SA long-term valuation bases Presented to ASSA members 2 November 2004 – Johannesburg 4 November 2004 – Cape Town

SA long-term valuation basesSA long-term valuation bases

Presented to ASSA members2 November 2004 – Johannesburg

4 November 2004 – Cape Town

Why are we here?Why are we here?

A repeat of sessional meeting held last year, but updated with 2003 statutory returns.

What will we show you?What will we show you?

Some key risks and trends in the insurance sector

Anticipated changes for the future

Information on new Analysis of Surplus in LT2000

Give you brief overview of the LT Insurance market in 2003.

Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.


Some key risks and trends in the insurance sector

Anticipated changes for the futureAnticipated changes for the future

Information on new Analysis of Surplus in Information on new Analysis of Surplus in LT2000LT2000

Give you brief overview of the LT Insurance Give you brief overview of the LT Insurance market in 2003.market in 2003.

Review some valuation assumptions in the Review some valuation assumptions in the LT2000 and compare these with the resulting LT2000 and compare these with the resulting AOS.AOS.

Key risks and trends in the Key risks and trends in the insurance sectorinsurance sector

Drivers of change: Financial Sector Charter & BEE

Low interest rate environment Growing consumerism Legislative and regulatory changes

(especially FAIS) LT insurers believe marketplace is

overcrowded – major readjustments to marketing strategies expected

Source: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

Key risks and trends in the Key risks and trends in the insurance sector (Cont)insurance sector (Cont)

Premium growth 7-14% over next 3 years expected

Regulation and governance– King II won’t address concerns raised in Fedsure

investigation– Governance rests on integrity of directors and

management– Only minority LT insurers feel that commission

should be de-regulated– Likely that regulatory pressure will increase in

futureSource: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

International Key risks and International Key risks and trends in the insurance sectortrends in the insurance sector

Data based on 2003 reporting data in key IAIS member jurisdictions

Solvency positions and profitability of life insurers healthy

Concerns to supervisors:– Sustained low interest rate environments– Risk of sudden interest rate hikes

Insurers are moving away from equities to debt securities

Source: IAIS

International Key risks and International Key risks and trends (Cont)trends (Cont)

Supervisors use stress test methodologies to monitor sensitivity of sector’s financial strength to changes in market variables.

Stress tests show that life insurance sector can withstand significant shocks in the near term.

Trend to adopt are more realistic and risk-sensitive valuation and capital adequacy regimes.Source: IAIS


Several supervisors reported initiatives aimed at addressing insurers’ exposure to reputation risk.

EU: financial conglomerate directives – more emphasis by supervisors on group-wide supervision is expected.

Source: IAIS


Reinsurance:– Since Sep 11 a major hardening of market

conditions– Many reinsurers showed a significant

improvement in underwriting performance in 2002/3

– Lloyd’s also benefited from hardening market bouncing back to profits after the WTC-driven losses.

Source: IAIS


Some key risks and trends in the insurance sectorSome key risks and trends in the insurance sector

Anticipated changes for the future




Anticipated changesAnticipated changes

Some “small” Act changes e.g.– Replace Unit Trust Control Act with CIS

Control Act– Some discrepancies between ST and LT

Acts

Definitions of linked, market related business etc

Types of assets in Schedule 1

Anticipated changesAnticipated changes

Hybrid capitalCell businessReinsuranceSegregation between policyholders’

and shareholders’ assetsControl levels




Information on new Analysis of Surplus in LT2000



Analysis of Surplus Analysis of Surplus (Statement C7)(Statement C7)

Confidential statement Split between individual life, group business

and shareholders Supplementary statement

– Clarification of “other” (As small as possible please)

– Space for significant items Info in total only – but anticipate a split in

future per business class

Analysis of Surplus Analysis of Surplus (Continued)(Continued)

Free-floating columns for info per business class/product. (But please – complete total column as well)

Some freedom – please state all assumptions in the section at the bottom of the statement

Guidance manual on FSB website– Info on what should be included in the different

items Please do not change the format!

– In fact, do not change the format of any of the statements in the return





Give you brief overview of the LT Insurance market in 2003.


