South Africa: SAM: Things You Need To Be Sure Your SAM Co-Ordinators Are On Track With

Last Updated: 8 April 2014
Article by Raymond Bennett and Alfons Van Der Vyver

Insurance regulation as we know it will change – some say for the better, others are not so sure – when the Solvency Assessment and Management (SAM) framework comes into force on 1 January 2016.

This date was confirmed by the Financial Services Board (FSB) in their 2013 update. Their 2014 SAM update is expected shortly and no change in this date is expected. However, it is worth noting that there is a lot of work for the regulator in drafting and finalising SAM and getting it through parliament in these timeframes.

Equally, the industry has a significant amount of work ahead to implement SAM. The FSB's light and comprehensive parallel runs starting in mid-2014 and over 2015 respectively provide a good roadmap for firms to align their implementation plans to meet the 2016 implementation date.

In particular, the 2015 comprehensive parallel run essentially means that firms should treat SAM as live from 1 January 2015 – all of the reporting requirements (including the ORSA) are required by the FSB although it is anticipated that some of the governance requirements for SAM will not be enforced – at least to the extent they are different from the Insurance Laws Amendment Bill (ILAB).

The FSB initiated an economic impact study on the potential impact of SAM in mid-2013. This project is reaching its final stages and the FSB is expected to publish the key findings in 2014. There will also be a presentation of some of the key messages at the Actuarial Society's Life Assurance Seminar (5th and 9th of May in Cape Town and Johannesburg respectively).

Key activities for 2014 and 2015

The 3rd Quantitative Impact Study (QIS3):

  • It is a compulsory exercise for all insurers
  • Currently underway and submission is due on 30 April 2014

Light parallel runs:

  • Will be performed quarterly starting from 30 June 2014
  • This will effectively mean firms will re-do QIS3 for each quarter thereafter

Development of ORSA

  • Ahead of the full parallel run in 2015, firms are expected to develop their Pillar 2 capabilities
  • And in particular their approach to ORSA with many firms performing a dry run in 2014 ahead of the compulsory submission to the regulator in 2015
  • The ORSA is an area that the FSB has targeted in the latest Pillar 2 Readiness survey due 30 April 2014.

Development of Pillar 3 reporting capabilities

  • Whilst the full set of QRTs has not been finalised, a large portion of these templates have been produced
  • Firms will be expected to do full reporting in the 2015 comprehensive parallel run
  • Many firms will aim to automate the production of the QRTs to help meet the tight reporting deadlines for SAM

Further details on each of these activities are noted under each of the sections below

Pillar 1

Whilst the overall structure of the Pillar 1 requirements is largely finalised, the detailed requirements are being developed. The two key developments in respect of Pillar 1 are QIS3 and the changes to the IMAP that the FSB announced in December 2013.

QIS 3

QIS3 is currently underway and is compulsory for open firms, being firms which are currently underwriting new business, with the results being due by 30 April 2014. The submissions required include:

  • Solo submissions covering the full Pillar 1 balance sheet
  • Group consolidated results which also cover the full Pillar 1 balance sheet
  • A qualitative questionnaire covering a wide range of questions on all aspects of the Pillar 1 balance sheet as well as general areas such as preparedness for SAM and the level of difficulty involved in preparing QIS3

There are a number of key changes between QIS2 and QIS3, and even between the draft QIS3 and the final technical specification, including:

  • Risk free rate: insurers may now use the swap rate to discount the cash flows of liabilities that are backed by assets invested in swap based assets
  • Gross and net of management actions: the requirement to produce the results of stresses both gross and net of management actions has been removed and replaced with a requirement to disclose the solvency position of the with profit funds based on draft QRTs
  • Liquidity assessment: additional information has been requested to help define a good liquidity risk indicator
  • Treatment of own shares: QIS3 allows insurers the option to apply the delta NAV (i.e. the change in NAV) approach to their own shares as these are held by and the risks are borne by policyholders
  • Groups – clarification on alternatives to be calculated: QIS3 requires the deduction and aggregation using current capital requirements, and the alternative deduction and aggregation to be calculated. The accounting consolidation approach is optional

Internal Model Application Process (IMAP)

A number of firms are applying for internal model approval to use a customised capital model instead of the Standard Formula SCR. The FSB noted in its December 2013 newsletter that it has changed its approach based on lessons learned during the process to date. Details of the changes are yet to be published on the FSB's website but we understand that the detailed self-assessment template has been changed and that the process will be aligned to a theme based approach. The key themes that will be reviewed include governance, market risk, credit risk, validation and the use test.

The IMAP remains, by necessity, an intensive process and firms should not underestimate both the technical rigour that should be applied to the development and use of an internal model and the documentation requirements to support the use of the model. These aspects form the basis of the application for approval and will be used by the FSB to understand the model on paper (further technical reviews may also be conducted).

Pillar 2

In June 2013, the FSB published its report on the Pillar 2 readiness survey it conducted in mid-2012. The survey identified the ORSA as the key area of concern for the FSB where only 16% of the industry responded that their ORSA was "acceptable" or better – 33% of the industry responded that their ORSA was "weak". The industry's lack of understanding of the ORSA was highlighted with many firms requesting further guidance – the FSB's report on the results of this survey contains further commentary and guidance regarding the ORSA.

The FSB is currently conducting a follow up survey which is due to be completed by insurers and returned to the FSB on 30 April 2014. The focus of this survey is on the approach to the ORSA and progress made to date. The FSB will also conduct interviews with specific firms. The survey is intended to identify firms that are at risk of not meeting the Pillar 2 requirements and the results will be published in the third quarter of 2014.

Currently, many firms are focusing on their ORSA development ahead of the comprehensive parallel run in 2015 which requires firms to run their ORSA process and submit an ORSA report to the FSB.

Firms will also be looking ahead to the ILAB requirements which will mean that some changes to governance structures and processes will be required ahead of the SAM changes.

Pillar 3

There is currently a lot of activity within the FSB structures in this area. The suite of quantitative reporting templates (QRTs) is still under development. The FSB is also considering public comment received during 2013 relating to the assets (investments), and technical provisions templates for life and non-life business. 

It does not appear as if the goal of having the full suite of QRTs released for public comment by the end of March 2014 will be reached. The most significant challenge currently is defining and finalising the segmentation classes, both for life and non-life business.

This, together with other practical difficulties that insurers are facing (e.g. the requirement for collective investment schemes assets to be disclosed on a 'look-through' basis) is creating significant implementation challenges for insurers that need to start working on their reporting solutions.

The qualitative (narrative) reporting requirements are also currently being drafted through various working groups consisting of industry representatives. The qualitative reporting requirements are expected to be met through a similar format as the current regulatory returns – questions which are to be answered on a yes/no basis with explanations and comments provided in certain areas. The feedback from the pillar II readiness survey and follow-up exercise will also be used as guidance.

We believe that many companies have a lot to do to meet the reporting requirements. The main areas of work are likely to focus on:

  • ORSA development ahead of the comprehensive parallel run in 2015. Firms will also be looking ahead to the ILAB requirements which will mean that some changes to governance structures and processes will be required ahead of the SAM changes;
  • Whether the required data is available;
  • How quickly the data can be reported;
  • Whether the systems and processes for reporting data have been sufficiently tested and subjected to appropriate dry-runs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions