SAM will keep capital and risk management in the spotlight

Until quite recently short-term insurers were grappling with the challenges of implementing financial condition reporting (FCR) – the proposed revised statutory capitalisation requirements for short-term insurers from 2011 onwards. But now the Financial Services Board (FSB) has announced that FCR will only be one part of the solvency management equation. Instead, FCR will be superseded by, and included in, a revised capital regime to be known as Solvency Assessment and Management (SAM), which will apply to both the life and short-term insurance industries.

SAM will be based on the principles of the Solvency II Directive, which was adopted by the European parliament in 2009 and which will be implemented in European Union countries in 2012. 

Solvency II is based on three pillars, much like the Basel II approach developed for the banking industry, and it similarly aims to align capital requirements more closely with actual risks. The first pillar centres on quantitative requirements, which relate to issues like the valuation of assets and liabilities and the determination of capital requirements for particular risks; the second pillar deals with qualitative requirements including governance, risk management and supervisory processes; and the third pillar relates to reporting and disclosure. A communication recently issued by the FSB to local insurers says that the SAM project “envisages changes to each of these areas in line with Solvency II proposals” but which cater for the unique South African environment.

According to an international report Risk Management in the Insurance Industry and Solvency II , lessons learned from Basel II reveal two key imperatives.

“The first involves implementation, and the need to influence the entire insurance organisation. Solvency II requires well-planned change programmes, the impact of which will reach from the front office to the board of directors and from risk management to IT.

“The second major challenge will be managing the strategic consequences. Risk-savvy insurers can use insights from their sophisticated internal risk models to develop risk-based marketing, and employ risk-based performance management, helping to optimise their balance sheet. Insurance companies that move quickly to execute such risk-based activities are likely to become winners in the insurance industry.”

There is no doubt that SAM will impact significantly on the local insurance industry in that it will change the way that capital is managed. And this will be particularly true in the alternative risk transfer environment where a number of sources of capital are used; and capital usage and distribution will become an important factor in future.

Currently short-term cell captive’s capital calculations are relatively arbitrary; and even life cell captives that use actuarial data to determine capital requirements, do not take into account the entire risk spectrum. But, going forward, capital calculations for both life and short-term insurers will be completely risked based – taking into account all risks.

Just like Basel II put risk management centre stage in the banking industry, so SAM will force companies to identify and manage their risk properly. The current 25% solvency requirement will no longer be able to shield companies that do not remain firmly and relentlessly focused on risk management in order to lower the capital requirement.

One issue that the regulator will have to grapple with is how to treat cell captive insurers within the SAM structure, given the unique nature of their business model. Solvency II acknowledges the differences between the traditional market and ART facilities like captives and cell captives and it is expected that local regime will follow suit.

The FSB has adopted an inclusive consultative process with regard to the development of SAM and is currently engaging with various industry stakeholders. Thus niche players, like cell captives, will be able to provide input in order to have their uniqueness recognised.

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

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