Chapter 7- South African Regulatory Environment (LTIA 1998 & IA 2017) Flashcards Preview

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Flashcards in Chapter 7- South African Regulatory Environment (LTIA 1998 & IA 2017) Deck (20)
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Describe the twin peaks model of financial regulation? (2)

The financial sector regulation act August 2017 gives the South African reserve bank an explicit mandate to maintain financial stability.

From April 2018 onward the prudential authority performs macro prudential regulation and the FSCA (independent) is responsible for market conduct.


Describe the power, duty and obligations of the head of actuarial function? (1,7,1,4,1,3,1,3,1,3)

• An life insurer must have an effective actuarial function to assist the board of directors regarding matters below

(Responsibilities guided by APN 106)

• Review of the adequacy and reliability of technical provisions, MCR and SCR
o Data (sufficiency and quality)
o Assumptions
e.g. life underwriting risk, market risk, operational risk, liquidity shortfall indicator
o Methodologies/Models
o Appropriateness of approximations or judgement of their is insufficient data
o Analysis of change (best-estimate assumptions relative actual experience) (appropriateness and impact of management actions and risk mitigation techniques)
o SCR using (partial) internal models or insurer-specific parameters

• Review ( and sign off where aprropriate) returns to PA

• Review of financial position (Regulatory returns OF1)
o Risks to solvency and liquidity
o Solvency capital ratio
o Future solvency / ORSA Report
o Risk monitoring as part of ORSA

• Review shareholder distributions
o Impact of distribution on Solvency Capital Ratio

• Opinion of stipulated policies
o Asset-liability management
o Underwriting
o Reinsurance and other forms of risk transfer

• Review of product design, premium rates and policy conditions

• Consider policyholders’ reasonable benefit expectations when reporting on above relating to:
o Surrender values
o Level of bonuses
o Level of fees, expense charges and risk charges

• Review of profit allocations
o Awarding of bonuses to policyholders

• Transfer of business and other significant transactions
o Transfer
o Merger
o Acquisition


Describe Governance and operations standards for insurers 3 section 2.2? (4)

(A paragraph summarising the high-level responsibility of HAF and other control functions)

The head of compliance, risk management and actuarial control are responsible to provide input to the board of directors
regarding the operations, efficiency and effectiveness of
components of risk management and internal controls in the area of responsibility.


Describe the points in governanace and opretaion standards section that regulate the control functions of a life insurer? (10)

• Head of control functions must be fit and proper

• Adequate policies and procedures relating to appointment, dismissal and successions and the board of directors will be actively involved in these procedures

• The appointment, performance assessment, remuneration, disciplining and dismissal of the head of each control function (excluding internal audit function) must be approved by the board of directors

• The appointment, performance measurement, remuneration, deplaning and dismissal of the head of internal audit must be done by the board, its chairperson and the audit committee

• Remuneration should not be predominately consistent with financial performance of insurer but needs to account for financial soundness as well as long-term strategy

• Head of control function must also have segregated duties from operation business lines

• The head of control functions must have:
o Sufficient seniority and authority to be effective
o Reporting lines that support their independence
o Unrestricted access to relevant information
o Direct access to the board of directors without presence of senior management to address concerns about risk management and systems controls
o Freedom to report to board without the fear of retaliator from senior management

• Head of control function must report directly to the board or relevant committee

• An insurer in light of the nature, scale and complexities of the insurer’s business and risk appoint one person as the head of more than one control function (other than internal audit)

• The head of a control function must without delay report in writing to the board of directors or and relevant committees is the reasonably suspect that a financial law has been contravened.


Describe the Insurance Act section 36&37 regarding maintenance of financial soundness (definition) (2)

as well as the actions that can be taken by the prudential authority (regarding prescribing the determination methodology (3) as well as requiring additional capital to be held (6))?

