FINANCIAL CONDITION REPORTING

Ioana AbrahamsIoana Abrahams

13 November 200913 November 2009

13/11/2009

Slide 2

FinancialServices

Board

AGENDA

Current methodology

Background

FCR

FCR to date

FCR Graphical Overview

Model options under FCR

Prescribed Model

Internal Model

Partial Model

Conclusion

Way forward

13/11/2009

Slide 3

FinancialServices

Board

CURRENT METHODOLOGY

Current methodology

Insurance liabilities:

Outstanding claims reserves (OCR)

Incurred but not reported reserve (IBNR)

Unearned premium provision (UPP)

Unexpired risk reserve (URR)

Contingency reserve: 10% of NWP

Capital requirement:

Additional amount: 15% of net written premium (NWP)

Minimum of R3 million (shortly to be increased to R5 million then 10 million under FCR)

13/11/2009

Slide 4

FinancialServices

Board

BACKGROUND

Current methodology doesn’t allow for:

Underlying risks

Size of insurer

Diversification / concentration

Risk management

FSB is implementing risk-based supervision

IAIS requirements must be met

Act changes made during 2008 to facilitate FCR

World-wide trend to move to different techniques

13/11/2009

Slide 5

FinancialServices

Board

FCR TO DATE

The FCR process was started in 2002

Various working groups formed

The first calibration done during 2005

First issues paper released for comment in December 2006

Comments received were taken into account and this resulted in a recalibration exercise

Recalibration exercise started in 2007; now nearly complete

13/11/2009

Slide 6

FinancialServices

Board

FCR GRAPHICAL OVERVIEW

Fair value of assets

Ris

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Financial Condition Report

Excess Assets

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Free Assets

LiabilitiesConsist of best estimate plus

additional prescribed margins.

Minimum CapitalRequirement

Minimum of R10m

VERY SIMILAR TOLIFE INSURANCE

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Slide 7

FinancialServices

Board

MODEL OPTIONS UNDER FCR

Prescribed Method

Industry structure

Industry Parameters

Internal Models

Company structure

Company parameters

Peer review (application)

Annual certification by an actuary

Partial Models

A combination of above two options

Revised issues paper

13/11/2009

Slide 8

FinancialServices

Board

PRESCRIBED MODEL

Based on aggregate industry data – “average” view

Formulae for reserves and margins

Capital requirement allows for proportional reinsurance and expenses

Some shortcomings of initial model:

Non-proportional reinsurance

Data not always reliable

Cell business

Reinsurance companies

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Slide 9

FinancialServices

Board

PRESCRIBED MODEL

Capital requirement

Consists of:

Asset Capital Charge

• Very small part of total capital charge

• Protection against loss in market value of the assets backing the

liabilities and other capital elements

Insurance Capital Charge

• Major part of total capital charge

• Calculation tool in ST return

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Slide 10

FinancialServices

Board

PRESCRIBED MODEL

Assets

Use current Act & Directives

Insurance liabilities

Claim liabilities

OCR – best estimate (should be the same)

IBNR – six-year run-off per business class

Premium liabilities

UPP – as before, seen as 75% sufficient

URR – as before

Prescribed margins take liabilities to 75% sufficiency

13/11/2009

Slide 11

FinancialServices

Board

PRESCRIBED MODEL: REVISED

Small working group was formed in 2007

Considered comments on how previous method could be improved

Terms of reference for recalibration

Deloitte was appointed for the recalibration exercise

Three years of data added (FY 2005 - 2007)

Aims:

Simplify previous method

More appropriate method for typical insurers

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Slide 12

FinancialServices

Board

PRESCRIBED MODEL: REVISED

The following changes were made to the previous prescribed model:

Simplify diversification and correlation

Discounted IBNR

Credit Risk: Reinsurance

Credit Risk: Assets

Non-proportional reinsurance (MER)

Remove expense and investment return adjustment

Minimum CAR – will include an allowance for operating expenses and operational risk

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Slide 13

FinancialServices

Board

PRELIMINARY RECALIBRATION RESULTS

13/11/2009

Slide 14

FinancialServices

Board

EFFECT OF UPDATES

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Slide 15

FinancialServices

Board

INTERNAL MODEL

This is (in our opinion) what an insurer should develop – However:

Determining regulatory capital should not be the primary reason

Appropriateness with respect to complexity of risks

Detailed data required

Guidance will be updated, taking international practices into account

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Slide 16

FinancialServices

Board

INTERNAL MODELS

Qualitative standards

IM based on sound risk management principles and structure

Integral part of day-to-day management

Independent review

Audit trail

Analysis of change

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Slide 17

FinancialServices

Board

INTERNAL MODEL

Specification of risk factors

Must consider all risks

Rank most important risks

Suitable method chosen – not necessarily stochastic

Allow for correlations between risks (method not prescribed)

Stress testing

Specific tests not prescribed

Test model sensitivity to assumptions

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FinancialServices

Board

INTERNAL MODEL

Sign-off and review

Board assumes ultimate responsibility

Statutory actuary sign-off of calculations

Actuary to follow professional guidance

IAA guidance on internal models

SA guidance for reserving completed

External review required for approval (at this stage)

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Slide 19

FinancialServices

Board

INTERNAL MODEL

Proposed model approval process

Approval for calculating regulatory capital

External providers’ models not approved automatically

Application form

On-site visits

Use test, calibration test, statistical quality test

Model used at least one year prior to implementation

Progress from prescribed partial internal model

Can’t regress without approval

Application subject to a fee

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Slide 20

FinancialServices

Board

PARTIAL MODEL

This is a combination of own company specific factors and industry factors

Same approval process proposed as for the full internal model route

13/11/2009

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FinancialServices

Board

CONCLUSION

The FCR model is specific to the short-term environment

The proposed FCR approach fits in with international developments

Risk-based capital requirements

A better model to run an insurance business

13/11/2009

Slide 22

FinancialServices

Board

WAY FORWARD

New Solvency Assessment and Management (SAM) project

Based on Solvency II

Will encompass both life and short-term insurance

Work done to date on FCR will be the first draft for discussion for short-term insurance

First Steering Committee meeting end November 2009

Full implementation 1 January 2014; however, standardised model for short-term insurance to be implemented on 1 January 2012

THANK YOU

Ioana Abrahams

Actuarial Analyst: Insurance

Tel: 012 428 804

Email: ioanaa@fsb.co.za