Unprepared insurers delay South Africa's risk-based solvency regime

Third quantitative impact study and economic impact study to be launched later this year

Concerns over insurers' ability to comply with South Africa's new risk-based solvency regime have prompted the country's regulator to delay the regime's implementation by one year.

The Financial Services Board (FSB) began work on the Solvency Assessment and Management (Sam) programme, aimed at creating a risk-based supervisory regime for the prudential regulation of both long-term and short-term insurers in South Africa, in 2009.

Full implementation of the rules was planned for January 1, 2015, but this has now been pushed back by one year.

A fear that South African insurers would not be able to implement fully the regime by the original start date was a key factor in the FSB's decision to delay, according to the South African Insurance Association (SAIA).

Nico Esterhuizen, Sam programme manager at the SAIA, based in Johannesburg, says: "One of the main reasons the FSB has made the decision to move the implementation date [is that] it wanted to provide insurers with more time to prepare. I think it is a case of insurers not really being ready. [The delay] provides us with some extra leverage in terms of analysing some of the more technical aspects."

The Sam regime is being developed in such a way as to qualify for equivalent status for Solvency II, the European risk-based solvency regime. It adopts Solvency II's three-pillars approach and incorporates capital requirements and an Own Risk and Solvency Assessment (Orsa) similar to that prescribed by the European directive.

However, while Solvency II has been in development since the early 2000s, South African insurers have had only four years to adapt to the incoming Sam regime and with less sophisticated risk management than their European counterparts.

Two quantitative impact studies (QIS) conducted in 2011 and 2012 revealed that many insurers had some way to go before they could become Sam-ready, especially for those in the non-life sector.

"We still had a number of insurers who participated in QIS 2 that didn't make the Solvency Capital Requirement (SCR), roughly about 22% [of the non-life industry], so that is a significant percentage," says Esterhuizen.

More time was also required for insurers' work on quantifying risk, he adds.

The FSB is set to undertake a third quantitative impact study at the end of 2013. Ian Marshall, the FSB's head of SAM, based in Pretoria, says that the rules are still under development and are being revised in preparation for QIS 3.

"It is important to ensure that the proposed framework is appropriate for the South African insurance industry, and is not a simple copy and paste of Solvency II. A number of options have been tested in QI 1 as well as QIS 2. The results from this exercise are now being taken into account to shape the framework," he says.

A lack of information on the likely effect of the regime on the domestic industry was another factor in the delay, says Marshall. The FSB is scheduled to begin an economic impact study in April to predict possible outcomes, and any findings are expected to be inputted into the development process in time for QIS 3, he says.

A dearth of adequate data on underwriting risk for non-life insurers has also been a long-running concern of domestic insurers preparing for the new regime. Esterhuizen explains that non-life underwriting risk is roughly 70% of the total gross SCR under Sam, and insurers have still to get to grips with this component of the regime.

South African insurers welcomed the delay as a prudent decision by the FSB. Paul Myeza, chief executive officer of Lion of Africa Life Assurance in Cape Town, says: "I think the postponement of the implementation of Sam is to afford broader input from all stakeholders.

"The regulatory environment in the South African life insurance industry is very stringent so the postponement is not a threat [to policyholders] as we have always had capital adequacy requirements, which will continue to be enforced until Sam comes into place."

Ralph Mupita, chief executive officer of Old Mutual Emerging Markets in Cape Town, hopes the rescheduling will give supervisors more time to refine the Sam regime. "We are happy to work with the regulators on timetable matters and facilitate the introduction in a way that manages the process most efficiently and which minimises the cost to end-consumers. We will be ready to meet the timetables envisaged," he says.