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Issued for industry comments 1
FINANCIAL SERVICES BOARD
Issues Paper: Financial Condition Reporting – Proposed Solvency Assessment for
Short-term Insurers
INTRODUCTION .........................................................................................................................2
RISK-BASED SUPERVISION .....................................................................................................6
LEGISLATION CHANGES ..........................................................................................................6
THE FINANCIAL CONDITION REPORT.....................................................................................7
PRESCRIBED MODEL..............................................................................................................17
TRANSITION ARRANGEMENTS FOR THE PRESCRIBED METHOD ....................................29
NEW APPLICATIONS ...............................................................................................................30
APPLICATION AND APPROVAL PROCESS FOR ALTERNATIVE MODELS..........................31
CERTIFIED MODELS................................................................................................................34
INTERNAL MODELS.................................................................................................................44
TECHNICAL GUIDANCE ..........................................................................................................58
DEFINITIONS AND ABBREVIATIONS......................................................................................59
APPENDIX 1 .............................................................................................................................63
APPENDIX 2 .............................................................................................................................71
REFERENCES ..........................................................................................................................75
Issued for industry comments 2
Introduction
Purpose of the paper
1 The purpose of this paper is to inform the short-term insurance industry of the method of statutory
financial reporting that will be required in South Africa in the future. This method is called Financial
Condition Reporting (FCR).
2 This paper describes FCR and the methods of calculating a short-term insurer’s insurance liabilities
and Capital Adequacy Requirement (CAR) that will be required by the Financial Services Board
(FSB).
3 The paper also describes changes that will need to be made to legislation governing short-term
insurance in order to accommodate FCR. It also outlines the arrangements for transition between
the current method of financial reporting to FCR. It sets out deadlines by which all short-term
insurers in South Africa should have made the transition.
4 The paper contains a fair amount of technical information. Insurers are advised to consider
obtaining professional advice to determine the effect that these proposals will have on their specific
circumstances.
Issued for industry comments 3
Comments
5 This paper is open for public comment until 31 May 2007. Comments will not be treated as
confidential, unless specifically stated as such.
6 Comments must be sent, using the accompanying document template for comments, to:
Mrs Hantie van Heerden
Actuarial Department
Financial Services Board
PO Box 35655
MENLO PARK
0102
Fax number (012) 347 1288
E-mail address: [email protected]
Why Financial Condition Reporting?
7 By introducing FCR, the FSB is following a risk-based regulatory approach that is becoming more
acceptable internationally. Some of the countries that have already adopted a risk-based regulatory
approach are Australia, the UK, the USA, Germany, Canada, Holland and Switzerland.
8 The advantage of the current approach is that it is easy to administer. Effectively, it requires each
short-term insurer to hold risk capital at least equal to 25% of its annual net written premium. Its
disadvantage is that it is not sufficiently prudent for all insurers as the risk capital is independent of
the size of the insurer and the underlying risk. Thus it cannot be fully relied on to alert the FSB
when a certain insurer is in trouble. The current approach is also not useful for an insurer’s risk
management.
9 FCR is favoured because it requires each insurer to calculate risk capital that depends on the
underlying risk of its business. This will allow insurers to make more efficient use of capital when
they manage the underlying risk.
Issued for industry comments 4
10 FCR will aid insurers in their risk management. This is because the method requires insurers to
implement sound risk management strategies and to use the report and models that accompany the
method in the day-to-day running of their business. This will result in a better understanding of an
insurer’s risks by its management, its board and the FSB.
Costs
11 The benefits of FCR will cost money. A significant portion of the cost will be incurred in complying
with the regulation. This cost will ultimately be borne by the same policyholders that FCR will aim to
protect. However, the FSB is of the opinion that the benefits will outweigh the cost.
Envisaged use of models to determine Capital Adequacy Requirement and liabilities
12 The FSB’s preferred approach to calculating risk capital and liabilities is through using an Internal
Model. This is because, of all the options that insurers have, it is the most accurate in calculating
risk capital. It is envisaged that ultimately, all insurers will be required to use Internal Models to
calculate their risk capital. Since the Internal Model requires specialised expertise and judgement to
develop, the person responsible to develop it should have an appropriate professional certification.
13 The Internal Model has the drawback of the cost and expertise that is required in developing it. To
aid companies that will not be in the position to build their own Internal Model by the time that FCR
becomes a requirement, the Prescribed Model has been developed. It is based on the whole short-
term industry and will be most accurate for companies that are average in most respects. Although
the formulae are complex, the model is easy to use and is already incorporated into the ST2006.
14 Another option that companies have to calculate their risk capital and liabilities is the Certified
Model. Many of the features of this model are the same as those of the Prescribed Model. However,
individual insurers are able to change some elements of the Prescribed Model to meet their specific
circumstances. The person responsible to develop the Certified Model should also have an
appropriate professional certification. In its certified model application, the insurer should outline its
strategy and time frame in progressing to an internal model. In addition, the insurer should outline
Issued for industry comments 5
the enterprise wide risk management procedures it has in place as part of its risk management
strategy.
15 The diagram below compares the different types of model that insurers can choose from.
16 The diagram below summarises FCR, its requirements and the methods that can be used to
calculate liabilities and risk capital.
Financial Condition Report
Fair
valu
e of
adm
issi
ble
asse
ts
Ris
k M
anag
emen
t
Use
in d
ay-to
-day
runn
ing
of b
usin
ess
Fair
valu
e of
ass
ets
Excess
assets
Liabilities
Best estimate
+ Prescribed
margins
PM, CM or
IM
CAR
Min R10mil
PM, CM or IM
Free Assets
• Industry Structure
• Industry
Parameters
Prescribed Model
• Industry Structure
• Company Parameters
• Annual certification
by actuary
Certified Model
• Company Structure
• Company Parameters
• Peer review at
application
• Annual certification by
actuary
Internal Model
Issued for industry comments 6
17 If the insurer received approval to issue debentures or preference shares (other than compulsory
convertible preference shares) these instruments will be viewed as suitable capital to back the
CAR. The same terms and conditions, as prescribed by the Registrar in the approval of these
instruments, will apply.
Risk-based supervision
18 The FSB is in the process of implementing risk-based supervision. Under this approach, the riskier
an insurer is, the more stringently it will be regulated.
19 Insurers will be classified into categories of risk and control levels will be established to determine
the level of regulation that each insurer will be subject to.
20 FCR fits in naturally with risk-based supervision as it will provide the FSB with more accurate
information regarding each insurer’s level of risk.
Legislation Changes
21 Legislative changes will be necessary to implement FCR. The changes that we have proposed in
the Insurance Amendment Bill 2007 are discussed below.
22 The main change will be to remove the sections on the valuation of liabilities from Schedule 2 and
replace it in a Board Notice / Regulation format. The reason for this is to simplify the process in
future if changes to the formulae or other technical aspects are required.
23 If it happens that the Insurance Amendment Bill is enacted before FCR can be implemented, we
propose that the current legislation’s principles should be included in the Board Notice / Regulation
until the time that FCR is implemented. A proposal, if this should occur, is attached in Appendix 1 in
a Board Notice format1.
1 The same information can be put into the format of Regulations
Issued for industry comments 7
24 Once FCR is implemented the Board Notice / Regulation should contain the principles as set out in
this issues paper, in other words the details regarding the Prescribed Model, Certified and Internal
Models as well as the disclosure thereof.
25 Other act changes include the following:
• All references to the contingency reserve must be removed.
• All references to the “additional amount” must be removed and replaced with “capital adequacy
requirement”. (Referring to a “capital adequacy requirement” also makes the short-term
legislation more comparable with the long-term legislation.)
• References to “liabilities” in the Act must be changed to “liabilities and capital adequacy
requirement”.
• Allowance must be made for the appointment of a statutory actuary in certain circumstances,
including the right to the FSB to approve (and remove) such an appointee.
• An additional requirement must be added in section 28 (2) to state that an insurer shall be
deemed to be financially unsound if it has not made provision for the capital adequacy
requirement.
• Part 2 of the Regulations to the Act must be removed.
26 It is not certain when the Insurance Amendment Bill will be tabled in Parliament, but we hope that it
will happen during the latter half of 2007.
The Financial Condition Report
27 A Financial Condition Report provides an outline of the key risks and matters impacting on the
financial condition of the insurer. This includes providing the insurer with implications of issues
identified and, where these implications are adverse, proposing recommendations designed to
address the issues. It augments, but does not replace, statutory returns.
28 The Board of directors of the short-term insurer should assure themselves and demonstrate within
this report that adequate capital support is in place to minimise the risk of possible financial failure
of the insurer.
Issued for industry comments 8
29 The report should focus on principles. For example, smaller insurers may need to report less than
larger insurers.
30 The principles of disclosure that should be adhered to are described in this section. Therefore no
standard template is given at this stage.
Financial Condition Report submission
31 The report must be submitted by all registered short-term insurers. This includes registered short-
term insurers in run-off.
32 This report must be completed on an individual short-term insurer level and not at a group level2.
33 This report must be submitted to the Registrar of Short-term Insurance on an annual basis
accompanying the annual statutory return (within four months after the financial year end of the
insurer). It should not be viewed as an annexure to the statutory return or the published annual
financial statements. Neither should any cross-reference be made between the report and the
statutory return or the published annual financial statements.
34 The Registrar may at any time require, with valid reasons, a short-term insurer to compile and
submit, within a reasonable period of time, a Financial Condition Report. This request by the
Registrar may be made on an ad hoc basis (over and above the annual submission requirement)
depending on the nature of the short-term insurer’s financial position.
35 This report must be signed off by the chairperson of the Board of Directors and the chief executive
officer of the short-term insurer.
36 In the event the short-term insurer was assisted by an approved person in compiling any part of the
report, the report must state the name and level of assistance provided by the approved person.
2 However, if an insurer is prone to systemic risk, this should be mentioned and addressed.
Issued for industry comments 9
Insurer's background
37 The report must outline and describe the intrinsic nature of the business and the external
environment within which the short-term insurer operates. Such information includes:
• the corporate structure;
• the ultimate beneficial shareholder of the insurer as well as the financial condition of the holding
company; and
• the business classes registered and registration conditions imposed.
Recent experience
38 The report must identify and comment upon significant features or trends in the insurer’s recent
experience, including any impacts due to external factors. Deviations in actual experience from
expected experience must also be discussed, including reasons for these deviations.
39 The report must comment on any steps taken, or proposed to be taken, by the Board and senior
management of the insurer to address areas of deviation and adverse experience.
Risk management strategy
40 The report must outline the short-term insurer’s risk management strategy. It should be a
demonstration of the systems and procedures in place to identify, assess, mitigate and monitor the
risk with which the insurer is faced.
41 The report must disclose the following matters in respect of the risk management strategy:
• the risk governance relationship between the Board, Board committees and senior management;
• the processes for identifying and assessing risks;
• the process for establishing mitigation and control mechanisms for individual risks;
• the process for monitoring and reporting risk issues (including communication and escalation
mechanisms);
• those persons in the insurer with managerial responsibility for the risk management framework,
their positions, roles and responsibilities;
• the process by which the risk management framework is reviewed;
• the mechanisms in place for monitoring and ensuring continual compliance with the Capital
Adequacy Requirement (CAR); and
Issued for industry comments 10
• the processes and controls in place for ensuring compliance with all other prudential
requirements.
42 Additional requirements will be necessary if the insurer uses an internal or certified model to
calculate its liabilities and / or CAR. These are described in the sections on certified models and
internal models below.
Liability valuation
43 In determining the value of its insurance liabilities, an insurer must determine a value for both its
outstanding claims liabilities and its premium liabilities for each short-term regulatory return class of
business. Where,
• outstanding claims liabilities relate to all claims incurred prior to the valuation date, whether or
not they have been reported to the insurer; and
• premiums liabilities relate to all future claim payments arising from future events post the
valuation date that are insured under the insurer’s existing policies that have not yet expired.
44 The report must include the method used to calculate the liabilities, whether this is the Prescribed
Model (PM) or a company-specific calculation performed by an Approved Actuary.
45 When the calculation is performed by an Approved Actuary the calculation needs to be done in
accordance with the guidance notes prescribed by the Actuarial Society of South Africa.
46 Irrespective of the methodology used the following information is required by class of business:
• a best-estimate value of the outstanding claims liabilities, split between case reserves for
outstanding claims and incurred but not reported (IBNR) reserves;
• a best-estimate value of the premiums liabilities;
• risk margins for each insurance liability specified above, determined on a basis that is intended
to value the insurance liabilities of the insurer at a 75% level of sufficiency;
• an analysis of the historical adequacy of each liability estimate over the past five years; and
• if the historical provisions have been inadequate, an explanation for these inadequacies and
steps taken by the insurer to prevent the situation from persisting needs to be included.
Issued for industry comments 11
Asset and liability management
47 The report must comment on the current approach of the insurer to asset and liability management
in relation to the liability profile and liquidity needs of the short term insurer.