• The insurers must maintain the financial soundness by ensuring that eligible own funds are at least equal to the greater of the minimum capital requirements or solvency capital requirements

• A controlling company in respect of an insurance group must maintain financial soundness by ensuring that eligible own funds are greater than the group prescribed solvency capital requirements

• The PA may appoint a qualified representative (at insurers cost) if they believe that values used to determine financial soundness are not suitable

• Alternatively the PA may provide a methodology of how the values should be calculated

• The PA may also require the insurer to get procedures independently reviewed by a person approved by the prudential authority

• The PA may direct a capital add-on for the insurer if they believe that the risk profile of the insurer significantly deviates from the underlying assumptions used to calculate the solvency capital requirements

• The add-on referred to above should ensure that solvency capital requirements are in line with underlying prescribed assumptions

• Or if the company significantly deviates from the governance framework in this Act

• The capital add-on will then reflect the significance of the deviation from the governance framework

• The capital add-on may be added on to the minimum capital requirements if greater than the SCR

• The add-on will be reviewed at least once a year and remove the capital add-on imposed if the PA is satisfied that deficiencies are remedied


Describe Insurance Act section 39 regarding the failure to maintain financial soundness? (5)

• Procedures must be in place to identify deteriorating financial soundness

• An insurer may not declare or pay dividends or make a profit distribution if it currently fails to comply with section 36 or the declaration will result in failure of compliance

• An insurer must notify the prudential authority without delay if it fails to provide for technical provisions or solvency capital requirements including reasons for the failure and implemented remedial procedures

• An insurer must also without delay inform the PA if they think that in the following three months they may not be able to meet solvency capital requirements

• The PA may take measures necessary to address failure regarding financial soundness compliance


Describe the valuation of assets, liabilities regarding demonstrating financial soundness? (6)

The economic balance sheet ensures that assets and liabilities are calculated at market consistent values

Elegible own funds (excess assets over technical provisions) needs to solvency capital requirements in order to demonstrate financial soundness

The minimum capital requirements refer to the lower bound of solvency capital requirements to prevent exposure to unacceptable amount of risk for policyholders

The MCR and SCR are intended to serve as indicators for regulatory intervention with measures appropriate to the degree of risk. The SCR is higher than the MCR and will be the first trigger for regulatory intervention if breached.

Insurers are allowed to calculate all or parts of SCR using an internal model. The model needs to be approved by the regulator and would be subject to meeting certain tests before it can meet the SCR calculation.

Long-term insurers are also required to calculate a liquidity shortfall indicator. This is a high level assessment of the magnitude to liquidity risk due to an event in the calculation of SCR (risk based calculation).


Describe the governance requirement regarding ORSA and SRP in the Insurance Act? (6,6)

The two main elements contained in the governance requirements of the Act

• Own Risk and solvency assessment (ORSA)

• ORSA is the entirety of process and procedures
• Employed to identify, access, monitor, manage and report short-term and long-term risk undertakings
• And determine own funds to ensure solvency is met at all times
• And are sufficient to meet business strategy
• Over a suitably long time horizon
• Across a diverse range of scenarios

• Supervisory review process (SRP)'

The PA will use the statutory review process (SRP) to access the ability of the insurer’s systems to identify, access, monitor and manage risk. The SRP considers:
• Systems of governance and risk assessment (inclosing the ORSA)
• Technical provisions
• Capital requirements
• Investment rules
• Quality and quantity of own fund
• Use of a full or partial internal model


Describe the objectives of ORSA (8) , What ORSA must include an Assessment (5) of as well as what should be included in an ORSA report (7)?

The insurer would need to perform a forward looking, risk based own risk and solvency assessment. The objective would be to access:
• Resilience of insurer to possible scenarios
• Overall solvency needs of the insurer taking into account the risk profile, risk appetite, business strategy
• Compliance with financial soundness
• Significance of deviation of risk profile relative to risk profile underlying financial soundness calculations
• ORSA is conducted using a longer time horizon than conventional risk assessments (e.g. include a three year capital projection, key performance and risk indicators consistent with growth and economic assumptions)
• An ORSA must be done annually, where risk materially changes or directed by the PA
• Needs to demonstrate risk management integration with governance i.e. included in strategic decisions regarding capital planning and management.
• The PA may direct the insurer to conduct an ORSA again if they are not satisfied that it is in line with the insurers risk profile

An ORSA must include an assessment of
• Potential future changes in the risk profile in stressed situations
• Quantity and quality of own fund needed over business planning period
• Quantity and quality of own funds available to the insurer (including how composition may change)
• Overall solvency needs in quantitative term complemented by qualitative risks
• Deviations between risk profile and implied risk profile underlying solvency capital requirements

The ORSA report which needs to contain a declaration from the chairperson of the board and the CEO must contain at a minimum the following (GOI 3.2 Section 10.2):

