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  1. INSURANCE LAWS AMENDMENT BILL Jonathan Dixon Deputy Executive Officer: Insurance Financial Services Board

  2. Overview • Background • Main elements • Governance framework • Insurance groups supervision • Timelines • Q&A

  3. 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

  4. Background

  5. Background • 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

  6. Background SAM Pillar 1 Pillar 2 Pillar 3 Qualitative requirements Reporting & Disclosure Quantitative requirements Insurance Groups ILAB introduces interim measures on Pillar 2 and insurance group supervision as a stepping-stone to SAM implementation in 2015

  7. 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

  8. Overview • Background • Main elements • Governance framework • Insurance groups supervision • Timelines • Q&A

  9. 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.

  10. Governance Framework Out- sourcing

  11. Governance Framework • 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.

  12. Governance Framework • Requirements • adequately protects the interests of policyholders. Written Policies Org Structure Compliance • Risk Management • Investment • Reinsurance & Risk Transfer • Internal Controls • Remuneration • Outsourcing • Transparent • Clear Allocation • Segregation • Fit & Proper • Risk Management System • Internal Control System • Control Functions • Outsourcing

  13. Board of Directors • Objective • Adopt and implement a governance framework • Prudent management and oversight of business • Adequately protects the interests of policyholders.

  14. Board of Directors • Requirements over and above the Companies Act, given objective of adequate policyholder protection Duties Composition Structure • Sufficient number of non-exec directors • Composition must support objectivity in decision making • Appropriate number and mix to ensure adequate spread and level of knowledge, skills and expertise • Independent Chairman • Assess and determine need for board committees • Audit Committee is minimum requirement • Risk and remuneration committees recommended • Fit and proper • Act in the best interest of the insurer and its policyholders • Exercise independent judgement & objectivity

  15. 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

  16. 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.

  17. Risk Management System • Requirements • Adequate for nature, scale and complexity, adapted • Strategy should be across all activities, consistent with business strategy Material Risks Elements Strategy • processes for contingency planning, business continuity & crisis management • Resources • Strategies • Policies • Processes • Objectives • Principles • Assumptions • Responsibility • Regular review for modification & Improvement - documented • Board & Management reports - material risks, and risk management effectiveness

  18. 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.

  19. Control Functions • General Requirements • necessary authority, independence, resources, expertise and access to all relevant employees and information 1 2 3 4 Risk Management Compliance Actuarial Control Internal Audit

  20. Control Function Heads Conditions Requirements • Must have a head of each area • Can head up more than 1 area (not Internal Audit) • Statutory Actuary can be head of Actuarial Control, if individual doesn’t conduct work which compromises the independence and oversight nature of the role • Registrar intervention if structure detracts from adequacy of control • Regularly report to BoD or committee • Regularly meet with Chairperson of BoD or Committee, in the absence of senior management • Report non-compliance to BoD, and to Registrar if no appropriate action is taken by the BoD within 30 days of receiving the report

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

  22. 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

  23. 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

  24. Overview • Background • Main elements • Governance framework • Insurance groups supervision • Timelines • Q&A

  25. 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

  26. 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

  27. Insurance Groups - Definition • 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: • In at least one other regulated financial sector; • 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 sectoralframeworks.

  28. 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

  29. Overview • Background • Main elements • Governance framework • Insurance groups supervision • Timelines • Q&A

  30. 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

  31. Questions