48 The report must outline the process followed to implement an investment strategy, including the
following:
• the investment objective of the insurer;
• how the capital position, the term and currency profile of its expected liabilities, liquidity
requirements and the expected returns, volatilities and asset class correlations are incorporated
in this objective;
• the formulation of the investment strategy, discussing strategic asset allocation, assets allocation
ranges, risk limits target, currency exposures and ranges;
• the management of individual asset classes, whether performed internally or outsourced to
investment managers;
• the responsibilities of individuals and committees deciding and implementing the investment
strategy;
• the selection process of the investment managers as well as the monitoring of these investment
managers in respect of adherence to their mandates;
• the process of ensuring the continuing appropriateness of the investment strategy; and
• the monitoring of compliance with the investment strategy.
49 The report must outline the liquidity plan for different classes of business at different points in time.
50 In respect of derivatives transactions the report must outline the
• objective in using derivatives;
• risk tolerance or allowed exposure of the insurer and a management framework consistent with
the risk tolerance;
• lines of authority and responsibility for transacting derivatives; and
• the consideration of worst-case scenarios and sensitivity analyses.
Issued for industry comments 12
Business projections
51 The report must include the projected premium income used in the calculation of the CAR, by line of
business.
52 The report must include a comparison of actual premium income achieved against projected
premium income used for previous CAR calculations. The comparison should contain figures for the
previous five financial periods split by line of business with an explanation for any major
discrepancies between actual and expected premium income.
Capital management and capital adequacy
53 The report must outline the insurer’s strategy for setting and monitoring capital resources over time
and the processes and controls in place to monitor and ensure compliance with the CAR as
determined in accordance with professional guidance as prescribed by the Actuarial Society of
South Africa. Comment must be made on the strategy, including targets and trigger ratios included
in the strategy, and any issues arising from the use of the strategy, having regard to the insurer’s
CAR and future capital needs to support the business plan.
54 The report must include the method used to determine the CAR, whether this is the Prescribed
Model Method (PM), Certified Model Method (CM) or Internal Model Method (IM).
55 Where an IM or CM is used, the report must include the date at which the model was last approved
by the Registrar and any subsequent changes to the model since that date.
56 Where a CM is used, the report must indicate which business has been calculated under the CM
and report this business separately.
57 Where a CM is used, the insurer must report on the progress made towards implementing an
Internal Model.
Issued for industry comments 13
58 The following items of information must be disclosed:
• the capital base of the insurer;
• the CAR of the insurer, stipulating the model used; and
• the capital adequacy multiple of the insurer.
59 The report must comment on whether or not the insurer is complying with the CAR, and has
complied with the CAR continuously over the past year.
60 The report must identify trends in the insurer’s compliance with its capital targets over the last three
years.
61 The report must comment on the extent of, and reasons for, any breaches by the insurer of its
targets during the past year and the subsequent actions that were taken by the insurer to rectify any
breaches. Where such breaches have occurred it is necessary for an Approved Actuary to
comment on the extent of and reasons for any breaches by the insurer of its CAR during the past
year and the subsequent actions that were taken by the insurer to prevent such breaches from
reoccurring.
62 The Approved Actuary must consider and comment on the insurer’s capacity to continue to meet
the CAR and its capital targets over the next three years. This assessment should include
quantitative and qualitative stress and scenario testing.
Premium adequacy
63 The report must outline the insurer’s approach to the premium determination process. This must
include commentary on underwriting practices, expense assumptions and profit margins.
Reinsurance management strategy
64 The report must outline the insurer’s reinsurance management strategy and must comment on any
issues arising from the use of the specified reinsurance strategy and arrangements. This must
include:
• the primary objectives when placing reinsurance;
Issued for industry comments 14
• the process for selecting reinsurance partners;
• the process of establishing the type and level of reinsurance required; and
• the methodology used to calculate the maximum loss per risk and per event.
65 The report must outline the process for ensuring continuing appropriateness of the reinsurance
strategy and implementation of this strategy and highlight the monitoring and oversight of this
strategy.
66 The report must describe the impact of the reinsurance strategy on the overall capital model.
67 The report must comment on the use of facultative reinsurance by the insurer with reference to how
and why the decision to purchase facultative reinsurance is made.
68 The report must comment on the level of catastrophe cover purchased with commentary on the
decision process for selecting this amount of cover.
69 The report must highlight changes to the reinsurance strategy over the prior reporting period, with
specific reference to:
• the type of reinsurance cover purchased;
• the net retention levels;
• the amount of catastrophe cover purchased; and
• the lead reinsurer on major contracts.
70 The report must indicate in a form of a table the exposure to the insurer’s five largest reinsurance
partners. This table must include:
• the name of the reinsurer and country of incorporation;
• the total proportional treaty premium;
• the total catastrophe non-proportional treaty premium;
• the total non catastrophe non-proportional treaty premium;
• the facultative premium; and
• the percentage of the premium paid to this reinsurer in relation to all reinsurance premiums paid.
Issued for industry comments 15
71 In respect of the Motor, Property and Engineering business classes the report must include the
following information per cresta zone:
• the number of risks;
• the total sum insured;
• the total estimated maximum loss; and
• the gross and net premium income.
72 The report must outline the maximum protected and unprotected net retention per risk.
73 The report must outline the automatic capacity available per business class, including:
• the maximum amount of non-proportional risk capacity purchased;
• the maximum amount of proportional treaty capacity automatically available;
• the nature of this proportional capacity (surplus, quota share or autofac); and
• for property and engineering classes, the minimum estimated maximum loss percentage without
reference to the lead reinsurer.
Credit risk
74 The report must outline the processes in place to manage and monitor the credit risk exposure of
the short-term insurer.
75 The report must describe how the insurer defines acceptable ranges, quality and diversification of
credit exposures. It is recommended that this be related to different categories such as reinsurers,
brokers, policyholders, investments and other.
76 The report must include the limits set for credit exposures and the maximum exposure at the
reporting date to single counterparties and groups of related counterparties.
77 The report must include a description of the process for approving changes in the credit mandate
and changes in limit structures.
78 The report must include a description of the process for reviewing and, if necessary, reducing or
cancelling exposures to a particular counterparty where it is known to be experiencing problems.
Issued for industry comments 16
79 The report must include a list of any material third-party defaults over the prior reporting period and
the processes and procedures in place to mitigate such defaults from reoccurring in the future.
Operational risk
80 The report should include a definition of what the insurer perceives as operational risks within its
business context. Such risks may include:
• the risks associated with outsourcing work;
• business continuity risk;
• the risk of inadequate human resources;
• internal and external fraud;
• the risks associated with project management;
• the risks associated with underwriting and claims; and
• the risks around the introduction of new products.
81 The report needs to provide detail on the processes incorporated by the insurers to manage and
monitor the operational risk exposure.
82 The report must include a description of the process that the insurer applied to identify key areas of
risks which has been included under their definition of operational risk. This should also include
commentary regarding the reassessment of the insurer’s activities and internal functions to update
the definition.
83 The report must include detail on the financial losses suffered due to operational losses over the
prior reporting period. This must include:
• a description of the events that caused the loss;
• the control procedures that were not functioning to prevent the loss; and
• mitigating actions taken to prevent these losses in the future.
Issued for industry comments 17
Prescribed Model
84 The Prescribed Model can be used to calculate the insurance liabilities of an insurer as well as its
Capital Adequacy Requirement (CAR).
85 The Prescribed Model was calibrated using industry data from historical STAR returns. As such it
provides an approximate measure of an insurer’s insurance liabilities and its CAR. Also, whenever
the model refers to business classes, it refers to the eight business classes as used in the statutory
return.
86 Since the Prescribed Model is an industry average model, it has certain limitations and can not be
accurate for all insurers. This is firstly because the STAR returns did not contain all the necessary
data required and secondly because the data that were available were not always reliable.
87 In particular the data did not allow a split and analysis between proportional and non-proportional
reinsurance, since only certain non-proportional reinsurance is seen as approved reinsurance in the
Act. In the STAR return only the earned premium of the non-proportional approved reinsurance is
taken into account, and not the full effect that the reinsurance can have on the liability profile. This
has important implications for an insurer with a significant amount of non-proportional reinsurance.
88 Also, in the STAR return data it is not possible to separate extreme events from attritional losses.
Thus the calibration implicitly modelled these different types of losses together.
89 By its nature the Prescribed Model is approximate and will therefore not ‘fit’ individual companies
with specific circumstances. The lack of fit can be expected to be particularly pronounced for niche
insurers, cell captive insurers and reinsurers.
90 The Prescribed Model estimates insurance liabilities that are 75%3 sufficient. It also calculates the
CAR for different sufficiency levels (98%, 99% and 99.5%). However, the requirement is for
insurers to hold a CAR that is 99.5%4 sufficient.
3 This means that the liabilities will be expected to be insufficient once in every four years. 4 This means that the insurer will be expected to have insufficient capital once in every 200 years.
Issued for industry comments 18
Insurance liabilities
91 The diagram below slices the liabilities side of an insurer’s balance sheet in different ways to
summarise the Prescribed Model and the elements of liabilities and risk capital it calculates.
92 In the Prescribed Model, insurance liabilities are made up of the claims liabilities, the prescribed
margin on the claims liabilities, premium liabilities and the prescribed margin within the premium
liabilities.
93 The claim liabilities is a reserve with respect to claims that have occurred in the past. The unearned
premium liabilities is a reserve with respect to future claims on business already written. The
Prescribed Model provides a best estimate of both these reserves. The purpose of the prescribed
margins on these reserves is to make the total insurance liabilities 75% sufficient.
94 The calculation of the claim and premium liabilities is described separately below.
Liabilities Best estimate +
Prescribed
margins
75% sufficient
CAR Min R10mil
99.5% sufficient
Best Estimate
of Claim Liabilities (IBNR and OCR)
Best Estimate
of Premium
Liabilities
Prescribed Margin
on Claim Liabilities
Prescribed Margin on Premium
CAR
Best estimate of
Liabilities
TCR
Issued for industry comments 19
Claims Liabilities
95 The claim liabilities is a sum of
• Incurred But Not Reported reserve (IBNR) and
• Outstanding Claims Reported reserve (OCR).
OCR
96 Insurers provide their own best estimate of the OCR.5
IBNR
97 The Prescribed Model uses a table, based on the chain ladder method, to calculate the best
estimate IBNR reserve. It uses a different six-year run-off pattern for each business class to
calculate the percentage of claims not yet reported at the end of every year.
Percentage of claims not yet reported for the current financial year less x years where x = … Business Class
0 1 2 3 4 5
Accident 9.00% 2.90% 0.94% 0.30% 0.10% 0.03%
Engineering 8.67% 2.57% 2.04% 1.99% 1.98% 1.98%
Guarantee 24.92% 5.46% 1.39% 0.54% 0.36% 0.33%
Liability 17.01% 3.73% 1.32% 0.89% 0.81% 0.80%
Motor 4.33% 0.63% 0.31% 0.28% 0.28% 0.28%
Property 6.14% 0.43% 0.12% 0.10% 0.10% 0.10%
Transport 9.71% 3.40% 1.69% 1.22% 1.10% 1.06%
Miscellaneous 7.30% 1.01% 0.29% 0.20% 0.19% 0.19%
5 Depending on the insurers’ current methodology, this reserve should not change from the current method to the Prescribed Method.
Issued for industry comments 20
98 The IBNR reserve is obtained by summing the products of earned premium and the appropriate
percentage of claims not yet reported for each combination of business class and relevant year.
99 Example:
Consider an insurer that writes Motor and Property business only. The following information applies:
• Each class of business is completely run off after two years
• The earned premiums for the two classes are as follows:
Earned premium for current financial year less
x years where x = Business Class
0 1
Motor 3 000 000 2 000 000
Property 5 000 000 3 500 000
Using the Prescribed Model, the IBNR calculation for this company would be performed as follows:
Calculation for current financial year less x years where x = Business Class
0 1
Motor 3 000 000*4.33% 2 000 000*0.63%
Property 5 000 000*6.14% 3 500 000*0.43%
This would give the following results for IBNR:
Issued for industry comments 21
Result for current financial year less x years where x = Business Class
0 1
Total
Motor 129 900 12 600 142 500
Property 307 000 15 050 322 050
Total 436 900 27 650 464 550
The total IBNR for the insurer is therefore R464 550.
100 The methodology described above will be the minimum level of IBNR required. If an insurer wants
to use a lower IBNR percentage, it needs to get approval from the FSB. The Registrar may direct in
a particular case, another percentage to be used.
Prescribed margin on the claim liabilities
101 The prescribed margin on the claim liabilities increases the sufficiency of the total claim liabilities
(IBNR + OCR) to 75%. It is found by using the following formula:
cOCRGrossIBNRGrossbainMescribed )__(arg_Pr +×+=
102 The scale used should be in R’000s.
Issued for industry comments 22
103 The parameters a, b and c are given below for each business class:
Business Class a b c
Accident -2.22492 2.79709 -0.01411
Engineering -1.31733 1.60758 -0.00220
Guarantee -7.46957 8.22086 -0.00624
Liability -1.29049 1.59921 -0.00358
Motor -1.86457 2.55882 -0.02002
Property -3.64609 4.48216 -0.01284
Transport -15.67146 16.30213 -0.00241
Miscellaneous -4.75294 5.57018 -0.01016
Premium Liabilities
Unearned Premium Provision
104 The Unearned Premium Provision (UPP) must be calculated using the current estimation technique,
namely the 365ths method. If an insurer wants to use a different method, the FSB must approve the
alternative method, whether the alternative method is more conservative or not.
