update on prudential standards (sam)life clients with negative tps can expect lapse risk to drive...

Update on Prudential Standards (SAM) Guardrisk client workshop 28 November 2018

Agenda

Where are we?

Latest developments

Business model focus areas

Where are we?

Where are we?

AFTER STARTING IN 2010 Insurance Act effective date of 1 July 2018 is announced by Nhlanhla Nene on 27 June 2018

Insurance Act forms the primary legislation and is supported by secondary legislation in the form of Prudential Standards

Separate Financial Soundness Standards (Branches, Groups, Insurers (FSI), Lloyds, Micro-insurers)

Continues to be 13 Prudential Standards for Insurers with no significant changes to those published on 28 June 2018

Large parts of the ST and LT Acts of 1998 replaced by Insurance Act

In short SAM is now official law

Where are we? continued…

FSI 2.3 Determination of Eligible Own Funds

FSI 2 Valuation of Assets Liabilities and

Eligible Own Funds

FSI 2.2 Valuation of Technical Provisions

FSI 2.1 Valuation of Assets and Liabilities Other than Technical Provisions

FSI 4 Calculation of the SCR Using the Standardised Formula

FSI 4.1 Market Risk

Capital Requirement

FSI 4.2 Life Underwriting

Risk Capital

FSI 4.3 Non-life

Underwriting Risk Capital

FSI 4.4 Operational Risk Capital

Latest developments

Latest developments

Licence conversion process

PROCESS TO CONVERT EXISTING REGISTERED INSURERS TO LICENCE UNDER SAM

Latest developments continued…


Additional work (once-off) as part of new Insurance Act of 2017

Earmarked to occur during 2 year transition period for all insurers

Cell captives included in first wave (Jul 2018 to Dec 2018)

Process initiated by PA through a formal letter (Stage 1)

At this stage have applied for converted licences to enable: 1) Non-Life cell captive 2) Life cell captive 3) Micro-insurer cell captive (combined)



Stage 1 – Complete 2018-10-02

Stage 2 - ? Policy decisions influencing debate

Stage 3 - ? Work dependent on stage 2

Stage 4 – ? Internal PA process to consider application

Stage 5 and 6 - ? Dependent on prior


Ancillary Own Fund (AOF) Applications

Process started in Feb 2018

Respond to Regulator in provided template within short turn-around time

Had to provide overview of anticipated financial applications required under SAM – included in this AOF applications

Not all cells have Own Funds more than Solvency Capital Requirement (OF < SCR) Such applications would seek to recognise the economic value of the shareholders agreement to have part of the unpaid share capital not yet called up recognised as “ancillary” funds in the cell’s regulatory balance sheet


Ancillary Own Fund (AOF) Applications

Have to apply on cell by cell basis

Notable resource effort to compile required information and make application

Already submitted majority of AOF applications mid-Oct 2018

Remainder submitted by 30 Nov 2018

Addressing initial PA questions as part of 30 Nov 2018 submission


Eligible reinsurance Under Insurance Law - reinsurance may be allowed (is eligible) where reinsurer is licenced in an equivalent jurisdiction


Eligible reinsurance Mauritius and African territories not on the list

Guardrisk has lobbied in both Mauritius and South Africa to have Mauritius added to the list of equivalent jurisdictions

Formal process to consider Mauritius underway at the PA

Have been expecting communication to the industry from the PA on this process and progress – continue to follow-up

On the date when Guardrisk licence converted under Insurance Law of 2017, then may only allow for eligible reinsurance (not on list = not in)


Credit life capital requirements

Need to be issued as a life policy under new Insurance Act Options in Guardrisk 1) Issue under life cell captive 2) Issue under micro-insurance cell captive

Potential to manage solvency capital requirements in deciding future of credit life business: 1) When issued as Accident and Health under non-life licence (30% to

50% of 12 month NWP) 2) When issued as Risk under life licence (15% to 30% of 12 month

NWP) 3) When issued as Risk under micro-insurance licence (15% of 12

month NWP)

Business model focus areas continued…

Retention decisions

Business models with minimal retention and trading off reinsurer balance sheet result in non-economic sustainable SCR

Alternatively stated, 0% retention does not equal SCR of 0 under Prudential Standards of Insurance Act

Required to calculate net of reinsurance SCR that allows: 1) Retention amount 2) Plus reinstatement cost 3) Plus allowance for reinsurer default on ceded portion With calculation done at a per peril event eg. earthquake, hail and horizontal (multiple smaller cat events) within natural catastrophe

100% retention, gross SCR

(SAM)


Retention decisions

SCR FLOOR at 0% retention Higher than

zero

0

SC

R

unde

r rei

nsur

ance

pr

ogra

m

Retention % under reinsurance program

0% retention, net SCR (SAM)

Previously – reinsurance operated linearly i.e. a zero SCR was possible

when 0% retention


Single large risks

SCR BSCR

Non-Life Underwriting Risk

Premium & Reserve Risk

Catastrophe Risk

Lapse Risk

Market Risk

Interest Rate Risk

Equity Risk

Currency Risk

Property Risk

Spread and Default Risk

Concentration Risk

Illiquidity Premium

Operational Risk


Single large risks

Accepting new large target risk (1 policy) can increase the overall SCR immediately

Conversely, dropping single large target risks (1 policy) can reduce overall SCR immediately

Change for underwriters to consider in that single policy issued can now influence SCR directly and immediately

Mathematically efficiently manage SCR by either: 1) Avoiding “accommodation” of single large target policy OR 2) Write multiple similar large policies (CAT does jump as much with

2nd, 3rd, 4th etc. policy)


Mass lapse reinsurance

Before SAM there was limited interest in mass lapse reinsurance

Life clients with negative TPs can expect Lapse risk to drive SCR

Return on capital is increased by lapse RI purchase, although cost to the P&L, better value for money than retaining the lapse risk in the SCR

Early days, business model of floats translates to additional market risk SCR (not the case before Insurance Act)

Reconsidering Floats

Alternatives like dedicated bank accounts exist and have a process implementation timeline (both parties impacted operationally)

CONCLUSION

NOW LIVING IN A RISK BASED REGULATORY REGIME

SLIDE NO: 21

SOME ASPECTS OF BUSINESS MODELS NEED TO CHANGE

FOCUS MOVING TO SEARCH FOR OPPORTUNITIES

SEEN SOME OPPORTUNITIES, LIKELY TO DISCOVER MORE

Thank you

update on prudential standards (sam)life clients with negative tps can expect lapse risk to drive...

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