INSURANCE LAWS AMENDMENT BILL

FinancialServices

Board INSURANCE LAWS AMENDMENT BILL

Jonathan DixonDeputy Executive Officer: Insurance

Financial Services Board

FinancialServices

Board

Overview

• Background

• Main elements

○ Governance framework

○ Insurance groups supervision

• Timelines

• Q&A

FinancialServices

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Background

• IMF Report on Standards & Codes, 2010

○ South Africa’s regulatory system is fundamentally sound and is substantially compliant with international standards

○ Insurance regulation is also sound and while the

assessment identified areas for development, these are being addressed

○ Main areas for development include insurance group

supervision and insurer governance, risk management and internal control requirements

FinancialServices

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Background

IAIS International Core Principles (ICP) Comments

Corporate Governance“The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognises and protects the interests of policyholders.”

No explicit requirements for insurers – limited to requirements of the Companies Act.

Risk Management and Internal Controls“The supervisor requires an insurer to have, as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters and internal audit.”

Recommendation to develop insurance specific requirements.

FSB to provide guidance to companies on its observations of good and bad risk management practices.

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○ Effective insurance group-wide supervision is also key to 3rd country equivalence under Solvency II – EU Member states may provide that the calculation of the group solvency shall take into account the Solvency Capital Requirement and the own funds eligible to satisfy that requirement, as laid down by the third-country concerned

Background

IAIS International Core Principles (ICP) Comments

Group-wide supervision“The supervisor supervises insurers on a legal entity and group-wide basis.”

Significant gaps regarding the powers of the FSB and the focus of supervision

FinancialServices

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Background

SAM

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Insurance Groups

Pillar 1 Pillar 3Pillar 2

ILAB introduces interim measures on Pillar 2 and insurance group supervision as a stepping-stone to

SAM implementation in 2015

FinancialServices

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29/10/2008

Background

• Process to date○ SAM Structures developed proposals

○ FSB reviewed and finalised proposals

○ Discussion Documents 1 and 81 reflect the details

○ ILAB drafted based on discussion documents

○ ILAB and Discussion Documents were issued for

industry comment

○ Revised draft submitted to NT for consideration

FinancialServices

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Overview

• Background

• Main elements



• Timelines

• Q&A

FinancialServices

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Governance Framework

The ongoing financial soundness and stability of an insurer is highly dependent on the quality of its

leadership, governance, and management teams, and on its risk management and internal control systems. It is therefore vital that these interim measures prepare insurance and reinsurance companies for the SAM

regime. Ideally the interim measures should increase awareness of risk exposures, as well as improve the

scrutiny and management of these matters.

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Out- Out- sourcingsourcing

FinancialServices

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• Objective

○ Adopt and implement an effective governance framework

○ Prudent management and oversight of business

○ Adequately protects the interests of policyholders

○ Proportionate to nature, scale and complexity of business and risks.

FinancialServices

Board

• Requirements

• adequately protects the interests of policyholders.


Org Structure Compliance Written Policies

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Board of Directors

• Objective

○ Adopt and implement a governance framework

○ Prudent management and oversight of business

○ Adequately protects the interests of policyholders.

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• Requirements over and above the Companies Act, given objective of adequate policyholder protection

Board of Directors

Composition Structure Duties

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Senior Management

• Key requirements

○ Carry out day-to-day operations effectively, in line with strategies, policies and procedures

○ Promote a culture of sound risk management, compliance, and policyholder protection○ Provide adequate and timely information to the Board, including information necessary

for the monitoring and review of company performance, risk exposures, and performance of senior management

○ Provide the registrar and other stakeholders with information required to satisfy legal and other obligations

FinancialServices

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Risk Management System

• Objective

○ The risk management system must be capable of supporting the Board of Directors in its responsibilities with respect to the furtherance of the safe and sound operation of the insurer and the protection of policyholders.

FinancialServices

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• Requirements

• Adequate for nature, scale and complexity, adapted• Strategy should be across all activities, consistent with business strategy

Risk Management System

Elements Strategy

Board & Management reports - material risks, and risk management effectivenessBoard & Management reports - material

risks, and risk management effectiveness

Material Risks

Regular review for modification & Improvement - documented

Regular review for modification & Improvement - documented

processes for contingency planning, business continuity & crisis management

processes for contingency planning, business continuity & crisis management

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Internal Control System

• Objective

○ The Internal Control System should provide the Board of Directors with reasonable assurance from a control perspective that the business is being operated consistently with the

(a) strategy set by the Board of Directors,

(b) agreed business objectives,

(c) agreed policies and processes, and

(d) laws and regulations.

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1 2 3 4

Control Functions

• General Requirements

○ necessary authority, independence, resources, expertise and access to all relevant employees and information

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Control Function Heads

Conditions Requirements

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Outsourcing

• Requirements

○ An insurer that outsources any function or activity must have an outsourcing policy that includes the matters as may be prescribed.

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Outsourcing - Limitations

• Cannot outsource aspects which may:

○ Materially impair the quality of governance

○ Materially increase risk or affect ability to manage risks and meet legal & regulatory requirements

○ Impair the registrar’s ability to monitor compliance with regulatory obligations

○ Undermine continuous, fair & satisfactory service to policyholders

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Outsourcing – Requirements

○ Remuneration must be reasonable and commensurate with the activity outsourced

○ The Board must be satisfied that outsourcing of a control function does not undermine its independence, objectivity, and effectiveness

○ Prior to outsourcing a management, control or material function, must notify Registrar

○ ILAB will replace current Directive 159

FinancialServices

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Overview

• Background

• Main elements



• Timelines

• Q&A

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Insurance Groups

• Significance○ Lessons from financial crisis – focus on system-wide

supervision and systemically significant financial conglomerates

○ Risks to policyholders can arise from elsewhere in the group

○ Insurance groups are exposed to and a source of specific risks, including liquidity risk, contagion risk, complexity risk, agency risk

○ Financial conglomerates are a prominent feature of the SA financial landscape

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Insurance Groups - Definition

• “Two or more entities of which at least one is an insurer and one has significant influence on the insurer.”

• The significance of influence is determined based on:

○ participation

○ influence and / or other contractual obligations

○ interconnectedness

○ risk exposure

○ risk concentration

○ risk transfer and / or intra-group transactions

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Category 1 : 1 insurer + 1 or more non-financial entities

Category 2 : 2 or more insurers

Category 3 : Financial conglomerate

An insurance group is a financial conglomerate if it conducts insurance activities plus financial activities either:

o In at least one other regulated financial sector; o In at least one non-regulated financial sector to

the extent that the financial activities in that sector are not subject to group-wide/consolidated supervision by sectoral frameworks.

Insurance Groups - Definition

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Group-wide Supervision

• Regulatory requirements○ Establish a non-operating holding company (NOHC): can be

applied at insurance group or insurance sub-group level

○ Transparent group structure

○ Registrar’s approval for material acquisitions

○ Group solvency assessment

○ Possible capital add-on, limits on intra-group transactions and risk concentrations

○ Group-wide governance and reporting requirements

FinancialServices

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Overview

• Background

• Main elements



• Timelines

• Q&A

FinancialServices

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29/10/2008

Timelines

• Way forward○ Aim to table in Parliament before end-2012

○ Implementation mid-2013 – stepping stone to SAM

final measures

○ Drafting of subordinate legislation

○ SAM Pillar II Readiness Review

○ Information request to all insurance groups on legal

and organisational structure

○ Finalise group returns

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Questions

INSURANCE LAWS AMENDMENT BILL

Documents

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