Unexpired Risk Provision
105 Where an insurer has specific knowledge that its premiums are inadequate, appropriate prudence
would need to be borne in mind when setting an Unexpired Risk Provision (URP). This URP would
also form part of the insurance liabilities and would have to be set at a 75% level of sufficiency.
Since the calculation of the URP would depend on the context and the specific circumstances of the
insurer, a formula is not prescribed for it.
Issued for industry comments 23
Prescribed margin within UPP
106 The prescribed margin within UPP needs to be calculated in order to quantify its contribution to
Total Capital Required. It is calculated by using the following formula:
UPPemiumEarnedGrossbainMescribed c ××−−= ])Pr__(1,0[maxarg_Pr
107 The parameters a, b and c are given below for every business class:
Business Class a b c
Accident 0.909828 0.000000 0.000000
Engineering 0.884053 0.000000 0.000000
Guarantee 0.950792 0.000000 0.000000
Liability 0.861766 0.000000 0.000000
Motor 0.866146 4.325236 -0.312100
Property -90.139828 91.659539 -0.000482
Transport -7.738425 9.022793 -0.004004
Miscellaneous -25.797955 27.875147 -0.002596
Risk capital required
The Total Capital Required (TCR) as calculated by the Prescribed Model is the result of the formula
explained below.
Total Capital Required
108 The formula that calculates TCR uses the following charges for risk as inputs:
• Charge for investment risk, called the Asset Capital Charge (ACC)
Issued for industry comments 24
• Charge for insurance risk, called the Insurance Capital Charge (ICC)
Asset Capital Charge
109 The Prescribed Model specifies a capital adjustment factor for each investment class. The capital
factors were estimated using the Smith Model, calibrated to the South African market. The aim of
the capital adjustment factor is to provide the specified level of protection against loss in market
value of the assets backing the liabilities and other capital elements.
110 The ACC is calculated by first allocating assets to liabilities (both current liabilities and insurance
liabilities) and Capital Adequacy Requirement elements to decide which assets the capital
adjustment factors need to be applied to. The ACC is the sum of the products of the capital
adjustment factor and the amount of assets held in each investment class for all investment
classes.
111 The capital adjustment factors for different investment classes are given in the following table for a
99.5% level of sufficiency:
Investment Class Capital Adjustment Factor
Cash 0.0%
Equity 38.0%
Property 32.5%
Fixed Interest (Outstanding Term = 1 year) 6.7%
Fixed Interest (Outstanding Term = 2 years) 11.27%
Fixed Interest (Outstanding Term = 5 years) 19.8%
Fixed Interest (Outstanding Term = 7 years) 24.6%
Fixed Interest (Outstanding Term = 10 years) 27.0%
Issued for industry comments 25
Insurance Capital Charge
112 The diagram below shows how the insurance capital of a short-term insurer is built-up from various
components. This diagram is best understood from the bottom-up, since each component of risk
feeds upwards into the component above it.
113 Gross Stand-alone Risk Capital is capital that covers the risk within each of the business classes. It
is ‘stand-alone’ because it does not yet take into account the correlation and diversification that
Issued for industry comments 26
exists between the business classes. It is gross of reinsurance. Gross Stand-alone Risk Capital is
estimated by using tables. The tables are results of a dynamic financial analysis model calibrated to
STAR returns data. Their inputs are class of business, Gross Written Premium and Gross
Unearned Premium Provision. The tables can be found in Appendix 2.
114 Net Stand-alone Risk Capital is calculated by firstly multiplying the Gross Stand-Alone Risk Capital
by the retention factor for the appropriate business class. The retention factor is based on
proportional reinsurance. It is at this point where the Prescribed Model can be significantly
inaccurate for companies with a significant amount of non-proportional reinsurance. This is because
detailed data available was not available in STAR returns for a more in-depth calibration taking into
account the type of reinsurance taken out by an insurer.
115 In the event of a worst-case insurance loss (as envisaged by the net stand-alone risk capital
calculated at this point) the company will also incur expenses in the normal course of business.
These expenses thus need to be allowed for in the Capital Adequacy Requirements of each class
of business by adding them to the net stand-alone risk capital. Insurers can use their current level of
expenses as an indication of the likely level of expenses in the coming year. Further, should
insurers feel that their expenses would rise significantly in times of high insurance losses, they
should estimate their expenses on this basis.
116 To calculate the ICC, Net Stand-alone Capital is calculated for each of the eight STAR return
business classes. From the Net Stand-alone Capital for each business class the overall insurance
charge for all business classes can be calculated. This is achieved by summing of the Net Stand-
alone Capital for each business class and multiplying the sum by a diversification and correlation
factor. The factor is determined as follows:
)()()(
pTSCpDCCpfactor =
Where
DCC(p) = Diversified and Correlated Capital at the pth
percentile
TSC(p) = Total Stand-Alone Capital at the pth
percentile
Issued for industry comments 27
DCC is the appropriate percentile of a log-normal distribution with the following mean, E[DCC], and
variance, V[DCC], appropriately parameterised for underwriting risk:
∑=
×=N
iii ULREEPEDCCE )]([][
Where:
N = The number of classes of business
i = The specific class of business under consideration
EPi = The earned premium in class of business i
E[ULRi] = The expected ultimate loss ratio for class of business i
∑ ∑∑=
<×+×=
N
ijijji iii ULRULRCovEPEPULRVEPDCCV
1
2 ],[)()(2][)(][
Where:
V[ULRi] = The variance of the ultimate loss ratio for class of business i
Cov[ULRi ; ULRj] = The covariance of the ultimate loss ratios of class i & j
TSC is the sum of the appropriate percentiles of a series of lognormal distributions where only
underwriting risk is allowed for. The following mean and variance are used in estimating the
parameters of each lognormal distribution:
)(][ iii ULREEPSCE ×=
)()(][ 2iii ULRVEPSCV ×=
The ratio of DCC to TSC is an approximate measure of the appropriate factor to be applied to the
net total capital required to allow for diversification and correlation effects.
117 Finally, the ICC is calculated by subtracting the investment return on assets backing insurance
liabilities from the overall insurance charge. It is yet to be decided whether the rate of investment
Issued for industry comments 28
return on assets backing insurance liabilities will be prescribed of if guidance will be provided. A
rate of return of 8% has been used in the model embedded in the 2006 statutory return for
illustrative purposes.
Calculating Total Capital Required
118 The TCR is calculated by using the ACC and the ICC as inputs.
22
⎟⎠⎞⎜
⎝⎛+⎟
⎠⎞⎜
⎝⎛=
iccacc gICC
gACCTCR
119 The gacc is the grossing up factor on the ACC and the gicc is the grossing up factor on the ICC. The
grossing-up factors are calculated via an intermediate calculation described below. This step
involves the performance of an asset allocation (after the allocation of assets to current liabilities
and reserves) to adjusted values for the asset capital charge and the insurance capital charge.
These adjustments are given below and are performed so as not to penalise companies for the
composition of elements of their shareholders’ funds not being used to back their Capital Adequacy
Requirements:
TCRadj = Intermediate total capital required (before grossing-up)
ACCadj = Adjusted Asset Capital Charge
ICCadj = Adjusted Insurance Capital Charge
22 ICCACCTCRadj +=
⎟⎠⎞
⎜⎝⎛
+×=
ICCACCACCTCRACC adjadj
⎟⎠⎞
⎜⎝⎛
+×=
ICCACCICCTCRICC adjadj
120 An asset charge (calculated on the same basis as ACC) is calculated for the allocation of assets to
ACCadj and ICCadj. These two charges are the weighted average fall in assets that could result for
an appropriate level of sufficiency.
Issued for industry comments 29
accc = asset charge on ACCadj where 10 << accc
iccc = asset charge on ICCadj where 10 << iccc
121 The resulting grossing-up factors are calculated as follows:
accacc cg −=1 where 10 << accg
iccicc cg ×−= 5.01 where 10 << iccg
122 The rationale for the above is that for the ACC, full grossing-up should be allowed for as a grossed-
up asset charge is needed in precisely the situation that you need the asset charge itself. The
grossing-up of the ICC only takes half of the appropriate asset charge into account since a worst
case insurance event will not always happen at the same time as a worst case asset event. The
use of a factor of a half can be seen to be allowing for a 50% correlation between insurance
catastrophes and investment market crashes. This is in line with the intended practice in European
markets.
Minimum Capital Required
123 The TCR implicitly contains prescribed margins referred to in previous sections. Thus the CAR can
be found by applying the formula below to the TCR:
CAR = TCR – Prescribed Margin on Claim liabilities – Prescribed Margin within Unearned Premium
Provision
124 The Capital Adequacy Requirement is subject to a minimum of R10 million.
Transition arrangements for the prescribed method
125 Should the FSB manage to make the necessary amendments to the Short-term Insurance Act
during 2007, then the implementation date for compliance with FCR is for all short-term insurers
with a financial year-end after 1 January 2009.
Issued for industry comments 30
126 From the date of implementation, insurers will have five financial years to accumulate capital to the
99.5% sufficiency level. To ensure steady progress towards the 99.5% sufficiency level within five
years, insurers will be considered financially unsound if they do not comply with the transition
capital levels.
127 Transition capital levels are calculated by defining
• x as the capital at the 99.5% sufficiency level
• y as 25% of Net Written Premium (the current solvency requirement)
• and deriving transition capital levels using variable proportions of x and y over the following five
year-ends as described in the table below:
First year-end
Second year-end
Third year-end
Fourth year-end
Fifth year-end
Proportion of x 20% 40% 60% 80% 100%
Proportion of y 80% 60% 40% 20% 0%
128 The FSB will be open to requests where insurers cannot comply with the transition capital levels.
These insurers should make the necessary application for dispensation with a clear motivation why
a special dispensation should apply to them. After consideration of the application, the FSB could
propose alternative transitional arrangements for such insurers.
129 The transition arrangements described above are applicable to the prescribed method only. If an
insurer chooses an internal or certified model, a 99.5% level of sufficiency must be maintained from
the date of approval of that method.
New applications
130 Entities that apply for a new short-term insurance license before FCR is implemented, will be
informed about the new proposals to ensure that no unrealistic capital expectations are set.
131 Applications for a new short-term insurance license after FCR has been implemented, will be
required to base their business plans on the same transitional arrangements as described above.
Issued for industry comments 31
Application and approval process for alternative models
132 Insurers that choose to use an Internal Model or a Certified Model to demonstrate solvency must
lodge an application to the FSB for their models to be approved.
133 For the rest of this section, the word ‘model’ refers to both an Internal Model and a Certified Model,
unless where the context makes it clear otherwise.
Model Approval Process
134 An insurer must obtain the FSB's prior approval before it will be able to use its model to determine
its CAR. Short-term insurers should make a written application to the FSB. The model approval
process can be lengthy therefore insurers should apply well in advance (i.e. at least six months in
advance) of the proposed effective date for using their models.
135 The insurer’s Board of Directors should sign the model application.
136 Any approval will be conditional on continued compliance with the requirements of these guidelines,
as modified from time to time.
137 The FSB process will not be an audit / check on the calculations of the model. The FSB will also
consider wider supervisory knowledge on the insurer and knowledge of wider market developments
and practices. Assessment of models will also form part of future on-site visits.
138 An external provider’s model(s) will not be approved explicitly. Although a provider’s model may be
acceptable in principle, an insurer will still have to apply individually.
139 Approval will be subject to the outcome of a comprehensive model review process including:
• completion of a detailed application form about the model and accompanying risk control
environment;
• one or more on-site visits to discuss the detail of the model, risk management systems, and
surrounding organisational structure and controls;
Issued for industry comments 32
• for an internal model, certification (by way of an independent review of the model) by an
independent actuary that the model’s methodology and assumptions are appropriate; and
• the model must have been in use for at least one year (in other words, producing results for at
least one year-end) as part of the risk management system used by the insurer.
140 If an insurer is applying for the use of a Certified Model, it should complete a single Certified Model
application containing all the elements that needs to be certified. Such an application could certify
alternative reserving methods, liabilities with prescribed margins and/or CAR. Despite submitting a
single application, results for each business class must be available and reported separately.
141 The application should incorporate a level of detail that provides sufficient justification for material
assumptions. The onus rests on the insurer to satisfy the FSB that its particular approach is
appropriate to its individual circumstances.
142 Once the FSB is satisfied with the extent to which the insurer has met the criteria outlined in these
guidelines, the FSB will approve the model. Any conditions on which the approval is granted will
also be specified.
143 The FSB will require, as a minimum condition of its model approval, that the insurer undertake to
advise the FSB in advance of any material changes to its model or surrounding controls, and that
the FSB be provided with any information necessary to satisfy itself that the insurer continues to
meet the criteria outlined in this proposal.
144 Examples of material changes include, but are not limited to:
• A change in model or significant modification to an existing model;
• changes in assumptions that, when used in the model, result in significant differences in Capital
Adequacy Requirements versus prior assumptions;
• a change in organizational structure that affects the model usage and capital calculation; and
• new products with features or options that significantly differ from the currently modeled portfolio.
145 Any material modifications to the model will require FSB review and concurrence. Depending on
the nature of the changes, a new approval may be required.
Issued for industry comments 33
146 If an insurer is applying for the use of a Certified Model, it should outline its strategy and time frame
in progressing to an Internal Model. The application should demonstrate to the satisfaction of the
Regulator that the insurer is not engaging in a cherry picking exercise that can potentially leave the
insurer under-capitalised.
