SA long-term valuation bases

1. SA long-term valuation bases Presented to ASSA members 2 November 2004 – Johannesburg 4 November 2004 – Cape Town

2. Why are we here? • A repeat of sessional meeting held last year, but updated with 2003 statutory returns.

3. What will we show you? • Some key risks and trends in the insurance sector • Anticipated changes for the future • Information on new Analysis of Surplus in LT2000 • Give you brief overview of the LT Insurance market in 2003. • Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

4. What will we show you? • Some key risks and trends in the insurance sector • Anticipated changes for the future • Information on new Analysis of Surplus in LT2000 • Give you brief overview of the LT Insurance market in 2003. • Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

5. Key risks and trends in the insurance sector • Drivers of change: Financial Sector Charter & BEE • Low interest rate environment • Growing consumerism • Legislative and regulatory changes (especially FAIS) • LT insurers believe marketplace is overcrowded – major readjustments to marketing strategies expected Source: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

6. Key risks and trends in the insurance sector (Cont) • Premium growth 7-14% over next 3 years expected • Regulation and governance • King II won’t address concerns raised in Fedsure investigation • Governance rests on integrity of directors and management • Only minority LT insurers feel that commission should be de-regulated • Likely that regulatory pressure will increase in future Source: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

7. International Key risks and trends in the insurance sector • Data based on 2003 reporting data in key IAIS member jurisdictions • Solvency positions and profitability of life insurers healthy • Concerns to supervisors: • Sustained low interest rate environments • Risk of sudden interest rate hikes • Insurers are moving away from equities to debt securities Source: IAIS

8. International Key risks and trends (Cont) • Supervisors use stress test methodologies to monitor sensitivity of sector’s financial strength to changes in market variables. • Stress tests show that life insurance sector can withstand significant shocks in the near term. • Trend to adopt are more realistic and risk-sensitive valuation and capital adequacy regimes. Source: IAIS

9. International Key risks and trends (Cont) • Several supervisors reported initiatives aimed at addressing insurers’ exposure to reputation risk. • EU: financial conglomerate directives – more emphasis by supervisors on group-wide supervision is expected. Source: IAIS

10. International Key risks and trends (Cont) • Reinsurance: • Since Sep 11 a major hardening of market conditions • Many reinsurers showed a significant improvement in underwriting performance in 2002/3 • Lloyd’s also benefited from hardening market bouncing back to profits after the WTC-driven losses. Source: IAIS

11. What will we show you? • Some key risks and trends in the insurance sector • Anticipated changes for the future • Information on new Analysis of Surplus in LT2000 • Give you brief overview of the LT Insurance market in 2003. • Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

12. Anticipated changes • Some “small” Act changes e.g. • Replace Unit Trust Control Act with CIS Control Act • Some discrepancies between ST and LT Acts • Definitions of linked, market related business etc • Types of assets in Schedule 1

13. Anticipated changes • Hybrid capital • Cell business • Reinsurance • Segregation between policyholders’ and shareholders’ assets • Control levels

14. What will we show you? • Some key risks and trends in the insurance sector • Anticipated changes for the future • Information on new Analysis of Surplus in LT2000 • Give you brief overview of the LT Insurance market in 2003. • Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

15. Analysis of Surplus (Statement C7) • Confidential statement • Split between individual life, group business and shareholders • Supplementary statement • Clarification of “other” (As small as possible please) • Space for significant items • Info in total only – but anticipate a split in future per business class

16. Analysis of Surplus (Continued) • Free-floating columns for info per business class/product. (But please – complete total column as well) • Some freedom – please state all assumptions in the section at the bottom of the statement • Guidance manual on FSB website • Info on what should be included in the different items • Please do not change the format! • In fact, do not change the format of any of the statements in the return

17. What will we show you? • Some key risks and trends in the insurance sector • Anticipated changes for the future • Information on new Analysis of Surplus in LT2000 • Give you brief overview of the LT Insurance market in 2003. • Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

18. Overview of LT Insurance market in 2003 • FSB classification: • G – General insurers (27 active in 2003) e.g. Old Mutual, Liberty, Regent Life • L – Linked insurers (12 active in 2003) e.g. Investment Solutions, MCubed, Citadel • R – Reinsurers (6 active in 2003) e.g. Munich Re, Swiss Re

19. Overview of LT Insurance market in 2003 • FSB classification: • A – Assistance insurers (7 active in 2003) e.g. Safrican, Lion of Africa, HTG, KGA • N – Niche insurers (11 active in 2003) e.g. Bonben, Relyant, Medscheme Life • C – Cell captive insurers (4 active in 2003) e.g. Guardrisk, Nova Life