• Detailed information on the current and future capital levels relative to minimum capital requirements and target levels over the business planning period
• Details regarding actual outcomes of applying ORSA relative to planned outcomes in previous report
• Descriptions of material changes to ORSA from the previous report
• Details and outcomes of stress testing and scenario analysis used In undertaking ORSA
• Breakdown of capital usage over the planning horizon including
o Business activity
o Insurance group members (if applicable)
o Geographic spread of exposure
o Risk types
• Assessment of changes in risk profile or capital management process over the planning horizon
• Reference to supporting documents and analysis where necessary


List the minimum disclosure requirements to the prudential authority regarding regulatory returns to be submitted? (8,4)

• Solvency capital requirements ratio
• Eligible own fund
• Solvency capital requirements
• Total Assets (FSI)
• Total liabilities (FSI)
• Basic own funds after adjustments and ancillary own fund
• Minimum capital requirements
• Minimum capital requirements ratio

The HAF is required to sign a statement that the below have been prepared in accordance with the interpretation of financial soundness standards and log files associated with the return:
• OF1 (statement of solvency position)
• TP1 (life technical provisions summary)


The key return to the FSCA is the conduct business return (CBR)? (6)

Each insurance licence is required to submit a CBR.

The returns require detailed information for each class of business regarding:

• Commission, binder fees and other payments,
o split by the sales channel and by the reason for the payment

• Advertising and marketing spend,
o split by marketing channel

• Business composition
o Number of inforce benefits, new benefits issued, benefits cancelled
o Split by market segment and sales channel

• Claims managements
o Including reported, paid and repudiated claims in the reporting period

• Compliant handling
o Including the reasons and results of the complaints

• Add-on benefits issued and the number of each benefit issued


Describe the requirements for a policy to be actuarially sound? (4)

Actuarial soundness does not specifically relate to the absolute profitability of the product. A loss leader may be sold but the actuary must be comfortable that new business volumes will not jeopardise the solvency of the insurer.

The long-term insurer shall not
• Enter into a policy HAF is satisfied that the premium, benefits and other values are actuarially sound

• Make a distinction between premium, benefits and other values of different long-term polices unless the HAF is satisfied that this is actuarially justified

• Award a bonus or similar benefit to a policyholder unless:
o Done in accordance with principles and practices of financial management (i.e. statement approved by the board of directors regarding discretionary benefits) of long-term insurer
o HAF is satisfied that it is actuarially sound and that a surplus is available for that purpose


Describe the regulation regarding amalgamation, demultualisation, transfers as well as material disposals and aquistions?

Section 50&51 of the Insurance Ac t together with GOI 6 sets out the requirements for any amalgamation, demutualisation or transfer of life business or any material acquisition or disposal

Any material transaction requires approval by the prudential authority who will usually appoint an independent actuary who will report on the desirability or otherwise of the transactions.

ASSA has produce APN 108 &109 dealing with these issues covered in Chapter 8.


Describe Long-term insurance Act Section 49 regulation 3A regarding the limitation of commission payable to intermediaries?(1,3,3,2,3,2,3

Still applicable to risk policies (only applicable to savings polices sold before 2009)

Single premium

i. Immediate annuities:
1 Compulsory purchase untied : 1.5% x Single premium
2 Compulsory purchase tied: Nil
3 Voluntary purchase: 1.5% x Single premium

ii. RA:
1 RA upon entry and not a transfer: 2.5% x Single premium
2 RA upon entry and transfer to a fund chosen by member: 1.5% x Single premium
3 RA upon entry and transfer to a fund not chosen by member: Nil

iii. Non-RA fund member policy:
1 Not a transfer, not a RA: 2.5% x Single P
2 Transfer from another fund, not a RA: 1,5%

iv. Term cover death, disability, health: 7,5%
v. Credit life 7,5%
vi. Any other single premium investment policy 3%

Recurring premium policies:
i. Credit provider Credit life 7,5% of each premium
ii. Credit life and term cover (excluding death): 3.25% of each premium

iii. Not a RA or fund member policy:
 First-year: 3.25% of the total amount of premiums payable during the policy (assuming level premiums), with a max of 85% of the first year’s premium
 Second-year: Further one-third of the above

iv. RA: as above with 3% and 75%, respectively

v. Group schemes: sliding scale, depending on the annual premium is paid
1 Credit schemes 7,5% of each premium
2 7.5% (small premiums) – 2.5% (large premiums)

vi. Individual investment polices (sinking fund class under LTIA) 3% of each premium

vii. micro-insurance
1 Credit life as above
2 No limits
viii. Funeral policies (Assistance under LTIA): no limits on commission


Explain the commission clawback in regulation 3A?