147 Once an insurer has commenced using the model for the measurement of its CAR, the insurer will
be required to continue using this method of capital measurement unless:
• The FSB revokes model approval and directs the insurer to use the Prescribed Model for
calculating its CAR; or
• The insurer seeks and receives approval from the FSB to regress from an Internal Model to the
Prescribed Model or a Certified Model or to regress from a Certified Model to the Prescribed
Model.
148 The application for approval of a model will be subject to a fee as published in the Government
Gazette.
Approved Actuary
149 Where an Internal Model or a Certified Model has been used, it is necessary that an actuary be
approved as an approved person to assist the short-term insurer in quantifying the insurer’s
technical liabilities and Capital Adequacy Requirements. However, the final responsibility remains
with the Board of the insurer.
150 The Actuarial Society of South Africa (ASSA) must approve the actuary to perform valuations for
short-term insurers and the Registrar of Short-term Insurance must approve the ASSA certified
actuary to perform valuations for the specific short-term insurer.
151 In the case of a short-term insurer using the Prescribed Model to calculate its Capital Adequacy
Requirement, automatic exemption is granted from appointing an approved actuary.
152 The FSB reserves the right to reject and/or to remove an ASSA certified actuary to perform
valuations for a specific short-term insurer. Such removal and/or rejection would be substantiated
by valid reasons.
Issued for industry comments 34
153 A change in the approved actuary for a specific insurer must be approved by the FSB.
Certified Models
154 A Certified Model is a medium term temporary solution to assist South African insurers in making
the transition from prescribed-formulae-based solvency demonstrations to Internal Model based
solvency demonstrations.
155 However, a Certified Model is not:
• any model used simply to minimise solvency requirements; nor
• a proxy for an internal model; nor
• a cherry-picking exercise where insurers select prescribed Capital Adequacy Requirements and
Certified Model elements to minimise overall Capital Adequacy Requirements.
Relationship with Prescribed Model
156 A Certified Model is an adjustment to the Prescribed Model. It is a tolerable solvency demonstration
that is appropriate where the prescribed formulae do not fairly quantify an insurer’s risk.
157 It allows consideration of an insurer’s individual risk characteristics by applying the insurer’s specific
risk parameters to the Prescribed Model’s structure.
158 The diagram below summarises the certified model framework in the context of the proposed
prescribed model’s framework:
Issued for industry comments 35
Prioritising and selecting business to certify
159 Insurers should prioritise their Certified Model designs according to the sizes (by gross written
premium and / or unearned premium provision) of their business classes. Larger classes of
business should be certified first. An insurer can model smaller classes first only if the data required
for the modeling of larger classes is not available and no reasonable modelling can be done without
it. In such cases, the insurer must satisfy the FSB in its application:
• that the data constraint exists and that it prevents modelling of the larger business class first and
• that reasonable steps have been taken to possibly model excluded business in the future.
160 To ensure overall sufficiency, developers should make the assumption that, while certifying sections
of the business, prescribed requirements for the other sections remain sufficient.
Issued for industry comments 36
161 An insurer may model homogeneous groups of business separately. It may consider correlations
and diversifications between these classes of business. It should justify its approach to the FSB and
demonstrate its reasonability.
Authorised adjustments to the Prescribed Model
Liabilities and Prescribed Margins
162 Insurers may model Claims Liabilities, Premium Liabilities and Prescribed Margins for all business
classes using a Certified Model.
163 Since, in the Prescribed Model, Prescribed Margins are included within the Total Capital Adequacy
Requirement (TCR), the calculation of the TCR should be adjusted in a Certified Model. This should
be done according to the following formula, subject to a minimum of zero:
escribedCertifiedAdjustmentBeforePMCertifieddDiversifieCorrelated
adjustmentAfrerPMCertifieddDiversifieCorrelated PMPMTCRTCR Pr
)_(&
)_(& −+=
164 Example:
Item Prescribed Model Monetary higher reserves + PM
Monetary lower reserves + PM
Claims liabilities 10 20 5
Premium liabilities 20 40 10
Prescribed margins 10 20 5
Total Capital Adequacy Requirement
30 30+20-10 = 40 30+5-10=25
Admissible assets 100 100 100
75% sufficient reserves 40 80 20
Excess assets 60 20 80
Capital Adequacy Requirement
20 20 20
CAR coverage 3 times 1 time 4 times
Issued for industry comments 37
Insurance Capital Charge
165 Once Liabilities and Prescribed margins for a specific business class have been certified, then the
Insurance Capital Charge (ICC) for that business class can be modelled. Asset Capital Charges
provided by the Prescribed Model may not be adjusted.
166 Insurers have two options in modelling ICC:
• Stand-alone insurance capital per business class; and
• Diversified insurance capital across business classes.
Option 1 - Standalone insurance capital per business class
167 Once the Certified Model developer has certified both reserves and prescribed margins for the
insurer’s business that could be modelled (to the extent allowed by appropriate data), then
consideration may be given to model the required insurance charge for such business.
168 Option 1 modelling works within the eight business classes as defined in the Short-term Insurance
Act 53 of 1998 and for which insurers are separately licensed. Within each of these classes, the
Certified Model developer should derive the distribution of profits/losses expected on the class of
business over a one-year time horizon6. This distribution of profits/losses is derived by subtracting
claims incurred from premiums earned in respect of both existing - and new business written in the
next year, while considering expenses, commission and reserve development. This modelling might
be done for homogeneous risk groups within each business class, in which case the Certified Model
developer should appropriately combine these groups (i.e. consider their correlations and
diversification effects).
169 Option 1 insurance charge modelling is done within a business class, as illustrated by the following
diagram:
6 An insurer may measure these profits/losses over a different combination of probability of default and time horizon, provided that the insurer can demonstrate to the FSB that the alternative parameters are appropriate for its business mix and produces a result which is consistent with the benchmark set above.
Issued for industry comments 38
* As defined in the Short-term Insurance Act 53 of 1998
170 The above diagram illustrates how these resulting stand-alone insurance charges (SCR) for each
business class would then be combined to take account of diversification and correlation between
business classes. It is compulsory to use the Prescribed Model to combine SCRs derived through
option 1 insurance charge modelling into an Insurance Capital Charge (ICC).
Option 2 - Diversified insurance capital across business classes
171 Option 2 modelling differs from option 1 modelling in allowing the Certified Model to produce
insurance charges that take account of correlation and diversification within the Certified Model
itself. This is particularly useful where the insurer offers coverage across various business classes
SCR
Propert
Combine using Prescribed Model
Property* Motor* Liability* Transport
Com
bine
ris
k Homogen
Homogen
Homogen
SCR
Motor
SCR
Liability
SCR
Transp
Insurance
Capital
Issued for industry comments 39
to a particular homogeneous risk group. Similar to option 1 modelling, the Certified Model developer
should derive the distribution of profits/losses expected on the risk group over a one-year time
horizon. This distribution of profits/losses is derived by subtracting claims incurred from premiums
earned in respect of both existing and new business written in the next year, while considering
expenses, commission and reserve development. Once again, a diagram should illustrate the
intention:
* As defined in the Short-term Insurance Act 53 of 1998
172 Once again, the Certified Model developer should appropriately combine these groups (i.e. consider
their correlations and diversifications).
Restricted areas of adjustment in a Certified Model
173 The following sections of the Prescribed Model framework may not be changed in a Certified Model
framework:
Property* Motor* Liability* Transport
Com
bine
ris
k Insurance
Capital
Issued for industry comments 40
• best-estimate claim liabilities for a single class of business7 (unless data limitations exist);
• best-estimate premiums reserves for a single class of business7 (unless data limitations exist);
• prescribed margins on claim liabilities for a single class of business7 (unless data limitations
exist);
• prescribed margins on premium liabilities for a single class of business7 (unless data limitations
exist);
• asset capital charge requirements; and
• the method for grossing-up the insurance capital charge and the asset capital charge.
Required buffer
174 A Certified Model of solvency capital represents a move away from the default solvency Capital
Adequacy Requirements. This removes some implicit industry-wide margins contained in default
solvency Capital Adequacy Requirements. In addition, individual-company data rarely include
sufficient catastrophe experiences to adequately model the “tail” of catastrophe losses. Coupled
with this, company data (for small insurers) are unlikely to be of such volume to have sufficient
credibility for capital modelling purposes.
175 Therefore, with any application of a Certified Model, a buffer should be added. This buffer should be
added to the final Capital Adequacy Requirement (after adjusting for modified prescribed margins)
where the buffer is set on a tiered approach in the following manner:
7 This means that the calculation needs to be done for all classes of business.
Issued for industry comments 41
Tier Buffer Description
Compulsory tier – held
by all insurers applying a
Certified Model to
solvency capital.
5% of rolling 12 month
total net written premium
Held by all insurers applying for a
Certified Model (option 1 or option 2
modelling) to solvency capital.
PLUS
Additional tier – held in
addition to compulsory
tier by insurers with
insufficient risk control
structures.
5% of rolling 12 month
total net written premium
Not required for insurers that
demonstrate, to the Regulator’s
satisfaction, on an ongoing basis a
Board approved, comprehensive, pro-
active and preventative enterprise-wide
risk management that effectively limits
operational - and other risks.
PLUS
Assessed tier – added
by the Regulator on an
individual basis.
Variable on case-by-case
basis
Assessed by the Regulator at the
application stage and could be revised
annually thereafter.
The total buffer required is multiplied by the following ratio, to account for the extent to which a Certified
Model is used:
( )( )∑∑
+
+
essBuAll
essBuCertified
GWPGUPR
GWPGUPR
sin_
sin_
)(
)(
176 Insurers with no enterprise-wide risk management would hold a buffer equal to the sum of all three
tiers. The total buffer can be a maximum of 15% of Net Written Premium.
Additional risks that must be considered
177 The professional developing the Certified Model should apply his/her mind to any significant
additional risks that arise when proposing the use of a Certified Model to substitute sections of the
Issued for industry comments 42
Prescribed Model. Where appropriate, the professional should make allowance for such risks,
ensuring appropriate sufficiency for only the certified business.
178 The Certified Model developer must ensure compliance with prescribed ASSA guidance notes.
Cell insurers
179 The risk profile of cell insurers is vastly different from that of non-cell insurers. Also, between cell
insurers and within cells, there is great difference in the underlying risk. Internal Models are, thus,
the only method of accurately reflecting the inherent risk for a cell insurer. The following are interim
measures to assist cell insurers in making the inevitable transition to Internal Models.
1st party cells
180 There is an international trend to make the ring fencing in cell insurers more absolute through
Protected Cell Company) and Incorporated Cell Company legislation. If South Africa follows this
international trend, a case could be made to grant express certification of all 1st party cells. Here,
an express certification is meant to imply simple application and prompt approval, but not automatic
approval.
181 The express certification should apply only to 1st party cells with policy limits, where the policy limits
are less than the sum of the net asset value of the cell and the expected premium. If reinsurance is
used for the cell, one of the following must be adhered to:
• approved reinsurance (as defined in the Act) is used,
• foreign reinsurance with a pay-as-paid clause is used; or
• foreign reinsurance with no pay-as-paid clause is used, but with security in place equal to the
cover bought.
182 1st party cells which do not meet the above reinsurance requirements and do not qualify for
express certification can still be certified through the standard certification process (i.e. not express
certification).
183 Every 1st party cell meeting these requirements need to set money aside equal to the premium plus
the net asset value less the claims incurred in respect of the cell. By the nature of the cell, this
amount should not be less than zero. Although no other solvency capital is proposed in respect of
Issued for industry comments 43
such 1st party cells, the Certified Model developer must consider and provide for any asset risk (by
applying the asset risk Capital Adequacy Requirements to the cell’s assets) that could exist for such
cells. Cell insurers may use the re-capitalisation clause in providing for these risks, but where used,
the insurer should clearly disclose and justify this approach in its Certified Model application.
184 Insurers must apply in a single application for the express certification of the abovementioned 1st
party cells. Such applications may group 1st party cells by class of business and cover more than
one class of business. Insurers must report on express certified 1st party cells separately from non-
certified 1st party cells in their annual statutory returns and financial condition report.
185 While developing Certified Models, developers must be satisfied that requirements for express
certification are met.
186 For the certification of other 1st party cells, cell insurers should apply for approval in a similar
fashion to that proposed for non-cell insurers above. A single application may group 1st party cells,
provided similar capital calculations would be applied to these grouped 1st party cells.
3rd party cells
187 The FSB will apply stricter criteria in evaluating any applications to replace prescribed requirements
for 3rd party cells. Once again, a single application may group 3rd party cells, provided similar
capital calculations would be applied to these grouped 3rd party cells. Requirements for such
applications are similar to that proposed for non-cell insurers above.
Combined 1st and 3rd party cells
188 Combined cells should be split into 1st and 3rd party components. These components should be
treated as recommended in this framework. If splitting of such cells is impractical, the FSB will
approve such cases on their individual merits, while erring more on the side of prudence as the
relative size of the 3rd party component increases.
Issued for industry comments 44
Internal models
189 The term “internal model” is increasingly being used to identify those models built by insurers for
their own economic capital and regulatory Capital Adequacy Requirement purposes. The adjective
“internal” was added to the more general word “model” through common insurance industry usage
to identify models built by the insurer.