Overview of LT Insurance Overview of LT Insurance market in 2003market in 2003

FSB classification: G – General insurers (27 active in 2003)

e.g. Old Mutual, Liberty, Regent Life

L – Linked insurers (12 active in 2003)

e.g. Investment Solutions, MCubed, Citadel

R – Reinsurers (6 active in 2003)

e.g. Munich Re, Swiss Re


FSB classification: A – Assistance insurers (7 active in 2003)

e.g. Safrican, Lion of Africa, HTG, KGA

N – Niche insurers (11 active in 2003)

e.g. Bonben, Relyant, Medscheme Life

C – Cell captive insurers (4 active in 2003)

e.g. Guardrisk, Nova Life


Distribution of insurers per year-end month

27%

6%

47%

3% 1%16%

2 3 6 8 9 12


Who went where? Ranking according to total assets

2003 2002Old Mutual g 1 1Sanlam g 2 2Momentum g 3 3Liberty g 4 4Investment Solutions l 5 5Metropolitan Life g 6 6Investec Employee Benefits g 7 7Capital Alliance Life g 8 9M Cubed Investment Life l 9 8Investec l 10 10

Ranking according to Total Assets

Insurer Industry

Overview - some key Overview - some key indicatorsindicators

g l r a n cTotal R’b 2003

Total R’b 2002

Number of active insurers

27 12 6 7 11 4 67 64

Net premiums received

68% 29% 1% 0% 0% 1% 165 177

Net benefits paid 69% 30% 1% 0% 0% 0% 157 134

Total expenses incurred

93% 3% 2% 1% 1% 1% 20 19

Investment yield 9.7% -3.1%11.2

%3.2% 16.1%

5.0% 8.0% 0.8%

Overview – where are the Overview – where are the assets invested?assets invested?

As % of Rows g l r a n cTota

l (R'b) 2003

Total

(R'b) 2002

Cash and deposits 75% 21% 2% 0% 0% 1% 60 67

Fixed interest 90% 6% 3% 0% 1% 0% 179 168

Equities and convertible debentures

90% 9% 0% 0% 1% 0% 348 334

Property 99% 1% 0% 0% 0% 0% 36 34

Collective investment schemes

66% 34% 0% 0% 0% 0% 96 98

Other 77% 21% 1% 0% 0% 1% 98 42

Total assets 85% 13% 1% 0% 1% 0% 817 783

Overview – where are the Overview – where are the assets invested?assets invested?

As % of Columns g l r a n c

Cash and deposits 7% 12% 17% 31% 5% 19%

Fixed interest 23% 10% 67% 11% 32% 22%

Equities and convertible debentures

45% 29% 5% 4% 61% 10%

Property 5% 0% 0% 3% 0% 0%

Collective investment schemes

9% 30% 0% 33% 0% 2%

Other 11% 19% 11% 19% 2% 46%

Total assets 695 108 7 0 4 3

Distribution of assets - 2003Distribution of assets - 2003General Insurers

Cash and deposits

Fixed interest

Equities and convertibledebentures

Property

Collective investmentschemes

Other

Linked Reinsurers

Assistance Niche Cell

Overview - the liabilities and Overview - the liabilities and CAR…CAR…

g l r a n c

Total

(R'b) 200

3

Total

(R'b) 200

2

Linked liabilities 57% 42% 0% 0% 0% 1% 253 265

Non-linked liabilities 98% 0% 1% 0% 1% 0% 454 409

Total liabilities 84% 15% 1% 0% 1% 0% 736 706

Excess assets 97% 1% 1% 0% 0% 0% 81 77

CAR before management action

99% 0% 0% 0% 0% 0% 73 82

CAR after management action

98% 0% 1% 0% 0% 0% 32 35

Overview – remarksOverview – remarks

Industry funding factor (excluding CAR) unchanged from 2002 at 1,11.

Industry funding factor (including CAR) unchanged from 2002 at 1,06.

Industry CAR cover slight improvement from 2,18 (2002) to 2,56 (2003).






Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

Valuation assumptions in the Valuation assumptions in the LT2000LT2000

The results we are about to show represent a mix of greatly different insurers.

The dangers of interpreting industry results should be kept in mind.

We suggest the results to be an orientation exercise and nothing more.

What were the hurdles?What were the hurdles?

To consolidate two very different versions of the LT2000 (38 insurers on version 2.3 and 32 insurers on version 3)

Valution basis (G11 – old; G10 – new) proved to be especially difficult

Next year we’ll have a problem with the AOS (C7)

Therefore – had to make assumptions to derive an industry representative basis

Discount ratesDiscount rates(LT2000 version 2.3)(LT2000 version 2.3)

Observed rates from 5% to 13% (2002: 6% to 18%) between the classes of business.

Observed inflation assumption between 5% and 9% (2002: 2% and 11%).

Weighted average inflation assumption of 7.2% (2002: 9.6%).