20. Overview of LT Insurance market in 2003 • Distribution of insurers per year-end month

21. Overview of LT Insurance market in 2003 • Who went where? Ranking according to total assets

22. Overview - some key indicators

23. Overview – where are the assets invested?

24. Overview – where are the assets invested?

25. Distribution of assets - 2003

26. Overview - the liabilities and CAR…

27. Overview – remarks • Industry funding factor (excluding CAR) unchanged from 2002 at 1,11. • Industry funding factor (including CAR) unchanged from 2002 at 1,06. • Industry CAR cover slight improvement from 2,18 (2002) to 2,56 (2003).

28. What will we show you? • Some key risks and trends in the insurance sector • Anticipated changes for the future • Information on new Analysis of Surplus in LT2000 • Give you brief overview of the LT Insurance market in 2003. • Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

29. Valuation assumptions in the LT2000 • The results we are about to show represent a mix of greatly different insurers. • The dangers of interpreting industry results should be kept in mind. • We suggest the results to be an orientation exercise and nothing more.

30. What were the hurdles? • To consolidate two very different versions of the LT2000 (38 insurers on version 2.3 and 32 insurers on version 3) • Valution basis (G11 – old; G10 – new) proved to be especially difficult • Next year we’ll have a problem with the AOS (C7) • Therefore – had to make assumptions to derive an industry representative basis

31. Discount rates(LT2000 version 2.3) • Observed rates from 5% to 13% (2002: 6% to 18%) between the classes of business. • Observed inflation assumption between 5% and 9% (2002: 2% and 11%). • Weighted average inflation assumption of 7.2% (2002: 9.6%).

32. Discount rates – 2002 (LT2000 version 2.3)

33. Discount rates – 2003(LT2000 version 2.3) Untaxed Business Annuities Retirement Fund business Taxed Business

34. Discount rates2003 (LT2000 version 3) • Individual business: • Around 38% of insurers entered a representative assumption • Observed rates between 9% and 12.5% between the classes of business. • Average central discount rate (CDR) 10.5% • Highest discount rates for linked and market-related classes. • Lowest discount rates for without-profit annuities. • Observed inflation assumption between 5.4% and 6.5% (Average of 6%)

35. Discount rates2003 (LT2000 version 3) • Group business: • Not a lot of data • Around 16% of insurers entered a representative assumption • Observed rates between 7.8% and 10.5% between the classes of business (lower than individual) • Average central discount rate 9.1% • Average inflation assumption of 5.8%

36. Discount rates2003: LT2000 version 3

37. Discount rates2003: LT2000 version 3

38. Discount rates – 2003Per business class (Individual)(LT2000 version 3)

39. Discount rates – 2003Per business class (Individual)(LT2000 version 3)

40. Spread between discount rate and inflation assumption - 2003

41. Moving left suggesting more valuators using lower differential. Cumulative spread between discount rate and inflation assumption(Comparison between 2002 and 2003)

42. Discount ratesAOS Results • Industry in total made investment profits, compared to losses in 2002 • Per industry grouping: • In aggregate, assistance business and those in run-off made losses (few made profits) • Most profits made by general insurers • Per year-end month: • In aggregate, those with March year-ends made losses (although some did make profits) • Most profits made by insurers with December year-ends

43. Discount rates – AOS results

44. Mortality • In the graphed rates, we tried to determine representative mortality rates for males and females. • Where possible, we used weighted rates, but simplifying assumptions were needed to consolidate the different versions of the LT2000. • For assurance we use SA85/90 ultimate 100% heavy to place weighted rates in perspective. • For annuities we use a(55) to put weighted average rates in perspective.

45. Mortality – Assurance tables • Most popular tables are SA85/90 and SA56/62. • Bigger insurers resort to internal tables. • Specialized classes revert to special tables like A24-29 and ELT8… • Encouraging to see some insurers implementing the ASSA2000 model (where products justify it). • Still significant number that fail to complete G10.1 and G10.2 (usually say – refer to attached valuation report…)

46. Mortality – Assurance table adjustments • Proportional adjustments with or without constant additions are popular with the level of complexity varying. Examples include: • Proportion vary across age (model accident hump) • Or over time (model temporary initial selection) • With risk factors (popular for smoking status, sex and health?) • Age adjustments used mainly for sex differential.

47. Mortality – Assurance males (Linear scale)

48. Mortality – Assurance females (Linear scale)

49. Mortality – Assurance males (Log scale)

50. Mortality – Assurance females (Log scale)