190 Internal models are based upon computer models of all the business or a specific line or segment of
a company’s activity. They are usually stochastic in nature and directed to determining the amount
of capital that will be sufficient to guarantee the success of that business to a high degree of
probability. These models depend upon scenario generators that can produce a wide variety of
scenarios that can affect the future course of the company’s business.
191 The Internal Model Method (IMM) is intended to allow an insurer to calculate both the value of the
liabilities and the value of its Capital Adequacy Requirement (CAR) based on the output of its in-
house capital allocation model. The objectives of an internal model are to:
• give insurers incentives to develop their risk measurement and risk management;
• put the onus on the management of insurers to develop their own view of their capital needs; and
• determine capital that is appropriate to the risk in the individual insurer’s business.
192 Hence, each insurer will have the flexibility to develop a methodology that is best suited to its
business, provided that the model chosen is comprehensive, rigorous and broadly consistent with
comparable segments of the industry.
193 The benefits of an IMM could extend to improving the management’s ability to make decisions on,
for instance, strategy formulation, capital planning, product development, governance and other
decision making processes within the insurer.
194 Use of the IMM will be strictly conditional on the FSB's approval. The internal model method will be
used to substitute the results generated on the prescribed basis.
Issued for industry comments 45
195 It is the FSB’s preference that insurers should, in future, calculate their Capital Adequacy
Requirement based on an internal model method. However, making use of the IMM will not be
compulsory at this stage.
196 This document focuses on IMMs for individual short-term insurers. It is not the current intention to
extend the IMM for insurance groups.
197 To ensure that the CARs calculated by insurers using the IMM are sufficiently prudent, comparable
and consistent across the industry, model approval will require that the insurer's risk management
system and the methodology underlying the capital calculation meet certain criteria. The FSB will, in
consultation with industry, refine these criteria over time to ensure that they are consistent with the
evolution of industry modelling capabilities. In broad terms, however, the insurer should satisfy the
quantitative and qualitative requirements outlined in these guidelines. In order to recognise
expected advances in insurance risk management and modelling, these guidelines will likely be
revised from time to time.
198 Each insurer will have discretion to determine the precise nature of its modelling approach.
However, an insurer must be able to demonstrate that its internal model:
• operates within a risk management environment that is conceptually sound and supported by
adequate resources;
• is based on a set of quantitative parameters specified in this proposal, including a required
probability of default and a modelling time horizon over which that probability is to be measured.
These parameters will be set at a level that ensures insurers achieve and maintain a minimum
level of financial soundness;
• addresses all material risks to which the insurer could be reasonably expected to be exposed
and is commensurate with the relative importance of those risks, based on the company's
business mix;
• is closely integrated into the day-to-day risk management process of the insurer; and
• is supported by appropriate audit and compliance procedures.
199 In addition to the quantitative and qualitative requirements of this proposal, insurers seeking
approval to use the IMM must have in place adequate processes for validating the accuracy of the
Issued for industry comments 46
capital measurement model, and for monitoring and assessing its on-going performance. A proven
track record of reasonable accuracy in measuring risk will also be required.
Qualitative factors
200 It is important that insurers using the IMM have risk management systems and capital
measurement models that are conceptually sound and implemented with integrity. Accordingly,
there are a number of qualitative criteria that the FSB will have regard to in deciding whether to
approve an internal model for capital adequacy purposes.
201 The qualitative criteria are:
(a) The insurer should have an independent risk management unit that is responsible for the
design and implementation of the insurer's capital measurement model. This unit could form
part of the insurer's actuarial function, its financial control division, or other appropriate group
within the insurer's organisational structure that is separate from the insurer's general business
units. It is not the FSB's intention to mandate a particular organisational structure for insurers,
provided the designated unit has adequate independence, appropriate skills and resources,
and direct reporting access to the senior management of the insurer.
Amongst other things, this unit should produce and analyse the periodic results of the capital
measurement model and conduct regular validation of the model against the actual experience
observed by the insurer. The insurer's Board and senior management should be actively
involved in the risk control process and must regard risk control as an essential aspect of the
business to which significant resources need to be devoted. The periodic reports and validation
results produced by the independent risk management unit must be reviewed by a level of
management with sufficient seniority, independence, and authority to enforce restrictions on
the insurer's overall risk exposure.
Reports should be produced that satisfy the needs of each level of risk monitoring, and should
be available to and understood by both the business function and the independent risk
management function. Reports, at a minimum, should address risk exposures and action
plans, compliance with applicable policies, and audits.
Issued for industry comments 47
The organizational structure of the insurer and its relevant committees should indicate a direct
flow of risk management responsibilities from the Board to the senior management and risk
management functions.
The level of skill and experience of key risk unit staff should be commensurate with the
complexity of the risks they monitor. Skills should include systems, finance, business and
actuarial. The Statutory Actuary should be an integral element of the risk management
process. Individuals involved in the risk management process should not have conflicting
responsibilities or priorities.
On an annual basis the Board (or its Audit sub-committee) should minute its satisfaction or
concerns related to management’s actions in relation to the risk management process. A copy
of this minute should be attached to the Financial Condition Report. If there were concerns
raised then a follow-up minute noting resolution of those concerns (or otherwise) should also
be attached.
(b) The capital measurement model must be closely integrated into the day-to-day risk
management process of the insurer. Accordingly, the output of the models should be an
integral part of the process of planning, monitoring and controlling the insurer's risk profile.
(c) An independent review of the capital measurement model should be carried out periodically.
The model must be independently reviewed at least every three years, whilst an annual review
will be viewed as best practice.
(d) A review of the overall risk management process should take place at regular intervals (ideally
not less than once a year) and should specifically address, at a minimum:
• the scope of the risks captured by the capital measurement model;
• the integrity of the management information system;
• the verification of the consistency, timeliness and reliability of data sources used to run
internal models, including the independence of such data sources;
• the accuracy and appropriateness of volatility, correlation and distributional assumptions;
• the verification of the model's accuracy through periodic back testing or other validation
process;
• the validation of any significant change in the capital measurement model;
Issued for industry comments 48
• the adequacy of the documentation of the capital measurement model and
accompanying risk management systems and processes;
• the organisation of the risk management unit; and
• the integration of the capital measurement model into the broader risk management
framework of the insurer.
(e) An audit trail of all changes affecting the model is required. It must be possible to re-evaluate
an historic model at a future date and subsequently make all known changes to obtain the
results of the existing model.
(f) For the first year that an internal model is used an analysis of change will not be expected.
However, from the second year onwards an insurer will need to provide details of the work
carried out over the interim period – whether updating the methodology and/or parameters.
(g) The insurer needs to give a view on the quality of the policy data used for modeling purposes.
(h) If any external data are used (e.g. industry data) this should be disclosed and motivated.
(i) Where a software package is used, it is important that the employees of the insurer
understands the technical operation of the software, its results and how changes to the
methodology or the assumptions will affect the results.
Quantitative standards
202 The insurer's capital measurement model should calculate an amount of capital sufficient to reduce
the insurer's probability of default over a one year time horizon to 0.05% or below. The probability of
default applies to the insurer’s business classes as a whole.
203 The insurer’s liability reserves should be best estimates. Margins should be added to take the level
of the total reserves of the insurer up to a 75% level of sufficiency. The addition of the Capital
Adequacy Requirement will therefore result in a total level of sufficiency of 99.5%.
204 An insurer may measure its Capital Adequacy Requirement over a different combination of
probability of default and time horizon (e.g. using a lower level of sufficiency over a longer time
Issued for industry comments 49
period), provided the insurer can demonstrate to the FSB that the alternative parameters are
appropriate for its business mix and produce a result which is consistent with the benchmark set
above.
205 The Capital Adequacy Requirement will be subject to a minimum monetary value of R10m.
206 The FSB reserves the right to change the value of the Capital Adequacy Requirement, as
calculated by an internal model, if it deems the result to be inappropriate.
207 The methodology used to produce an internal model will not be prescribed. The insurer needs to
explain what methods were used and why they are deemed to be appropriate. In addition, a
minimum number of simulations will not be specified but again, the insurer needs to explain why the
chosen number of simulations is appropriate.
208 There must be sufficiently credible experience on which to base the model parameters.
209 The mean and variance of the model output must be similar to the actual empirical data mean and
variance.
210 The method must include the results of any experience investigations undertaken to set the model
assumptions.
211 The method may take into account the margins that are included in the liabilities.
212 Management actions may be allowed in calculating the insurer’s Capital Adequacy Requirement,
provided that:
• the board has agreed (by board resolution) that these management actions will be implemented,
if necessary;
• the implications of the likely delay in recognising emerging weaknesses and implementing
alternative mitigating strategies have been considered;
• all the management actions assumed have been disclosed to the FSB; and
• an estimate of the benefit of the management actions assumed is provided.
Issued for industry comments 50
213 There should be an ongoing analysis of changes in modeled results from one period to the next.
214 Any differences in the assumptions used for determining the CAR versus determining actuarial
liabilities should be explained by the Statutory Actuary.
Specification of risk factors
215 An important part of an insurer's internal capital measurement model is the specification of an
appropriate set of risk factors, i.e. the risks that impact on the value of the insurer's assets and
liabilities. The risk factors contained in the capital measurement model must be sufficient to capture
the risks inherent in the insurer's portfolio. Although insurers will have some discretion in specifying
the risk factors for their internal models, the criteria specified below should generally be taken into
account.
216 The risks specified below are intended to provide guidance to insurers on the sorts of risk factors
that should be incorporated into capital measurement models. However, the list is not intended to
be exhaustive: there may be additional factors specific to an individual insurer's activities that will
need to be built into any internal model before it can be used to calculate the insurer's CAR.
Similarly, there may be factors included below which are irrelevant or immaterial to a particular
insurer's business or modelling technique. In these cases, the insurer will not be required to devote
significant modelling resources where this is clearly unwarranted.
217 The insurer should highlight and rank its most important risks (e.g. the top ten risks) and explain
how these were addressed in their model.
Investment Risks
218 An insurer's capital measurement model must consider the risk that the amount and / or timing of
the cash flows connected with the insurer's assets will differ from expectations or assumptions as of
the valuation date. Factors that should be considered include:
• default / counterparty failure;
• the future market value of assets;
• the liquidity of assets (the potential that the insurer may be unable to meet its obligations as they
fall due because of having a timing mismatch); and
Issued for industry comments 51
• the impact of changes in interest rates on the value of asset cash flows (this includes cash flows
from bonds, mortgages, real estate and dividends).
Insurance Risks
219 An insurer's capital measurement model must consider the risk that the amount and / or timing of
cash flows connected with the insurer's obligations will differ from expectations or assumptions as
at the valuation date. Factors that should be considered include:
(a) The projection of exposure over the next year and in particular the variability inherent in
this.
(b) Outstanding claims risk - the risk that the actual cost of claims for obligations incurred
before the calculation date will differ from expectations or assumptions due to factors such
as:
• unexpected inflation in claim costs;
• changes in interest rates;
• changes in the legal environment in which claims will be resolved, including the
environment in which claims are pursued by policyholders or third parties;
• changes to the basic premises underlying the provisions for a particular coverage
(such as has occurred with environmental impairment liability);
• patterns of pricing adequacy which affect the payment of claims or the adequacy of
case reserves;
• currency fluctuations which affect the costs of losses when expressed in local
currency;
• the possibility of latent claims;
• the randomness of the claims process itself; and
• incompleteness of databases.
(c) Process and systems risk.
(d) Premiums risk - the risk that premiums relating to post calculation date exposures,
including premiums written after the calculation date, could be insufficient to fund the
liabilities arising from that business due to changes in factors including:
Issued for industry comments 52
• changes in interest rates;
• competitive pressures that do not allow the insurer to achieve assumed levels of
exposure and/or rate adequacy;
• regulatory intervention that restrains premium increases or decreases or requires
business to be underwritten that would not be underwritten in the absence of such
intervention;
• retrospective premiums or dividends that differ from assumptions; and
• amounts collectible from agents that differ from assumptions.
(e) Loss projection risk - the uncertainty regarding assumptions about future claims costs. Loss
projection risk is a function of the factors that affect reserve risk and also of the uncertainty
regarding factors such as:
• unanticipated changes in loss costs and exposures from the historical experience
period;
• loss costs for the mix of new policies being underwritten, including the effect of
adverse selection; and
• loss adjustment practices in the future that may differ from those in the past.
(f) Concentration risk - the uncertainty regarding the cost of catastrophic events. This relates
to the quantification of low-frequency high-severity risks which the insurer may be exposed
to. The most common of these risks relates to natural catastrophe such as floods and
windstorms. Concentration risk can be considered a component of loss projection risk, and
is a function of factors such as:
• the coverages being written;
• the concentration of insured values in specific geographic areas or legal jurisdictions;
and across classes of business
• uncertainty regarding the frequency, severity and nature of catastrophic events.
If a catastrophe model is used to determine the Capital Adequacy Requirement for
concentration risk, the details of the model (provider, assumptions etc) should be provided.
Issued for industry comments 53
If a different model is used to derive the Capital Adequacy Requirement compared to the
model used to purchase reinsurance cover, the reasons for this should be explained.
