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6 | The South African Insurance Industry Survey 2016
unwanted risk - such as catastrophe risk or poor
credit risk.
Appropriate risk disclosure allows the investor
to understand the type of risks their funds are
exposed to, this allows for a more conscious
allocation of resources within the market.
Furthermore, appropriate measures of performance
against a risk appetite will reveal to the investor
whether their funds are being managed within the
promised structures.
QIS 3 results indicated that 61 percent of the
market risk in the balance sheet of non-life insurers
arose from equity on their balance sheet (with
market risk contributing about 46 percent of the
basic solvency capital requirement). Assuming this
was an individual insurer, the investor could now
ask some meaningful questions:
–– If I am investing in a short-term insurer, is it
really to get equity exposure?
–– Why is market risk such a significant component
of my investments?
–– Am I investing to get exposure to underwriting
risk and the associated returns?
–– Perhaps I am happy to let my non-life insurer be
an asset manager, but do they have the correct
credentials to perform this function?
This kind of detailed risk analysis is becoming
mainstream under SAM. SAM should be
fundamentally changing the way we expect
insurers to present their results. Did that 41
percent catastrophe risk exposure produce an
equal percentage of my return and, if not, why are
we not offloading that risk to companies
that specialise in managing those risks?
4 Solvency assessment and management economic impact study from www.fsb.co.za
This is useful information, especially as many of IT IS NOT THE STRONGEST OF
these risks are things that can be managed. Such THE SPECIES THAT SURVIVE,
management can be achieved with reinsurance NOR THE MOST INTELLIGENT,
or, for market risk, other risk mitigation techniques BUT THE ONE MOST
such as derivatives. RESPONSIVE TO CHANGE.
For the foreign investor: not so foreign after all Charles Darwin
With the looming risk of a credit rating downgrade
for South Africa, attracting foreign direct
investment is proving to be difficult. It would be
even tougher if South Africa were lagging the
international community in terms of insurance
regulation. Similar risk-based capital regimes are
being developed in most of our direct competitors
in the international community – Brazil, Russia,
India and China. The SAM framework aligns to best
standards of international prudential regulation.
Each working group has compared the topic
of their team to the practices of the European
Union and, in many cases, to the practices of the
Canadian and Australian authorities, to name a
few. Solvency II equivalence is on the cards and is
essential to maintain foreign investor confidence in
the sector.
For the investor: the economic impact
The economic impact study (EIS) performed by
the Financial Services Board (FSB) regarding the
implementation of SAM had the following to
say about the economic impact: “… the study
suggests that the implementation of SAM is likely
to lead to better risk management at a direct cost
that is small when seen in context of the size of
the South African insurance industry. This additional
cost to the insurance industry will lead to a
neutral to slightly positive impact for the economy
as a whole, while also contributing to a more
sustainable and stable financial sector.”4