SA QIS2? If so, please provide an overview of these concerns. 6.2 Are you comfortable with the limits/rules that apply specifically to non-proportional reinsurance? Please explain your answer. 6.3 What are your views on the current requirements of segmentation of reinsurance contracts for authorisation purposes? 7. Treatment of Financial Reinsurance 7.1 IFRS 7 specifies guidelines surrounding the recognition of financial reinsurance and finite reinsurance. Are you comfortable with the guidelines on financial reinsurance and finite reinsurance (such as, requirements to report financial reinsurance initially at fair value or regarding the use of financial reinsurance for risk transfer)? If not, please provide comments around whether you feel that statutory recognition and requirements should differ or not. 7.2 Please could you provide an overview of the types of finite and financial reinsurance arrangements entered into by your company? 7.3 Please list the advantages and disadvantages of entering into finite or financial reinsurance arrangements. 7.4 Do you have any other specific concerns with finite and financial reinsurance? 8. Impact of developments in Solvency II 8.1 Where relevant, how will/ has Solvency II changes at a group level affect/ed your current reinsurance business? 8.2 How do you expect or, if applicable, how has 7
Solvency II had an impact on the amount and type of reinsurance business your company is/will be engaged in? 9. Impact and efficiency of the EU Reinsurance Directive 9.1 If applicable, were there any major concerns highlighted during the implementation phase of the EU Reinsurance Directive at a parent company or associate? 9.2 If applicable, what are the planned or likely changes to your South African reinsurance business as a result of the EU Directive? C. Reinsurance market 1. Major reinsurers with head offices in your country 1.1 Do you prefer placing reinsurance with a specialised reinsurer and if so why? 1.2 What is your view about sufficient reinsurance capacity available in South Africa with regard to the below types? - Facultative - Treaty - CAT 2. Structure of local reinsurance operations 2.1 How much of the business reinsured in South Africa is retroceded offshore? 2.2 Why is business retroceded offshore? 2.3 Would local reinsurers be able to meet the requirements (in terms of capital and capacity) of the local insurance industry should foreign reinsurers leave South Africa? 3. Global trends 3.1 Which global trends in reinsurance company 8
in reinsurance operational structures 4. African and Other International Markets serviced from South Africa governance have you identified? 3.2 What, in your view, would be the likely impact on skills and job creation in South Africa if foreign reinsurers were allowed to operate on a branch basis? 4.1 As an insurer with other African operations, how do you as an insurer make decisions on the placement of reinsurance for African operations? 4.2 As an insurer with other African operations, does your African subsidiary directly reinsure its risks, or is reinsurance performed via the South African business? 4.3 What are the advantages/disadvantages of regulatory requirements (with regard to reinsurance) of African countries? Specifically, have you experienced other African countries requiring specific reinsurance capital requirements and/or specific requirements for reinsurer legal structure? 4.4 Has there been a move towards using African reinsurers as alternatives to other established international reinsurers? 5. South African economic development 5.1 If foreign reinsurers were allowed to operate on a branch basis, what are your views on potential impacts to the South African economy and national strategy initiatives? 9
D. Market Dynamics 1. Choice of reinsurer 1.1 When insurers select reinsurers, please could you rank the following factors by importance: i) Technical skills/expertise ii) Credit quality iii) Diversification iv) Business relationships v) Price vi) Domicile vii) Reputation Please give a brief justification of your rankings for the above categories as well as explanations of any other factors you feel are relevant. 2. Competition in the reinsurance sector 2.1 Which types of reinsurance does your company primarily provide/use? 2.2 Please provide a listing of the type of reinsurance business sold, and state which types/lines of business are the primary focus of your company (if applicable) (see answer template for guidance). 2.3 Is your reinsurance sector competitive? 2.4 What contributes to/limits competition? (see answer template) 2.5 Is this viewed as a problem? 2.6 If it is viewed as a problem, what has been considered to improve the level of competition? 3. Reinsurance intermediary 3.1 How is reinsurance intermediated in your business? 3.2 Is reinsurance intermediation different for non-life and life reinsurance, different types of business and different insurers or reinsurers? 3.3 How does intermediation differ between treaty and facultative placement? 10
3.4 Do you have concerns with the level of the costs of reinsurance brokerage services? 4. Regulatory arbitrage 4.1 Does regulatory arbitrage play a role in deciding on reinsurance placements? Please explain your answer. 5. Lloyd s 5.1 To what extent is your business reinsured with Reinsurance Lloyd s? Syndicate 5.2 To what extent does Lloyd s affiliation affect your choice of reinsurer? 5.3 Could you provide an overview of benefits that your company derives from using Lloyd s for your reinsurance needs? 6. Placement decisions 6.1 What would inform your choice in determining whether to place your business with local based reinsurers or offshore reinsurers? How would any conflicts of interest in the purchasing of reinsurance be handled? E. Tax 1. Tax Regime 1.1 How does the interplay between South African and 2. Double taxation agreements international tax regimes affect your reinsurance decisions, if at all? 2.1 South Africa has double taxation agreements in place with a variety of countries. Do these arrangements assist in the availability of business, or in the freedom with which business can be placed? F. Management 11
1. Risk Management 1.1 As a reinsurer, are explicit parental guarantees or intra-group retrocession arrangements generally put in place for subsidiaries in South Africa? Please provide details on the nature of the contracts that are retroceded. 1.2.1 What type of companies do you typically retrocede to? 1.2.2 From your experience, are there differences experienced in retrocession regulations between South Africa and other countries? 1.3.1 How do you use reinsurance to protect your business from concentration risk? 1.3.2 To what extent is the role of reinsurance as a form of diversification considered in product design and reinsurance decisions? 1.3.3 Does reinsurance provide enough protection from concentration risk, or should there be a greater utilisation of reinsurance in this regard? Please provide comments. 1.4 What is your current practice in terms of using credit ratings as a method of deciding on reinsurance contracts? 2. Skills and development 2.1 What areas of technical assistance do reinsurers provide to insurers? Please provide other areas of technical assistance that your company regularly provides. 2.2 What level of technical assistance from reinsurers is most common in your experience? (see answer template) 2.3 What impact does the provision of technical assistance have on barriers to entry for new insurers? 2.4 What impact does this have on the levels of competition in the reinsurance market? 2.5 Have you experienced any negative impacts 12
resulting from skills and personnel shortages/inadequacies in South Africa? G. Other 1. Country rating 1.1 Are there any self-imposed requirements relating to the credit ratings of the companies with which business is placed? 2. Exchange controls 2.1 Do international or local exchange control regulations have a significant impact on the placement of business? 3. Specific concerns 3.1 Are there any other matters currently being dealt with by the regulator (aside from SAM) that can have an impact on your reinsurance or on your business as a reinsurer? H. Voluntary questions 1. Reinsurance of risks 2. Impact of developments in IFRS reporting requirements 1.1 What risks are reinsurers reluctant to reinsure? 1.2 Is this a problem? 1.3 If so, how could it be remedied? 2.1 What is the expected impact in reinsurance activities as a result of current developments in IFRS reporting requirements for insurers and reinsurers? Please comment on any views you may have on the IFRS 9 changes and IFRS 4 Phase II suggested changes. 13