One of the methods to measure (and mitigate) concentration risk is to put in place sound
systems for the setting, monitoring and altering of its Maximum Event Retention (MER). At
a minimum, these systems must consist of policies and procedures that detail:
• the insurer's willingness to take on catastrophic risks;
• how the insurer's financial resources cover its calculated MER;
• the regular process by which the policies are reviewed by senior management, and (if
relevant) by the Actuary, in the light of the insurer's results by class of business and
geographical region, as well as current market conditions e.g. availability of adequate
catastrophe reinsurance cover;
• the regular process by which the policies are approved by the directors; and
• the regular process by which the insurer's compliance with its policies is
independently reviewed.
In determining the level of MER for a given portfolio, the insurer should consider:
• the classes of business in which the insurer is engaged;
• the types of catastrophic risk which need to be addressed;
• the geographical zones in which the insurer transacts business if natural catastrophes
are considered; and
• how the geographical zones will be grouped for calculation purposes.
The insurer should base the calculation of its MER on:
• the relevant area of concentration (e.g. geographic region);
• which peril produces the greatest MER;
• the return period of the relevant catastrophe and the sensitivity of the MER to
changes in the return period; and
• results produced by modelling the insurer's own past experience.
Issued for industry comments 54
The MER must be calculated in a manner consistent with the processes for setting,
monitoring and altering the MER outlined in the insurer's Reinsurance Strategy Document.
Regardless of the methodology used, the Board should at least annually seek the advice of
its Auditor, Actuary, or other relevant expert, to review the calculation of the MER, and
ensure that it is established at an appropriate level.
An insurer must inform the FSB of any changes to its MER arising as a result of changes in
its risk enterprise management system, risk profile, classes of business underwritten or
reinsurance program.
(g) Reinsurance risk - uncertainty regarding the price and availability of desired reinsurance,
and of the uncertainty regarding the collectability of reinsurance recoverables arising from
the financial condition of the reinsurer or ambiguity about coverages provided. Reinsurance
risk recognises how reinsurance responds under stress, such as a large catastrophe or
other strain on collectability, aggregates, reinstatements and other reinsurance parameters.
Correlations between reinsurers should be allowed for. Intra-group reinsurance should be
disclosed.
Both “approved” and “non-approved” reinsurance will be allowed in the internal model
approach to determine Capital Adequacy Requirements. However, allowance for credit risk
for reinsurance recoveries should be done in accordance with the table below:
Issued for industry comments 55
Standard & Poor’s
Moody’s AM Best Fitch Global Credit Ratings
Probability of default
AAA to AA- Aaa to Aa3 A++, A+ AAA to AA- AAA to AA- 2%
A+ to A- A1 to A3 A, A- A+ to A- A+ to A- 4%
BBB+ to
BBB-
Baa1 to
Baa3
B++ BBB+ to
BBB-
BBB+ to
BBB-
6%
BB+ or
below
Ba1 or
below
B+ or below BB+ or
below
BB+ or
below
8%
Unrated 100%
As stated in the table above, no allowance can be made for reinsurance recoveries from
unrated reinsurers, unless a parental guarantee or deposit (as described in the Act) is in
place. Local ratings should be used. Where the insurer uses reinsurers with multiple ratings
from two or more of the rating agencies in the table above, the insurer should use the more
conservative rating.
The FSB's approval must be sought if an insurer wishes to use the rating determined by a
rating agency not included in the table above.
(h) Expense risk - the risk that expenses will differ from projections due to factors such as:
• contingent commissions to intermediaries;
• marginal expenses of adding new business; and
• overhead costs, including the risk that overhead costs will be changed by regulatory
intervention, and the risk that there may be periods of changing premium during
which overhead costs will not change in proportion to premium.
220 Not all these risks can be quantified using statistical means and it will be necessary to test the
results by means of stress testing. The risk manager will then need to take a view of the likelihood
of the occurrence evaluated under stress testing. A balance is therefore required between a
stochastic and a stress management solution.
Issued for industry comments 56
Parameter and Model Risk
221 Parameter uncertainty is the uncertainty in the parameters insurers select to estimate the capital
required. The uncertainty has many potential sources, but the most common is lack of credible
relevant data on which to base the main assumptions.
222 It is important to back-test the key assumptions for reasonableness. This would enable a broad
high-level reasonableness assessment of the parameters and indicate potential areas of significant
under or over estimation.
223 To compensate for known modelling shortcomings, an insurer could adopt more prudent
assumptions in one or more areas of its submission. In assessing a submission it is helpful if the
insurer makes clear which areas of weakness the prudent assumptions are intended to offset and
the extent of any offsetting.
Credit Risk
224 Credit risk refers to any risk in an insurer’s ability to recover money owned by third parties. This
should include all counter-parties, not just reinsurers. In particular, balances held with
intermediaries and banks should be considered.
Operational Risk
225 As well as accurately measuring financial risks, an insurer's model for measuring capital adequacy
must take into account the various operational risks that it also faces, i.e. the risk of financial loss
occurring through error, fraud or failure to perform activities in a timely manner as a result of
breakdown of people or systems, internal controls, corporate governance and external events.
These risks, although difficult to quantify, have the potential to impose significant costs upon, and
possibly seriously jeopardise, the financial soundness and on-going business of the insurer. An
insurer's capital measurement model will therefore need to include a measure of operational risk
within its capital calculation.
226 Particular care should be taken where core responsibilities are outsourced as the outsourcing party
will most likely not have the same incentive as the company in managing the risk. The risks that can
arise from such an arrangement should be critically examined and in particular whether or not such
outsourcing approaches are appropriate at all.
Issued for industry comments 57
227 We recognise that operational risk poses one of the most difficult challenges in assessing capital.
The insurer should use methodologies and models that are “fit for purpose”. Management should be
involved in making informed judgements on the assumptions to be used. Insurers should explain
how they decided on these judgements.
New business
228 If the average combined ratio over the last 3 years is greater than 100%, the insurer needs to make
explicit allowance for additional capital for new business.
Correlation Between Risk Classes
229 An insurer's capital measurement model must estimate the effects of the risks specified above
individually on the financial position of the insurer, and evaluate the interrelationships between
these risks and other risks.
230 A correlation matrix approach can be used to aggregate the results from individual stress tests
which have been independently applied8 to the business. A significant drawback of this
methodology is that it does not directly explore the impact of more than one risk occurring at the
same time within the business model. This could result in a material understatement of the capital
required. This effect can be described by several different names, but we refer to it as “non-
linearity”. Insurers must allow for this effect in a suitable manner. Depending on the availability of
sufficient data, there may be different methods to model correlation between risk classes that make
appropriate provision for non-linearity.
Sign off and review
231 The board of directors takes ultimate responsibility for the internal model. The board will sign off
that
• the internal model is based on reliable information;
• it is a fair reflection of the risks faced by the insurer; and
• it is consistent with the overall regulatory framework for solvency.
8 “Independently applied” means the following: Say a specific stress test is applied to the model (e.g. a drop in equity values) to determine the capital required for this stress test. All the other inputs will be “base case” assumptions for normal conditions. After the capital amount has been determined, the stress test’s inputs are returned to “base case” assumptions (i.e. equity values are returned to normal) and then the next stress test is applied to calculate the capital for that stress test (e.g. stressed fixed interest assumptions) and so on.
Issued for industry comments 58
232 In signing this off, the board will rely on its executive management team and its professional
advisors which include its statutory actuary and the external auditor.
233 A statutory actuary should be appointed to sign off the internal model’s calculations annually.
However, the statutory actuary should not be responsible for signing off the risk management
process. The statutory actuary may be independent or may be employed by the insurer.
234 The FSB will have the right at any time to ask for an independent opinion (should the statutory
actuary be employed by the insurer) or for a second independent opinion (should the statutory
actuary not be employed by the insurer).
235 The statutory actuary should follow the professional guidance issued by the Actuarial Society of
South Africa.
Technical guidance
236 This proposal did not address and propose sufficient technical guidance pertaining to:
• Reserving,
• Certified models; and
• Internal models.
237 Instead, the FSB requests the Actuarial Society of South Africa to develop and implement the
necessary professional guidance notes for actuaries that operate within these areas.
238 The Actuarial Society’s short-term insurance committee formed a “Data and Catastrophe” sub-
committee that will investigate the possibility of an industry catastrophe model as well as guidelines
in determining Capital Adequacy Requirements for catastrophe risks.
Issued for industry comments 59
Definitions and abbreviations
ACC - Asset Capital Charge
Act – Means the Short-term Insurance Act, 1998 (Act No. 53 of 1998)
Admissible assets - The difference between fair value of assets and assets which have been
disregarded for solvency purposes (inadmissible assets). Amounts to be disregarded are defined in Part
I of Schedule 2 of the Short-term Insurance act 53 of 1998.
ASSA -: Actuarial Society of South Africa
Capital adequacy multiple - The result obtained from dividing excess assets by the capital adequacy
requirement.
Capital Adequacy Requirement - The statutory minimum level by which an insurance company’s
assets should exceed its liabilities.
CAR -Capital Adequacy Requirement
Chain ladder method - A statistical method of estimating outstanding claims, whereby the weighted
average of past claim development is projected into the future. The projection is based on the ratios of
cumulative past claims, usually paid or incurred, for successive years of development. It requires the
earliest year of origin to be fully run-off or at least that the final outcome for that year can be estimated
with confidence. If appropriate, the method can be applied to past claims data that have been explicitly
adjusted for past inflation.
CM - Certified Model
Cresta zone - The Global CRESTA (Catastrophe Risk Evaluating and Standardising Target
Accumulations) zone data set helps brokers and reinsurers assess and present risk, based on the
zoning system established by the world's leading reinsurers. Based primarily on the observed or
expected seismic activity within a country, Global CRESTA zones consider the distribution of insured
Issued for industry comments 60
values within a country as well as administrative or political boundaries for easier assessment of risks.
Global CRESTA was originally developed as a joint project of Swiss Reinsurance Company (Zurich),
Gerling-Konzern Globale Reinsurance Company (Cologne) and the Munich Reinsurance Company
(Munich).
Earned premium - The total premium attributable to the exposure to risk in an accounting period
Estimated maximum loss - The largest loss that is reasonably expected to arise from a single event in
respect of an insured property. This may well be less than either the market value or the replacement
value of the insured property and is used as an exposure measure in rating certain classes of business.
Excess assets - The excess of the value of an insurer’s assets over its liabilities.
Facultative reinsurance - A reinsurance arrangement covering a single risk as opposed to a treaty
arrangement; commonly used for very large risks or portions of risk written by a single insurer.
Fair value of assets - means the fair value of an asset determined by reference to South African
Statements of Generally Accepted Accounting Practice
First-party cell – A cell where the shares issued to cell participants provide the cell owners with the
ability to underwrite their own risk and that of their subsidiaries. The cell participant is responsible for the
funding of the cell and the cell should be maintained at such levels as may be required to ensure the
required solvency is maintained at all times. Claims are limited to funds available in the cell after
providing for solvency.
FSB - Financial Services Board
ICC - Insurance Capital Charge
IM - Internal Model
IMM - Internal Model Method
Issued for industry comments 61
Incurred but not reported (IBNR) reserve - A reserve to provide for claims in respect of claim events
that have occurred before the accounting date but had still to be reported to the insurer by that date.
Latent claims - Claims resulting from causes that the insurer is unaware of at the time of writing a
policy, and for which the potential for claims to be made many years later has not been appreciated.
Maximum Event Retention (MER) - means the largest loss to which an insurer will be exposed (taking
into account the probability of that loss) due to a concentration of policies, after netting out any
reinsurance recoveries. The MER must include an allowance for the cost of one reinstatement premium
for the insurer's catastrophe reinsurance. The MER is calculated as the net exposure of the company
assuming a 250-year return period and is less than the company’s probable maximum loss.
Maximum Event Retention (MER) - The largest loss to which an insurer will be exposed (taking into
account the probability of that loss) due to a concentration of policies, after netting out any reinsurance
recoveries. The MER must include an allowance for the cost of one reinstatement premium for the
insurer's catastrophe reinsurance. The MER is calculated as the net exposure of the company assuming
a 250-year return period and is less than the company’s probable maximum loss.
Non-proportional reinsurance - Reinsurance arrangements, where the claims are not shared
proportionately between the cedant and reinsurer.
Outstanding claims reported (OCR) reserve - The reserve set up in respect of the liability for all
outstanding claims reported
Pay-as-paid clause – Refer to section 51(c) of the Act
PM - Prescribed Method
Probable Maximum Loss (PML) - means the largest loss to which an insurer will be exposed (within
the realms of possibility) due to a concentration of policies, without any allowance for reinsurance
recoveries.
Proportional reinsurance - A reinsurance arrangement where the reinsurer and cedant share the
claims proportionally.
Issued for industry comments 62
Return Period - means the expected average period within which a particular catastrophic event will re-
occur. For the purposes of these guidelines, insurers will be required to assume a return period of 1 in
250 years, or greater.
Risk Capacity - The amount of premium income that an insurer is permitted to write or the maximum
exposure that could be accepted, as per its reinsurance agreement.
