## wpiea2024240-print-pdf ## Source details **Canonical URL:** [wpiea2024240-print-pdf](https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024240-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2024/english/wpiea2024240-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2024/english/wpiea2024240-print-pdf.pdf.json) --- ### Introduction — motivation, scope, and structure - RBS offers quantitative requirements to enhance supervisory judgements about insurers’ financial soundness and supports a forward-looking, proactive supervision approach. - RBS adoption improves prospects for compliance with IAIS Insurance Core Principles (ICPs), though not strictly necessary. - Document structure: - Introduction and three country case studies: Kenya, Mexico, South Africa. - Each case study: industry overview; pre-RBS conditions; regulation and supervision; regulator profile; journey to RBS (organization and timeline); key lessons; conclusions/advice. - Annexes provide "Selected Details of RBS Implementation" for each country (Annex I—Kenya; Annex II—Mexico; Annex III—South Africa). ### Benefits and implementation considerations for RBS - Benefits: - Sets quantitative and qualitative requirements so insurers hold capital commensurate with risk profiles. - Encourages enterprise risk management and board/senior-management oversight of business models and risks. - Implementation challenges: - Medium-to-long-term, complex projects requiring specialist expertise and IT systems. - Core constraints: shortages of specialist expertise and appropriate IT systems (noted by IMF/World Bank FSAP). - Legal changes usually occur toward the end of projects—requires sustained government support and early industry buy-in. - Key implementation necessities: - Dedicated resources, clear project plan with milestones and timelines. - Concurrent adoption of risk-based supervision; RBS without risk-based supervision is unlikely to meet objectives. - Change management and skill upgrades (e.g., actuarial skills). - Consistent communication with industry and phased data/IT upgrades (data templates, data warehouses, ERS). ### Framing RBS and risk-based supervision - RBS: - Comprehensive, formally structured solvency regulation (quantitative and qualitative). - Capital adequacy sized to severe but plausible financial stresses. - Risk-based supervision: - Allocates supervisory resources to insurers/issues posing greatest risk to objectives (policyholder protection, financial stability). - Toolkit includes offsite supervision, onsite supervision, escalating corrective measures, licensing oversight, and oversight of key transactions. - Symbiosis: the paper focuses on RBS and shows supervisory frameworks evolving concurrently in case studies. ### Nature of the RBS journey - RBS regimes evolve over time; first iterations are starting points with expected evolution over 10-, 20-, or 30-year horizons. - Jurisdictions should tailor advanced-regime learnings rather than adopt “off-the-shelf” regimes. --- ### Implementing Risk-Based Solvency — Kenya (case study highlights) - Purpose and scope: - Chronicles IRA’s transition to RBS: sector context; supervisory approach before RBS; project execution; challenges; lessons. - Key industry metrics and trends: - Kenya ranked 4th in Africa by gross premium income in 2020 (3rd in 2019); ranked 57th globally in insurance penetration. - 2020 industry gross premium: $2.3 billion (2019: $2.3 billion) — nominal growth 2.3 percent (-2.9 percent in real terms). - Industry average annual growth rate over nine years: 9.7 percent. - Non-life accounted for about 60 percent of total premium written in 2020. - Life insurance penetration averaged 1 percent over 10 years (2020: 0.95 percent). - Insurance density in Kenya: $47.87 in 2020. - Industry asset base: 2012 $3.11; 2013 $3.66; 2014 $4.31; 2015 $4.79; 2016 $5.29; 2017 $5.91; 2018 $6.35; 2019 $7.11; 2020 $7.66. - Asset base to GDP (percent): 2012 7.3; 2013 7.7; 2014 8.0; 2015 7.6; 2016 7.0; 2017 7.0; 2018 6.8; 2019 6.9; 2020 7.1. - Asset composition (2020): investments 85.7 percent of total assets; government securities 67.1 percent of investments. - Total industry assets: end-2019 $7.1 billion; end-2020 $7.7 billion (growth of 8 percent). - Market structure (2020): - 61 insurers and reinsurers licensed: 33 non-life underwriters; 19 life insurers; 4 composite firms; 3 composite reinsurers; 2 non-life reinsurers. - Distribution channels: brokers 37.7 percent; agents 37.1 percent; direct 25.2 percent. - Underwriting performance (aggregate non-life 2016–2020, percent): - Loss ratios: 2016 62.7; 2017 61.5; 2018 62.5; 2019 