Discount rates – 2002Discount rates – 2002 (LT2000 version 2.3) (LT2000 version 2.3)

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%% pa

Annuities

Retirement Fund Business Untaxed

Business

Taxed Business

Discount rates – 2003Discount rates – 2003(LT2000 version 2.3)(LT2000 version 2.3)

9.6%

9.8%

10.0%

10.2%

10.4%

10.6%

10.8%

11.0%

11.2%

11.4%% pa

Annuities

Retirement Fund business

Untaxed Business

Taxed Business

Discount ratesDiscount rates2003 (LT2000 version 3)2003 (LT2000 version 3)

Individual business: Around 38% of insurers entered a representative

assumption

Observed rates between 9% and 12.5% between the classes of business.

Average central discount rate (CDR) 10.5%

Highest discount rates for linked and market-related classes.

Lowest discount rates for without-profit annuities.

Observed inflation assumption between 5.4% and 6.5% (Average of 6%)

Discount ratesDiscount rates2003 (LT2000 version 3)2003 (LT2000 version 3)

Group business:Not a lot of data

Around 16% of insurers entered a representative assumption

Observed rates between 7.8% and 10.5% between the classes of business (lower than individual)

Average central discount rate 9.1%

Average inflation assumption of 5.8%

Discount ratesDiscount rates2003: LT2000 version 32003: LT2000 version 3

Individual Business - AveragesVariable Class of business

With-profit Bus

Annuities Linked Market Perform

Other Total

With-profit

Without-profit

CDR 10.5% 12.5% 9.3% 10.3% 10.8% 9.6% 10.5%

IPF 10.2% - 9.4% 10.0% 10.2% 9.5% 9.8%

UPF 10.4% 10.4% 9.1% 10.7% 10.8% 9.9% 10.2%

CPF 9.7% - 9.4% 9.9% 9.8% 9.5% 9.7%

Corporate Fund 11.0% - 9.4% 12.2% 11.8% 9.9% 10.9%

Expense Inflation

5.7% 5.4% 6.0% 6.2% 6.1% 6.4% 6.0%

CDR – Exp Infl 4.9% 7.1% 3.3% 4.1% 4.7% 3.2% 4.5%

Discount ratesDiscount rates2003: LT2000 version 32003: LT2000 version 3

Group Business - AveragesVariable Class of business

With-profit Bus

Annuities Linked Market Perform

Other Total

With-profit

Without-profit

Central Discount Rate

9.5% 9.1% 8.4% - 9.5% 8.8% 9.1%

IPF - 7.8% - - - 8.8% 8.3%

UPF 10.5% 10.5% - - 10.5% 8.7% 10.0%

CPF - - - - - 8.4% 8.4%

Corporate Fund - - - - - 8.4% 8.4%

Expense Inflation

- 5.8% - - - 5.8% 5.8%

Discount rates – 2003Discount rates – 2003Per business class (Individual)Per business class (Individual)

(LT2000 version 3)(LT2000 version 3)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

With-profit business With-profit annuities Without-profit annuities

Class of business

Perc

en

tag

e

Expense inflation Central discount rate Central discount rate - expense inflation

Discount rates – 2003Discount rates – 2003Per business class (Individual)Per business class (Individual)

(LT2000 version 3)(LT2000 version 3)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Linked Marketperformance

Other Average

Class of business

Perc

en

tag

e

Expense inflation Central discount rate Central discount rate - expense inflation

Spread between discount rate Spread between discount rate and inflation assumption - 2003and inflation assumption - 2003

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%

Difference between discount rate and expense inflation

Perc

enta

ge o

f in

sure

rs

Cumulative spread between Cumulative spread between discountdiscount rate and rate and inflationinflation assumption assumption

(Comparison between 2002 and 2003)(Comparison between 2002 and 2003)

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

0.0% 2.5% 4.5% 6.5% 8.5% 10.5% 12.5%Difference between discount rate and expense

inflation

Pe

rce

nta

ge

of

insu

rers

2002

2003Moving left

suggesting more valuators using lower

differential.

Discount ratesDiscount ratesAOS ResultsAOS Results

Industry in total made investment profits, compared to losses in 2002

Per industry grouping: In aggregate, assistance business and those in run-off made

losses (few made profits)

Most profits made by general insurers

Per year-end month: In aggregate, those with March year-ends made losses

(although some did make profits)

Most profits made by insurers with December year-ends

Discount rates – AOS resultsDiscount rates – AOS results

Total (R‘m)2002

Total (R‘m)2003

Min of profit/loss -2,235 -338

Max of profit/loss 517 3,799

Total of profit/loss -1,681 5,721

Profit/total insurance profit -10% 71%

Average profit/loss -28 94

Weighted average of profit/loss

-380 1,088

MortalityMortalityIn the graphed rates, we tried to determine

representative mortality rates for males and females.