TCR - Total Capital Adequacy Requirement
Third-party cell – A cell where the shares issued to cell participants (owners) provide the cell owners
with the ability to underwrite the risks of third parties. The source of the business underwritten is usually
from a captured client base. The difference between a third party and a first party cell is that claims
instituted by third parties are not limited to the funds provided by the cell participant, after providing for
solvency. The funds provided by the promoters of the cell insurance facility will also be utilised to settle
claims should the cell participant fail to provide additional funds to settle any claims.
Treaty reinsurance - Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a
treaty.
Unearned premium provision (UPP) - The reserve set up in respect of the portion of premium written
in an accounting period that is deemed to relate to cover in one or more subsequent accounting periods.
Unexpired risk provision (URP) - The reserve required to cover the excess of the amount required to
cover the claims and expenses that are expected to emerge from an unexpired period of cover over the
UPP.
Issued for industry comments 63
Appendix 1
DRAFT BOARD NOTICE *** OF 2008
FINANCIAL SERVICES BOARD REGISTRAR OF SHORT-TERM INSURANCE
SHORT-TERM INSURANCE ACT, 1998
(ACT NO. 53 OF 1998)
Prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy
requirement of short-term insurers
I, Robert James Gourlay Barrow, Registrar of Short-term Insurance, hereby prescribe, under paragraph 2 of Schedule 2 of the Short-term Insurance Act, 1998 (Act No. 53 of 1998), the requirements for the calculation of the value of the assets, liabilities and capital adequacy requirement of short-term insurers, as set out in the Schedule hereto.
……………………………………….
RJG BARROW,
Registrar of Short-term Insurance
Issued for industry comments 64
SCHEDULE
Prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy requirement of short-term insurers
(Paragraph 2 of Schedule 2 of the Short-term Insurance Act, 1998)
1. Definitions
In these Requirements, unless the context indicates otherwise: ”Act“ means the Short-term Insurance Act, 1998 (Act No. 53 of 1998), and a word or expression to which a meaning has been given in the Act, has that meaning;
”annual return“ means the statutory return an insurer must submit to the Registrar annually;
”capital requirement”, in relation to a regulated financial institution, means the capital or solvency margin, and will include any additional asset requirements, as the case may be, required for that institution by the regulatory authority concerned;
”fair value“, means the value of an asset determined by reference to GAAP;
”GAAP“ means South African Statements of Generally Accepted Accounting Practice;
”group undertaking“, in relation to an insurer, means a juristic person in which the insurer alone, or with its subsidiaries or holding company, directly holds 20% or more of the shares, if the juristic person is a company, or 20% or more of any other ownership interest, if the juristic person is not a company;
”insurer“ means a short-term insurer;
”listed“ means listed on a stock exchange or similar trading facility, which is recognised generally by the international community of institutional investors;
”net asset value“, in relation to a group undertaking, means its net asset value calculated in accordance with paragraph 2.1.2.8;
”policy“ means a long-term policy;
Issued for industry comments 65
”regulated financial institution“ means: (a) a financial institution as defined in paragraph (a) of the definition of ‘financial institution’ in
section 1 of the Financial Services Board Act, 1990 (Act No. 97 of 1990); (b) a bank as defined in section 1(1) of the Banks Act, 1990 (Act No. 94 of 1990), or a mutual
bank as defined in section 1(1) of the Mutual Banks Act, 1993 (Act No. 124 of 1993); (c) an entity that carries on business similar to the business of an entity referred to in paragraphs
(a) or (b), which is not regulated by a law that regulates an entity referred to in paragraph (a) or (b), but which is subject to substantially similar regulation outside South Africa;
”Schedule 1“ means Schedule 1 of the Act;
”Schedule 2“ means Schedule 2 of the Act.
2. Valuation of assets 2.1 Calculation of values
The value of the assets in paragraph 2.1.1, in which a reference to an item by number means a reference to the item of the Table to Schedule 1, shall be as specified in that paragraph.
2.1.1 The value of-
(a) a Krugerrand coin referred to in item 1, shall be the price which the South African Reserve Bank is prepared to pay for it on the date as at which its value is calculated;
(b) a credit balance, deposit or margin deposit referred to in items 2, 3, 10, 16(5)(b) and (d) and 18, shall be the amount thereof;
(c) an asset referred to in item 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 or 16(1), (2), (3), (4) or (5)(a) or (c) which is listed on a stock exchange and for which a closing price was quoted on that stock exchange on the date as at which the value is determined, shall be the closing price or the closing price last so quoted;
(d) an asset referred to in items 16(5)(c) and 17, shall be the price at which the participatory interest would have been repurchased by the collective investment scheme management company on the date as at which the value is calculated, and in the case of a property collective investment scheme, the market value, and if it is listed on a stock exchange and for which a closing price was quoted on that stock exchange on the date as at which the value is determined, the closing price, or the closing price last so quoted;
(e) a futures contract referred to in items 16(5)(d) and 18, shall be determined by the mark-to-market as defined in the rules of the South African Futures Exchange referred to in section 18 of the Security Services Act, 2004 (Act No. 36 of 2004);
(f) an option contract referred to in items 16(5)(d) and 18 for which a price was quoted on a stock exchange on the date on which the value is calculated, shall be that quoted price;
(g) an asset referred to in item 21, shall be the amount of premiums less- (i) the amount or estimated amount of any commission which the short-term insurer owes
or for which it is likely to become liable in connection with the premiums; (ii) a provision of 7,5 percent of that amount, to cover the risk of loss arising from non-
receipt by the insurer of any premiums;
Issued for industry comments 66
(h) an asset referred to in item 14, 15, 19 or 20(b) or (c), or an asset not otherwise specified in this paragraph, shall be an amount not exceeding that which could have been obtained on the sale of the asset between a willing seller and a willing buyer, acting at arm’s length and in good faith, as estimated by the insurer;
(i) an asset referred to in item 20(a), shall be the amount which would be payable to the policyholder upon the full surrender of the policy on the day on which the value is calculated;
(j) a derivative not mentioned in subparagraph (e) or (f) shall be calculated as determined by the Registrar from time to time.
(k) an asset in respect of which no basis of valuation is prescribed in subparagraphs (a) to (i) shall be valued in accordance with GAAP.
2.1.2 Value of a group undertaking 2.1.2.1 The value of a group undertaking must be limited to the percentage of the shareholding or
other ownership interest of the insurer in the group undertaking, multiplied by the net asset value of the group undertaking.
2.1.2.2 If the group undertaking is listed, the value in paragraph 2.1.2.1 may be increased by-
A multiplied by B, Where- A equals the difference between the fair value and the net asset value of the group
undertaking, provided that A must be taken as nil if the net asset value is larger than the fair value;
B is the lower of 20% and the percentage of the holding by the insurer in the group undertaking.
2.1.2.3 If a group undertaking is not a regulated financial institution, and its fair value is less than
0,25% of the value of the liabilities of the insurer, it may be valued at fair value, notwithstanding paragraph 2.1.2.1.
2.1.2.4 If there is more than one group undertaking as contemplated in paragraph 2.1.2.1, each
may be valued at fair value, provided that their combined fair value is not more than 2,5% of the value of the liabilities of the insurer. If their combined fair value is more than 2,5% of the value of the liabilities of the insurer, only so many of them, selected by the insurer, as will have a combined fair value of not more than 2,5% of the value of the liabilities of the insurer, may be valued at fair value. The others must then be valued as required by paragraph 2.1.2.1.
2.1.2.5 If an insurer holds shares in its holding company, the value of those shares must for
purposes of valuation be limited to the following:
(a) If the holding company is listed - 2.5% of the value of the liabilities of the insurer. (b) If the holding company is not listed - nil.
2.1.2.6 Paragraph 2.1.2.5 applies also where the insurer, directly, or indirectly through a subsidiary
or trust, holds shares in its holding company under a share incentive scheme linked to shares in its holding company.
Issued for industry comments 67
2.1.2.7 Paragraph 2.1.2.5 does not apply where the insurer holds shares in its holding company under a collective investment scheme.
2.1.2.8 Net asset value of a group undertaking 2.1.2.8.1 If the group undertaking is a regulated financial institution
(a) The net asset value of the group undertaking is the value of its assets, less the sum of the value of its liabilities and its capital requirement as required by the regulatory authority concerned.
(b) If the group undertaking is a company, and its main business is insurance business, the insurer must, in calculating these values, exclude so much of its capital and reserves as shareholders, other than the insurer, may withdraw in cash when they cease to be shareholders, in terms of the articles of association of, or a contract with, the group undertaking.
2.1.2.8.2 In other cases
(a) The net asset value of the group undertaking is the value of its assets, less the value of its liabilities.
(b) If the group undertaking carries on most of its business in South Africa, these values must be calculated in accordance with GAAP.
(c) If the group undertaking carries on most of its business in another country, these values must be calculated in accordance with accounting standards generally accepted in that country.
(d) In calculating these values, the following items must be excluded, to the extent that, according to the insurer, they can be ascertained with reasonable effort and are material:
(i) an amount, excluding a premium in respect of a short-term reinsurance policy, which remains unpaid after the expiry of a period of 12 months from the date on which it became due and payable;
(ii) an amount representing administrative, organisational or business extension expenses incurred directly or indirectly;
(iii) an amount representing goodwill or an item of a similar nature;
(iv) an amount representing a prepaid expense or a deferred expense.
3. Valuation of liabilities 3.1 Method of calculating the incurred but not reported reserve (IBNR) 3.1.1 The minimum amount referred to in section 32(1)(a)(ii) of the Act, shall be an amount equal to 7
per cent or such other percentage as the Registrar may direct in a particular case, of the total amount of all of the premiums payable to the short-term insurer under short-term policies entered into by it in the period of 12 months preceding the date on which the amount is calculated, reduced by the total amount payable by the short-term insurer as premiums under approved reinsurance policies in respect of the short-term policies concerned.
Issued for industry comments 68
3.2 Method of calculating the unearned premium provision (UPP) 3.2.1 In respect of short-term policies, other than short-term reinsurance policies, the minimum amount
of the unearned premium provision referred to in section 32(1)(b) of the Act shall, subject to paragraph 3 of Schedule 2, be the amount calculated by means of the formula-
(A - B) x (1 - C/D)
in which formula-
A represents the amount remaining after deducting from the total amount of all
of the premiums payable to the short-term insurer under all of the short-term policies concerned for the whole of the period for which each of those short-term policies is operative, of-
(a) the total amount of so much of those premiums as has been refunded as a result of the cancellation or variation of the policy;
(b) the total amount payable by the short-term insurer as premiums under approved reinsurance policies in respect of the short-term policies concerned;
B represents the total amount of the consideration, payable by the short-term insurer in terms of section 48 of the Act to independent intermediaries in respect of the short-term policies concerned, reduced by the total amount of any consideration payable to the short-term insurer in respect of approved reinsurance policies under which its liabilities in respect of the short-term policies concerned are reinsured: Provided that such reduction shall not exceed an amount equal to the maximum consideration which would have been payable to an independent intermediary in terms of section 48 of the Act had those contracts been short-term policies other than short-term reinsurance policies;
C represents the number of days in the period from the date of the commencement of the short-term policy until the day on which the calculation is made in accordance with this paragraph;
D represents the total number of days during the whole period for which the short-term policy is operative.
3.2.2 In respect of short-term reinsurance policies, the minimum amount of the unearned premium
provision referred to in section 32(1)(b) of the Act shall, subject to paragraph 3 of Schedule 2, be the amount calculated by means of the formula-
(A - B) / 2
in which formula- A represents the amount remaining after deducting from the total amount of all of the
premiums payable to the short-term insurer under all of the short-term policies concerned for the whole of the period for which each of those short-term policies is operative, of-
Issued for industry comments 69
(a) the total amount of so much of those premiums as has been refunded as a result of a cancellation or variation of the policy;
(b) the total amount payable by the short-term insurer as premiums under approved reinsurance policies in respect of the short-term policies concerned;
B represents the total amount of consideration payable by the short-term insurer in respect of those reinsurance policies, subject to a maximum of 30 per cent of the said premiums, reduced by the total amount of any consideration payable to the short-term insurer in respect of approved reinsurance policies under which its liabilities in respect of the short-term policies concerned are reinsured: Provided that such reduction shall not exceed the total amount of consideration paid by the short-term insurer in respect of those policies.
3.3 A short-term insurer shall, if the Registrar so approves or by notice requires, arrive at the minimum
amount of its unearned premium provision by means of a calculation which is different from that set out in paragraph 3.2.1 or 3.2.2 and which the Registrar is satisfied places a more appropriate value on the liabilities concerned.
4. Calculation of the capital adequacy requirement 4.1 The capital adequacy requirement referred to in section 29 of the Act shall be an amount equal to
the sum of the amounts described in paragraphs 4.2 and 4.3: 4.2 The additional asset requirement, which shall be calculated as the greater of A or B below:
A is R3 000 000 or such smaller amount as the Registrar may, in a particular case and for a determined period, approve; B is 15 per cent of the greater of the amount of the premium income of the short-term insurer in respect of the short-term insurance business carried on by it in the Republic after deduction of all premiums payable by it in terms of any short-term reinsurance policies entered into by it in respect of any short-term policies-
(i) during the period of 12 months immediately preceding the day on which the previous financial year ended; or
(ii) during the period of 12 months immediately preceding the day on which the calculation is made; and
4.3 A contingency reserve, which shall be calculated as the greater of A or B below:
A is an amount equal to 10 per cent of the total amount of all of the premiums payable to the short-term insurer under short-term policies entered into by it in the period of 12 months preceding the date on which the amount is calculated, reduced by the total amount payable by the short-term insurer as premiums under any approved short-term reinsurance policies in respect of the short-term policies concerned;
Issued for industry comments 70
B, at any time during a period, not exceeding three years, as the Registrar may approve, is such lesser amount as the Registrar may approve, subject to the conditions the Registrar determines, if the Registrar is satisfied that the short-term insurer concerned-
(i) has incurred claims under short-term policies of such extent and as a result of such extraordinary events that it is reasonable to meet all, or such part as the Registrar may approve, thereof from the contingency reserve; and
(ii) will be able to restore the reserve to the amount required in terms of subparagraph (i) within that approved period.
