ART market could "shield" niche and captive insurers from FCR

Financial condition reporting (FCR) is the proposed revised statutory capitalisation requirements for short term insurers that will be required in South Africa from 2011 onwards. Niche insurers, particularly those writing only one class of business, and wholly owned captives may find the financial and human capital investment required to comply with FCR prohibitive, to the extent that their cost of operations may increase materially. But all is not lost: many of these businesses could find a haven within the well-established and diversified alternative risk transfer (ART) market.

FCR follows a risk based regulatory approach, which is becoming more acceptable internationally. It requires short-term insurers to adopt one of three methods of calculating their capital requirements: the prescribed model (developed to assist companies that choose not to build their own); the certified model (a temporary solution to assist insurers to make the transition from the prescribed model to their internal model); and the internal model, which is a stochastic model developed by individual insurers to determine their particular capital requirements. The recent published Insurance Laws Amendment Bill also requires the appointment of a "statutory actuary" to certify an insurer's technical liabilities and capital requirements.

By 2011, when FCR is expected to come into effect, all short-term insurers using an internal model will have to satisfy the "use test" requirements of the Financial Services Board (FSB), in terms of which the company will have to prove that its internal model has already been in use for one or two years, not just for capital calculations, but used in the day to day management of the insurer.

The FSB recognises that the prescribed models may not cater for the unique business models of captives, cell captives and niche insurers, all of which have no option but to develop their own models. And this is where the challenge lies for niche insurers and wholly owned captives. Developing their own model and appointing one of the country's most expensive skills, in the form of an actuary, will in itself prove to be extremely costly and, in the case of the actuary, could prove to be very challenging. There is a dearth of actuarial skills in South Africa and especially of experienced short-term actuaries, since their involvement in this industry has been minimal until recently. On top of all this, the added burden of increased capital requirements, which will conceivably be necessary within the FCR framework, could result in a material decrease in return on equity for some of these insurers shareholders.

But it's not all doom and gloom: many of these companies could find solvency support within the ART market, and specifically in the cell captive environment, where the approved actuary and model will be provided by the cell captive insurer. This effectively gives the niche insurer and captive owner the best of both worlds: not having to incur the direct costs to conform to FCR in their own right, but still having access to underwriting profits and keeping risk financing strategies intact.

It's also worth mentioning that the cornerstone of the ART market is actuarial expertise; not writing risks in a traditional manner means that this sector has had to do its actuarial "homework". And, since the ART market already includes many self-insurance facilities and niche operators and understands these companies' specific risk profiles, it could well be the answer to shareholders' concerns.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: 011 669-1001

Prepared by:
Melanie Davis, PR@Work
Telephone: 011 615-3309 / 083 225 7450