Where possible, we used weighted rates, but simplifying assumptions were needed to consolidate the different versions of the LT2000.

For assurance we use SA85/90 ultimate 100% heavy to place weighted rates in perspective.

For annuities we use a(55) to put weighted average rates in perspective.

Mortality – Assurance tablesMortality – Assurance tables

Most popular tables are SA85/90 and SA56/62.

Bigger insurers resort to internal tables.

Specialized classes revert to special tables like A24-29 and ELT8…

Encouraging to see some insurers implementing the ASSA2000 model (where products justify it).

Still significant number that fail to complete G10.1 and G10.2 (usually say – refer to attached valuation report…)

Mortality – Assurance table Mortality – Assurance table adjustmentsadjustments

Proportional adjustments with or without constant additions are popular with the level of complexity varying. Examples include:

Proportion vary across age (model accident hump)

Or over time (model temporary initial selection)

With risk factors (popular for smoking status, sex and health?)

Age adjustments used mainly for sex differential.

Mortality – Assurance males Mortality – Assurance males (Linear scale)(Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality – Assurance females Mortality – Assurance females (Linear scale)(Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality – Assurance males Mortality – Assurance males (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality – Assurance females Mortality – Assurance females (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality – Annuity tables and Mortality – Annuity tables and adjustmentsadjustments

Most commonly used include a(55), internal table, a(90) and PA(90)

Adjustments mostly combination of proportional and age adjustment.

Many include improvement in mortality over time to cater for improving longevity:

0.5%, 1% and 1.5% improvement per annum seen.

Also a ‘CMI Improvement’

Mortality – Annuities males Mortality – Annuities males (Linear scale)(Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

20 30 40 50 60 70 80

g l r n a(55)

Mortality – Annuities females Mortality – Annuities females (Linear scale)(Linear scale)

0.0000

0.0100

0.0200

0.0300

0.0400

0.0500

0.0600

0.0700

0.0800

0.0900

20 30 40 50 60 70 80

g l r n a(55)

Mortality – Annuities males Mortality – Annuities males (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n a(55)

Mortality – Annuities females Mortality – Annuities females (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n a(55)

Mortality – AOS resultsMortality – AOS results

g l r a n cTotal (R‘m) 2003

Total (R‘m) 2002

Min of profit/loss -4 0 0 -7 -14 0 -14 -36

Max of profit/loss 266 0 24 2 18 17 266 200

Total of profit/loss

1,473

0 68 -6 33 191,58

81,125

Profit/total insurance profit

20% 0% 31%73%

27% 20% 7%

Average profit/loss

64 0 11 -1 5 6 35 24


159 0 10 -3 17 6 156 133

AIDSAIDS

Encouraging to see more widespread use of ASSA2000 model.

Representative idea of tables used:

Pattern I: 90%+ proportions of R6B with 50%+ multiplier.

Pattern II: 20% proportions of HA1 with 90% multiplier.

Refer members to PGN102 and PGN105.

For LT2000 version 3, please answer the AIDS question in statement G10 and attach the electronic copy requested!

MortalityMortality - AIDS adjustments - AIDS adjustments (Assurance products)(Assurance products)

Type of AIDS Adjustment

Proportion for

individual life

Proportion for

group life

No information 74% 97%

No adjustment disclosed 5% 0%

Adjust for gender 6% 3%

Adjust for gender and smoker

15% 0%

Total 100% 100%

Mortality – Mortality – Weighted AIDS Weighted AIDS Adjustments (Assurance)Adjustments (Assurance)

0

0.0002

0.0004

0.0006

0.0008

0.001

0.0012

0.0014

20 25 30 35 40 45 50 55 60

Male Female

Morbidity – Income disabilityMorbidity – Income disability

Many use GLTD (some make no adjustments to GLTD).

The bigger players resort to internal tables.

CMIR12, CDT and SA85-90 used by minority.

A proportional adjustment to all ages in the table is often used.

The minority apply an age adjustment or set the reserve as a % of office premium.

Observed rates identical for both sexes.

Morbidity – Income disability Morbidity – Income disability both sexes (Linear scale)both sexes (Linear scale)

0.00000

0.05000

0.10000

0.15000

0.20000

0.25000

0.30000

0.35000

0.40000

0.45000

0.50000

20 30 40 50 60 70 80

g r n

Morbidity – Income disability Morbidity – Income disability both sexes (Log scale)both sexes (Log scale)

0.00010

0.00100

0.01000

0.10000

1.00000

20 30 40 50 60 70 80

g r n

Morbidity – Lump sum Morbidity – Lump sum disabilitydisability

Most use internal tables or SA85-90.