5. Process for the relaxation of a provision
An insurer may approach the Registrar for relaxation of the provisions of this Board Notice. Each application will be evaluated based on the relevant information provided.
Relaxation will only be considered in order to ensure that the insurer maintains a financially sound condition, either in the short or medium term. Relaxation will not be considered only to improve the financially sound condition of an insurer.
6. Short title
This Notice is called the Notice on the Prescribed Requirements for the Calculation of the Value of Assets, Liabilities and Capital Adequacy Requirement of Short-term Insurers, 2008.
Issued for industry comments 71
Appendix 2
Gross Standalone Capital at 99.5% level of sufficiency
UPR Level (R'mil) Accident 0 0.3 1 2 4 11 29 75 193 500
0 0.00 0.41 1.15 3.24 8.85 21.22 53.18 123.95 289.17 685.46
1 1.47 2.06 2.94 5.18 10.89 23.12 55.02 125.61 290.67 686.83
2 2.79 3.42 4.24 6.11 11.71 25.39 55.66 126.27 299.24 692.21
4 5.29 5.97 6.70 8.75 13.65 26.68 56.58 127.79 298.09 689.34
8 10.02 10.68 11.17 13.06 18.76 30.18 60.84 132.32 296.87 709.62
16 18.91 19.39 19.85 22.02 27.06 39.26 68.49 137.70 293.23 694.20
32 35.61 36.75 37.64 39.64 43.74 53.09 86.06 147.23 314.06 703.18
63 66.84 68.59 68.84 69.70 71.23 85.28 113.19 185.28 343.07 750.23
126 125.06 123.14 126.28 124.17 128.46 139.13 171.19 233.83 405.56 763.03
251 233.20 222.14 233.19 232.09 236.59 249.78 273.46 333.81 488.81 858.66
501 433.27 440.87 435.24 419.42 424.68 448.63 481.89 517.53 679.56 1048.83
GW
P Le
vel (
Rm
il)
1000 801.79 786.05 809.99 801.37 785.72 817.22 834.79 916.70 1051.89 1359.66
UPR Level (R'mil) Engineering
0 0.3 1 2 4 11 29 75 193 500
0 0.00 0.21 0.67 2.22 6.54 17.72 44.24 103.43 248.91 582.26
1 0.75 1.06 1.71 3.54 8.05 19.30 45.77 104.82 250.20 583.42
2 1.44 1.70 2.21 3.80 8.33 19.32 45.48 106.32 247.55 576.45
4 2.74 3.01 3.34 4.69 8.77 19.23 44.80 105.20 241.10 575.57
8 5.16 5.38 5.58 6.71 10.07 20.16 44.53 105.80 248.05 584.89
16 9.61 9.93 10.03 10.65 13.40 21.96 46.38 108.09 247.69 572.24
32 17.67 17.68 17.43 18.25 20.90 27.18 48.21 106.22 254.14 567.03
63 32.01 31.47 33.08 32.24 35.16 39.60 57.40 109.46 248.92 563.28
126 56.88 57.99 56.61 57.15 57.84 62.42 77.72 120.83 246.81 564.85
251 98.61 97.65 98.41 97.58 100.88 100.60 110.99 141.29 250.39 553.40
501 165.53 160.28 164.03 167.91 163.67 171.81 172.91 198.64 273.09 530.61
GW
P Le
vel (
Rm
il)
1000 265.76 257.16 266.62 267.27 264.46 260.32 274.30 292.64 346.62 526.48
Issued for industry comments 72
UPR Level (R'mil) Guarantee 0 0.3 1 2 7 19 57 170 506 1500
0 0.00 1.05 3.14 9.11 23.16 57.55 125.85 275.67 553.39 1108.26
1 4.10 5.24 7.37 13.26 26.71 60.52 128.04 277.29 554.48 1109.00
2 7.58 8.62 10.37 15.80 28.68 59.31 131.77 271.24 559.48 1145.20
5 13.84 14.39 16.07 20.58 32.75 62.79 132.87 269.96 579.44 1113.19
10 24.97 25.71 26.67 29.88 41.53 69.50 134.63 278.91 580.29 1142.13
21 44.50 45.97 44.65 50.34 58.18 84.23 147.34 282.15 580.49 1164.66
45 78.41 75.22 78.52 81.60 90.29 111.28 168.13 305.55 600.52 1142.83
96 136.67 137.41 138.16 141.38 147.47 167.12 210.82 345.47 632.89 1156.26
205 235.62 231.08 233.10 228.47 255.71 261.31 298.47 410.51 656.52 1240.85
437 401.58 404.22 411.05 405.82 397.21 426.42 450.82 555.57 779.99 1257.84
935 675.62 687.17 674.44 655.91 695.05 661.49 729.07 776.72 950.85 1449.66
GW
P Le
vel (
Rm
il)
2000 1118.76 1108.28 1132.29 1121.56 1155.08 1116.25 1113.18 1202.07 1364.79 1689.82
UPR Level (R'mil) Liability 0 0.3 1 2 6 16 45 126 355 1000
0 0.00 0.79 2.23 6.39 17.55 42.21 104.52 235.90 563.23 1320.31
1 2.97 3.93 5.39 9.61 20.68 44.88 106.86 237.77 564.82 1321.63
2 5.66 6.56 7.90 11.97 21.52 46.57 104.08 241.17 568.25 1293.20
5 10.69 11.33 12.97 16.66 25.81 49.72 108.13 245.16 560.11 1320.00
10 20.09 20.12 22.09 24.48 34.47 56.41 112.48 248.76 559.97 1295.68
21 37.50 37.93 39.75 43.35 50.40 70.74 124.04 262.24 559.97 1321.76
45 69.59 69.91 71.84 72.86 81.13 96.86 148.14 273.93 587.71 1318.96
96 128.38 129.57 131.07 130.27 137.35 153.90 201.25 314.83 612.43 1371.85
205 235.49 234.57 242.08 238.68 248.02 250.36 297.27 404.10 699.29 1416.55
437 429.40 425.26 428.46 440.45 439.36 452.44 488.35 569.19 849.19 1510.24
935 778.09 792.11 786.89 782.23 778.95 784.01 821.34 905.26 1133.84 1689.85
GW
P Le
vel (
Rm
il)
2000 1400.32 1407.00 1380.50 1425.05 1412.17 1375.43 1455.65 1502.31 1686.36 2250.78
Issued for industry comments 73
UPR Level (R'mil) Motor 0 0.3 1 2 5 14 37 101 276 750
0 0.00 1.52 3.97 10.09 22.86 48.95 95.69 187.14 360.91 633.90
1 6.26 7.61 9.82 15.55 27.40 52.53 98.26 188.99 362.21 634.75
2 11.64 12.68 15.22 19.26 30.14 54.40 103.12 194.28 363.99 648.31
5 21.45 21.99 24.35 27.93 38.19 59.32 104.20 197.88 356.42 640.52
13 39.04 39.23 40.70 45.00 52.20 72.88 114.36 203.17 377.98 678.38
30 70.04 70.29 76.00 73.47 80.07 94.45 131.90 216.27 373.41 637.86
71 123.68 122.28 120.41 123.52 128.08 144.50 176.72 251.52 397.89 694.58
166 214.58 213.32 216.50 212.29 219.87 231.99 255.50 308.81 450.92 694.46
388 364.82 367.81 376.26 366.06 369.69 371.99 389.95 432.83 535.55 783.69
910 604.63 604.28 607.12 610.56 604.29 606.75 634.35 648.23 730.42 924.19
2133 966.68 976.12 962.56 966.32 986.68 975.16 966.98 997.87 1067.71 1201.17
GW
P Le
vel (
Rm
il)
5000 1458.45 1469.39 1432.66 1451.41 1435.38 1451.28 1513.22 1512.74 1485.42 1598.72
UPR Level (R'mil) Property 0 0.3 1 2 6 16 45 126 355 1000
0 0.00 1.99 5.72 15.42 36.35 76.72 156.53 301.16 543.77 958.43
1 7.74 9.94 13.84 23.17 42.83 81.57 160.04 303.56 545.31 959.39
2 14.48 16.37 19.08 28.12 45.93 83.04 158.30 302.76 545.10 947.08
5 26.55 27.61 31.13 36.22 53.48 92.16 159.17 298.71 543.43 969.36
12 47.67 50.10 51.88 55.71 67.96 102.08 167.52 309.32 561.07 944.19
28 83.88 84.19 87.38 87.69 101.78 128.19 195.59 317.06 561.98 990.52
63 144.72 145.12 147.42 151.21 156.79 180.44 234.52 350.05 580.82 941.87
145 244.73 242.76 244.27 248.57 252.18 271.94 317.18 414.01 619.73 970.40
332 404.56 420.46 407.24 408.06 412.76 426.87 454.48 532.16 710.77 1039.47
761 649.06 660.50 632.53 661.17 633.61 665.47 685.99 731.75 867.33 1127.36
1745 994.53 1000.74 1006.78 997.90 1021.65 1009.73 1018.27 1068.17 1122.17 1377.90
GW
P Le
vel (
Rm
il)
4000 1402.88 1413.74 1461.64 1434.28 1426.67 1383.76 1425.76 1436.96 1486.92 1597.29
Issued for industry comments 74
UPR Level (R'mil) Transport 0 0.3 1 2 4 11 29 75 193 500
0 0.00 0.73 1.98 5.43 12.66 27.60 55.10 105.50 203.39 371.15
1 2.71 3.63 5.04 8.68 15.59 30.07 57.00 106.91 204.45 371.89
2 4.65 5.59 6.59 9.58 16.62 29.33 56.08 109.92 207.75 377.02
4 7.96 8.46 9.75 12.29 18.39 32.00 56.98 107.44 203.75 361.33
8 13.55 14.01 14.74 17.08 22.70 34.56 60.24 111.30 207.30 377.87
16 22.89 23.51 23.06 25.46 30.19 41.68 67.24 112.30 207.44 367.01
32 38.38 38.58 39.36 39.85 44.53 54.31 75.51 122.69 219.08 377.40
63 63.77 64.52 62.44 63.51 66.79 75.01 97.71 139.26 227.79 388.36
126 104.76 102.80 103.03 104.88 109.36 112.62 132.59 171.96 243.88 403.48
251 169.58 164.66 167.32 170.92 172.14 170.18 189.35 220.08 294.40 446.42
501 269.13 263.14 259.87 274.91 267.68 278.34 281.29 309.77 357.06 482.17
GW
P Le
vel (
Rm
il)
1000 415.30 418.25 415.90 412.54 416.21 426.57 429.22 442.30 481.84 590.19
UPR Level (R'mil) Miscellaneous 0 0.3 1 2 6 16 45 126 355 1000
0 0.00 3.24 9.39 23.72 55.45 122.08 243.11 479.98 896.94 1610.35
1 11.78 16.21 22.70 35.65 65.34 129.80 248.57 483.80 899.47 1611.96
2 20.66 23.53 30.16 43.74 71.81 132.77 246.60 487.94 891.18 1588.80
5 35.72 36.80 42.24 53.39 80.28 138.02 258.53 476.72 920.10 1568.23
10 60.86 64.09 67.66 77.49 97.94 159.77 270.70 493.85 902.37 1579.79
21 102.35 107.85 107.98 112.14 133.15 178.44 283.43 518.05 925.77 1572.75
45 169.98 171.68 181.03 179.98 190.86 241.25 322.15 541.96 934.19 1631.47
96 278.91 283.80 283.96 287.26 296.37 335.26 407.01 586.73 961.42 1672.46
205 451.79 462.91 460.27 460.99 449.03 493.99 565.20 728.83 1065.61 1752.43
437 720.43 729.08 735.85 715.28 729.22 769.65 792.79 911.84 1211.08 1813.50
935 1124.26 1104.06 1129.07 1122.37 1142.20 1187.34 1188.55 1289.40 1493.27 1931.35
GW
P Le
vel (
Rm
il)
2000 1697.75 1732.50 1734.20 1690.78 1680.87 1750.83 1800.22 1798.04 1914.23 2355.56
Issued for industry comments 75
References
Certified Models subcommittee of Financial Condition Reporting working group of the FSB
Financial Condition Reporting—Certified Model framework, 2006
Deloitte and Insight ABC.
Financial Condition Reporting for South African Short-term Insurers Calibration Project, 2005
Disclosure and risk management of Financial Condition Reporting working group of the FSB
Disclosure and Risk Management, 2006
Internal Models subcommittee of Financial Condition Reporting working group of the FSB
Financial Condition Reporting Guidelines: Internal Models, 2006