Introduction of SAM to the SA market

1. Introduction of SAM to the SA market Ian Marshall Head of Department: SAM 11 June 2012

2. agenda • Overview of SAM implementation • Quantitative Impact Studies • Pillar 2 Readiness

3. agenda • Overview of SAM implementation • Quantitative Impact Studies • Pillar 2 Readiness

4. What is SAM? • New risk-based solvency regime for both long-term (life) and short-term (non-life) insurers and reinsurers, to be in line with international standards, based on Solvency II • Staged implementation • 1 January 2012 – Revisions to the Non-Life quantitative regulatory requirements • 1 January 2013 – Interim measures, introducing enhanced governance and risk management requirements, as well as group supervision • 2014 – Parallel run of SAM and current basis • 1 January 2015 – Full implementation • 3 Pillar approach, placing a lot of emphasis on good management and transparency • Quantitative requirements based on Market Consistent valuations, with the capital requirement reflecting the risks in the business • Development through extensive industry consultative approach

5. The three pillars

6. Solvency Assessment and Management (SAM) Steering Committee Stakeholders participating in the SAM Forum Structures CONSULTING PROCESS Insurance & Reinsurance Companies Pillar I Quantitative Requirements Sub Committee Pillar II Risk Management & Governance Sub Committee Pillar III Reporting & Disclosure Sub Committee The South African Insurance Association (SAIA) Technical Provisions Task Group Governance Task Group Reporting & Disclosure Task Group Economic Impact Study Task Group Association for Savings & Investment SA (ASISA) Capital Requirements Task Group Own Risk and Solvency Assessment & Use Test Task Group SAM Communication Task Group Tax Task Group Actuarial Society of South Africa (ASSA) National Treasury Capital Resources Task Group Stress Testing Task Group The South African Institute of Chartered Accountants (SAICA) Assets Task Group South African Revenue Service (SARS) Internal Models Task Group IRBA Insurance Groups South African Reserve Bank (SARB)

7. Developing the SAM framework SAM Governance structure (including public consultation) FSB review Quantitative Impact Studies • Solvency II Framework • Framework Directive • Delegated Acts • EIOPA binding standards and guidance Economic Impact Study Public Comment • IAIS ICPs Reinsurance Project • Other Regulatory Regimes • APRA • OSFI National Treasury and Parliamentary Process

8. agenda • Overview of SAM implementation • Quantitative Impact Studies • Pillar 2 Readiness

9. QIS 1 - Scope and limitations • Participation: 35 life insurers, 50 non-life insurers, 5 life reinsurers, 5 non-life reinsurers • Voluntary QIS exercise required significant resources to complete • Some insurers require more guidance on the various SAM methodologies • Some insurers experienced problems in obtaining the necessary data and inputs • Some of the QIS submissions had to be cleaned by the FSB before the analysis could take place • Two of the submissions were excluded from the analysis • Insurers generally reported that their reliability of results were good

10. QIS 1 - Overview • Aggregate view across all submissions: • The majority of insurers have shown an increase in both the available capital as well as the capital requirement • For two thirds of the life insurers, this increase in available capital is more than the increase in the capital requirement, leading to a larger free surplus • Many insurers showed a decrease in capital coverage ratio., the capital coverage ratio can decrease even where the actual amount of free surplus has remained the same or has increased

11. QIS 1 - Overview (2) • Proportion of respondents not meeting prescribed capital requirements:

12. QIS 1 - Solvency capital requirement (scr) • Contribution of risk components to Basic Solvency Capital Requirement (BSCR): Non-life insurers • Largest component of the BSCR for non-life insurers is non-life underwriting risk, followed by market risk. Counterparty default risk is the other main component of the BSCR, with no significant exposure from any of the other risk components

13. QIS 1 - Scr – non-life insurers • Market Risk: greatest components are equity risk and interest rate risk • Equity risk: 91 % of equities are locally listed. • Non-life underwriting risk: greatest components are premium and reserve risk and catastrophe risk • P & R risk: concerns regarding non-proportional reinsurance and risk mitigation strategies • Cat risk: man made cat component was significantly greater than natural cat component. Largest components of man made cat risk were credit and terrorism risks.

14. Timeline for SA QIS 2

15. agenda • Overview of SAM implementation • Quantitative Impact Studies • Pillar 2 Readiness

16. Pillar II Readiness review Key Components Readiness Assessment

17. Pillar II Readiness review Draft timelines:

18. Format of survey For proposed SAM Pillar II requirements Further questions on • Plans for future development • Suggestions for proportionality • Not intended to be a checklist of the final Pillar II requirements. • Not all Pillar II requirements are included. • Pillar II requirements are still under development.

19. Questions ???