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Insurance Group Supervision

Insurance Group Supervision

Additional regulatory requirements regarding supervisory, reporting and governance frameworks for insurance groups were expected to be enacted by means of what was called the Insurance Laws Amendment Bill (referred to as ILAB) during 2014.

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In April 2014 Finance Minister Pravin Gordhan asked that the Insurance Laws Amendment Bill (ILAB) be withdrawn. Shortly thereafter the Financial Services Board (FSB) announced that the requirements that were going to be included in the ILAB, will now be introduced through alternative means as follows:

  • Enhanced governance and risk management framework requirements will be introduced through a Board Notice, possibly for implementation by 1 January 2015; and
  • A formal framework for insurance group supervision will be provided through the Twin Peaks process . The effective date of implementation of the formal framework for group-wide supervision will be announced later in 2014 and is currently expected to be 1 January 2015.

According to the ILAB requirements, the insurance group supervisory framework will apply to an “insurance group” where insurance groups are defined as groups including 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.

Insurance groups will cover all relevant entities (including holding companies, non-regulated entities and special purpose vehicles). This means that group-wide regulatory requirements may now extend to companies elsewhere that previously may not have been subject to such regulations. The scope will also extend to risk concentrations and intra-group transactions.

The following items are expected to be required in terms of ILAB:

  • Insurance groups need to ensure that their group structures are transparent.
  • A non-operating holding company must adopt, implement and document an effective governance framework. This framework should provide for the prudent management and oversight of the insurance group’s business (including the business of regulated and non-regulated persons) and should adequately protect the interests of insurers (and their policyholders) that are part of the insurance group.
  • There is a requirement for group disclosure and supervisory reporting.

Group supervision under SAM will be much wider than just considering group solvency. It will be a regulatory and supervisory tool aimed at helping supervisors assess the risk that a (re)insurer’s membership of a group brings to the policyholders of that company. Group solvency assessments will be an important part of this, but of equal, if not greater, importance are the group’s governance and risk management processes. The following aspects of group supervision will need to be considered:

  • An effective risk management system should be established and maintained.
  • A group own risk and solvency assessment (referred to as ORSA) is required to be undertaken regularly and when the risk profile of the insurance group changes materially.
  • The proposed insurance group return will be completed on a bi-annual basis and will be unaudited. On an annual basis each insurance group will be required to submit an audited return. 

With the impending group supervision legislation, groups need to consider the structural, operational and compliance implications of this legislation as part of their growth strategies (for example into Africa). Some key considerations are:

  • Groups will need to consider whether the current group structure will be most efficient under SAM, taking into account group supervision and other business considerations.
  • Subsidiaries outside of South Africa may find that under SAM they need to comply with the requirements of a stricter group regulator.
  • With regard to group supervision implications on subsidiaries, it is important that proportionality be kept in mind in applying risk management and capital requirements to a proportionally smaller earnings contributor to overall group profitability.
  • Where deemed necessary, the FSB will have the right to add an additional capital requirement for any risks not reflected in the insurance group solvency submission.
  • Groups will need to develop suitable, bespoke internal procedures, including effective global frameworks to manage, monitor and report worldwide group risk and capital. These procedures and framework will also encompass subsidiaries outside of South Africa.

Successsful groups will be those that are forward-looking and embrace the group risk principles that the regulation is introducing. The key to success is addressing the challenges presented through an integrated group supervision strategy that aligns to the broader business objectives.

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