Page 12 - MC14326 all pages

8 | The South African Insurance Industry Survey 2016

The estimated ongoing cost of SAM for the “works to ensure that financial regulators regulation should go some way to restoring have not been doing this all along.
insurance industry is around R500 million act in the public interest,” shows that the confidence in the promises of insurers. According to the Economic Impact Study,
per annum. This equates to less than 0.1 opinion of many educated professionals “Survey responses clearly indicate that
percent of the insurance sectors’ annual is that regulators were not prioritising For the director, manager and employee: implementation of Pillar II requirements is
revenue.5 this. The Social Market Foundation paper, inspiring confidence seen as having the greatest benefit.”11
titled A confidence crisis: restoring trust Nobody likes a nasty surprise. However,
For the policyholder: keeping promises in financial service,9 supports this concern a nasty but considered surprise is not so Results analysis: best estimates and the
Despite the obvious benefits for the from a United Kingdom perspective. bad. That sinking feeling stops when you 99.5 percent confidence level
shareholder and investor in the South In Spain, there were specific protests realise you have a plan in place to deal Another positive development that SAM is
African insurance industry, these are about the barbarity of the financial sector. with it – catastrophe cover, professional bringing to financial reporting is the use of
merely an unintended consequence. From Whether one deems these credible or indemnity cover, data backup tapes, letters best estimates and capital to manage risk
the outset, the intention of the Financial not, it is clear that amongst markets with of credit, guarantees, security. These all rather than prudent reserving.
Services Board has been “the protection of vast social differences, there are concerns help directors, managers and employees
policyholders and beneficiaries.”6 about the trustworthiness of the financial sleep better at night. It has become a standard practice in the
sector. South African insurance industry to include
The Economic Impact Study reported, “… A key aspect of SAM is the risk significant levels of prudence in the IFRS
the vast majority of respondents indicated For the policyholder the requirements management system, which should (published) accounts. In the long-term
a view that SAM will improve policyholder related to independence at the C-level, comprise “…the totality of strategies, space, this includes the zeroisation of
protection.”7 Some industry commentators as well as the control functions, are key policies and procedures for identifying, negative reserves as well as compulsory
have suggested that the robustness of aspects that act in the public interest. assessing, monitoring, managing, and margins. In the short-term space, this
the South African insurance industry is Whether it be an independent challenge reporting of all reasonably foreseeable has included claims reserves held at 75
evidenced through the lack of market to gung-ho management, critical actuarial current and emerging material risks to percent sufficiency or even higher, as
failures following the 2008 crisis. In my analysis of proposed schemes or assurance which the insurer may be exposed.”10 well as the inherent prudence in holding
mind, this is akin to arguing that because over processes – all these things act in the Furthermore, this should be documented in unearned premium reserves at one
my office did not burn down in the last interest of policyholders. clearly articulated policies. The operational hundred percent sufficiency, instead of at
fire – I do not need to use the latest fire effectiveness of these should be assured a level which represents the best estimate
protection. This view seems to ignore the Many of these practices were not regularly by the mandatory internal audit of the future cash flows associated with
numerous market failures experienced this widespread in the insurance industry function. The completeness of these that business. SAM is largely doing away
century.8 before the release of Board Notice 158: should be assessed by the independent with this excessive prudence as seen in
Governance and Risk Management governance structures. Awareness of SAM the QIS 3 results. The available capital
The 2008 credit crisis has undoubtedly Framework for Insurers. throughout the organisation is required. for the life industry under QIS 3 was 64
shaken the public’s confidence in the Consequently, employees, management percent higher than on the existing regime.
financial sector as a whole. A significant Insurance is a promise of compensation for and directors should be reassured under Furthermore, the available capital for the
portion of public opinion in South Africa specific potential future losses in exchange SAM. By including emerging risks, this non-life industry was 54 percent higher.12
is informed by the views of the Western for payment. Much like for investors, clearly forces the risk committee (and
media. Movements like Occupy Wall Street a reduction in the risk associated with others) to consider what is not already For anyone interested in the performance
have highlighted this lack of faith and this promise increases the value of the encompassed, to try to anticipate the of an insurance company, the removal
targeted the financial services industry as promise. Effectively we all have real and unexpected. With the level of comfort of this prudence allows for a cleaner
the cause of significant financial setbacks contingent assets on our balance sheets this provides, it is hard to believe that understanding of the actual position and
in the world. The existence of the lesser- related to the promises of life and non- large public interest entities like insurers performance for the period as well as
known offshoot Occupy the SEC, which life insurers. The changes in prudential expected future cashflow.

5 Solvency assessment and management economic impact study from www.fsb.co.za 10 Part 4: BN158 of 2014: Governance and risk management framework for insurers from www.fsb.co.za
6 SAM road map 11 Solvency assessment and management economic impact study from www.fsb.co.za
7 Solvency assessment and management economic impact study from www.fsb.co.za 12 SAM SA QIS 3 Report from www.fsb.co.za
8 Facing Facts: Things Can and Do Go Wrong – KPMG Insurance Industry Survey 2013
9 www.smf.co.uk