Some use CSI table or move to set the reserve as a % of office premium.

Most apply a proportional adjustment that varies by age: x% at age 20 increasing by y% every age until termination.

The minority apply an age adjustment.

Morbidity – Lump sum Morbidity – Lump sum disability males (Linear scale)disability males (Linear scale)

0.00000

0.02000

0.04000

0.06000

0.08000

0.10000

0.12000

0.14000

20 30 40 50 60 70 80

g r n c

Morbidity – Lump sum disability Morbidity – Lump sum disability females (Linear scale)females (Linear scale)

0.00000

0.01000

0.02000

0.03000

0.04000

0.05000

0.06000

0.07000

0.08000

0.09000

20 30 40 50 60 70 80

g r n c

Morbidity – Lump sum Morbidity – Lump sum disability males (Log scale)disability males (Log scale)

0.00010

0.00100

0.01000

0.10000

1.00000

20 30 40 50 60 70 80

g r n c

Morbidity – Lump sum Morbidity – Lump sum disability females (Log scale)disability females (Log scale)

0.00010

0.00100

0.01000

0.10000

1.00000

20 30 40 50 60 70 80

g r n c

Morbidity – AOS resultsMorbidity – AOS results

g r n c Other

Total (R‘m) 2003

Total (R‘m) 2002

Min of profit/loss -10 -10 -7 0 0 -10 -22

Max of profit/loss 289 62 2 4 0 289 214

Total of profit/loss 615 52 -5 4 0 667 642

Profit/total insurance profit 8% 24

%6% 0% 8% 4%

Average profit/loss 44 13 -3 4 0 30 31


117 52 -5 4 0 117 58

Expenses – Fixed costs Expenses – Fixed costs (2002)(2002)

0

50

100

150

200

250

300

350

400

450

Single premium

Disability income in payment

Annuities in payment

Paid-up policies

Regular premium

Expenses – Fixed costs Expenses – Fixed costs (Version 2.3 - 2003)(Version 2.3 - 2003)

0

100

200

300

400

500

600

700

800

900

Single premium

Annuities in payment Paid-up

policies

Regular premium

Disability income in payment

Expenses – Fixed costs Expenses – Fixed costs (Version 3 - 2003)(Version 3 - 2003)

Very poorly completed. Understandable though - insurers differ

significantly and charge differently. Where multiple product ranges exist with different

expense assumptions per class, please disclose a representative expense assumption.

Completed statements suggests a representative fixed cost per policy of R170 per annum with significant variation.

Expenses – Variable costs Expenses – Variable costs and inflationand inflation

For regular premium policies observed insurers charging between 3% and 5% of regular premium (ignoring one reinsurer’s information…).

For regular/single premium policies observed insurers charging between 0.4% and 1.5% of fund value.

Observed expense inflation rates between 5% and 9% with a representative average of approximately 6%.

Expenses – AOS resultsExpenses – AOS results

Total (R‘m) 2003

Total (R‘m) 2002

Min of profit/loss -106 -137Max of profit/loss 123 264Total of profit/loss -68 71Profit/total insurance profit -3.4% 0.4%Average profit/loss -1 1Weighted average of profit/loss -16 48

Lapse rates – Recurring Lapse rates – Recurring premium (2002)premium (2002)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

g l r n a

First year Second year Third year Fourth year and later

Lapse rates – Recurring Lapse rates – Recurring premium (2003)premium (2003)

0%

5%

10%

15%

20%

25%

30%

35%

40%

g l r n a

First year Second year Third year

Lapse and surrender rates – Lapse and surrender rates – commentscomments

No AOS item in “old” C7 to analyse profits from surrenders. “New” C7 should provide some insights next year…

Many EV sensitivity testing indicate significant sensitivity to withdrawals.

Many insurers have withdrawal assumptions that vary by months in force and between products - hard to consolidate.

Data of poor quality, hope to give better summary next year.

Questions?Questions?

Thank you for your timeThank you for your time

Contact details:Contact details:

Hantie van HeerdenHantie van Heerden(012) 422 2801(012) 422 2801

[email protected]@fsb.co.za

André Jansen van VuurenAndré Jansen van Vuuren(012) 428 8103(012) 428 8103

[email protected]@fsb.co.za

Documents

SA long-term valuation bases Presented to ASSA members 2 November 2004 – Johannesburg 4 November 2004 – Cape Town