• If there is an early lapse or surrender within two years from inception of a recurring premium individual life policy, insurer would be obliged to reverse commission
o Include conversion to paid up policy

• Clawback scale (i.e. maximum % of maximum commission that may be paid):
o 0% (< 6 months)
o 33.3% (1 year)
o 66.7% (1.5 years)
o 100% (2 years)


Describe how commission payments are impacted by regulation 3B? (7)

• The maximum permitted overall nominal rate of commission will be 5% of recurring premium investment business which will be split into discounted upfront commission and on-going portion

• Of this commission no more than 50% (2.5%) may be payable as the discounted portion upfront commission (using a minimum rate of 6%). The remained will be paid as-and-when over the policy term

• The maximum permitted commission for single premium policies will remain at 3% of single premium paid

• Commission on funeral or assistance polices that have an investment policy will also be capped

• A special dispensation will be allowed to be applied to small premium polices to support the sales of emerging markets. If the discounted commission comes to less than R400 the insurer can at their discretion increase upfront portion of up to R400

• Should the policy stop or decrease in the first five years other than due to death, disability or health event the unearned discounted commission payments will be reversed

• Subject to certain constraints the policyholder can redirect commission to other intermediaries or service providers


Describe the regulation regarding commission on replaced polices? (1,3)

Where the replaced policy is terminated early then claw back requirements will apply and when the policy is replaced a level percentage as and when commission will apply.

The following criteria will assist to determine if a replacement has occurred:

• A contractual change to the investment policy where the insurer will levy a charge in excess of 15% of the investment value

• The timing of the contractual change (i.e. a policy is replace 4 months before or after the replacement policy is entered into)

• The policyholder of the replacement policy should either be the policyholder of the replaced policy or the life insured


Describe Regulation 5A regarding minimum policy values for savings products? (3,3,2)

• Retrospective enhancements:
o Policies became paid-up or had premium reductions between 1 Jan 2001 and 1 Dec 2006 (i.e. policies still on books)
 Minimum policy value: 65% of investment account of that policy
o Policies lapsed / withdrawals / early retirement between 1 Jan 2001 and 1 Dec 2006 (i.e. policies off books)
 Policyholders would have been able to apply in writing within 3 years’ of the termination date to receive 65% minimum policy value

o Policies which had contractual changes after 1 Dec 2006
 Minimum policy value: 70% of investment account of that policy
 But for endowments and whole life policies SURRENDERED: 60%
• But, if paid-up/ premiums reduced  still 70%

• Communication to policyholders regarding the effect of contractual changes to policy values

• Amendments to the actuarial basis and values of policies that will have the effect of reducing the values/ benefits of that policy

o Regulation 5 guidance letter by LAC (annexure 1, chapter 7)


Describe Regulation 5B regarding the implications for minimum investment values? (4 sub 4,2,3)

• 5B (introduced in 2009) requires further enhancements to minimum EARLY termination values

• Minimum policy value on contractual changes for policies written after 1 January 2009:

o First policy year: 85% of investment account LESS fixed rand expense deduction
o …(increasing stepwise on each policy anniversary until the midpoint)
o Midpoint of policy term (rounded down, at least 5, at most 10): 100% of investment account LESS fixed rand expense deduction
o Subject to the sub-minimum of 70% of the investment value immediately before the contractual change

• Expenses permitted in the calculation of the investment value
o must be constant over the policy term (i.e. not front-end loaded)
o Fixed deduction for expense of making the contractual change may be at most R300

• Disclosure requirement:
o charges for contractual changes must be disclosed in the:
 policyholder summary,
 annual statements to policyholders/ members
 & to prospective clients


Describe the implications of regulation 4 ("The five year rule") on contract design? (3)

LTI Act – Regulation 4
• Limits amount to be taken out of savings policy in first 5 years
o Limits the extent to which surrender benefits and loans can be offered under life policies

• First five years since (policy inception / large contribution made):
o Policyholder can only access savings policy benefits twice
o Maximum benefit allowed is: premiums plus 5% per annum compound

• After five-year period: any balance remaining can be accessed

Decks in F202 Life Insurance Fellowship Class (34):