64.2; 2020 63.6. - Non-Life Combined Ratio (percent): 2016 102.4; 2017 101.1; 2018 102.8; 2019 103.4; 2020 102.0. - Non-Life Investment Income Ratio (percent): 2016 5.8; 2017 7.8; 2018 6.3; 2019 8.4; 2020 7.8. - Pre-RBS supervisory regime and capital rules: - Compliance-based supervision since 2006; one-size-fits-all approach. - Minimum capital requirements (USD): Non-Life 3,000,000; Life 1,500,000. - Solvency Margin prior to RBS: Non-Life 100,000 or 15 percent of Net Written Premium (whichever greater); Life 100,000 or 5 percent of Net Actuarial Liabilities (whichever greater). - Limitations: flat nominal minima and volume-based capital not reflecting market or credit risk. - Journey to RBS (timeline highlights): - 2008 review of Insurance Act; 2010 RBS Steering Committee; 2011 implementation team and consultant engagement; 2013 ERS development; 2014 ERS live; 2016 QIAs; 2017 RBS Regulations passed in Parliament; RBS Transition and regime introduced 2017. - Kenya took seven years to develop and implement its Risk-Based Supervision approach. - Nine key components of RBS shift: - Training; project team; inputs/outputs definition; RBS requirement development; early warning system; reporting requirements; electronic data reporting system acquisition; review of regulations/guidelines; stress testing development. - Challenges encountered: - Actuarial skills shortage; long-term scholarship program initiated. - Organizational silos required restructuring into life, non-life, and actuarial departments. - IT and data system upgrades required; ERS developed and went live in 2014. - Legislative powers inadequate—parliamentary changes protracted. - Kenya lessons and best practices: - Adapt models, build flexibility; start with simpler Excel models during QIA. - Allow lead time; phased data collection (monthly → quarterly → annual). - Continuous training (fortnightly sessions) and international technical assistance (IMF/World Bank). - Industry engagement: guidance notes, workshops, stakeholder forums. - What Kenya implemented: - RBS regulations published in 2017; ERS live 2014; QIA conducted; parliamentary adoption passed in 2017; effective implementation timing adjusted to June 30, 2020 (Annex I details). ### Annex I — Kenya (selected technical highlights) - RBS regulations published in 2017; intended two-year transition to 2019; effective date changed to June 30, 2020. - Pillar 1 approach: - Total balance sheet approach; market-consistent valuation of assets and liabilities; IFRS financial statements. - IFRS 9 adoption mandated (circular 2019); IRA working on IFRS 17 implementation (level of aggregation, discount rates, risk adjustment with recommended 75 percent confidence level for risk adjustment). - Capital adequacy ratios and thresholds: - Insurers required to hold 200 percent of a prescribed capital requirement (PCR) above which no financial sanctions imposed. - Insurance Act Section 41(1) requires CAR of at least 100 percent. - Risk categories and methods: - Key risks: insurance, market, credit, operational. - Deterministic capital requirement using factor-based and stress-based approaches. - Factor-based approach: factors set as percentages of exposure measure derived from TVaR at 95 percent over one year using 10 years data for premium/claims factors. - Diversification: square root aggregation across insurance, market, credit with operational risk added (no diversification between operational risk and other risks). --- ### Implementing Risk-Based Solvency — Mexico (case study highlights) - Regulatory transition: - April 2015 Ley de Instituciones de Seguros y de Fianzas (LISF) concluded a 25-year strengthening process; key elements on technical reserves, capital adequacy, investment policy effective January 1, 2016. - Key industry statistics: - Insurance penetration rate rose to 2.5 percent by 2021 (below Latin American average 3 percent and global average 6.8 percent). - Assets under management to GDP rose to 7.6 percent by 2021 (50 percent growth). - 2021: 113 licensed insurers — 57 locally owned, 56 foreign owned. - Life premium composition 2020: 73.9 percent pesos; 15,2 percent foreign currency (primarily USD); 10.9 percent inflation-indexed (UDI). - UDI: initial value 1 peso on April 4, 1995; value on December 31, 2021 was 7.11 pesos. - Investments (2021): 74.7 percent securities; 9.7 percent premium debtors; 5.9 percent reinsurance recoverables; government securities 63.9 percent of securities; equity 17.7 percent. - 83.6 percent of securities held by insurers were long dated. - Yield characteristics: 92 percent fixed rate; 8 percent variable rate. - Market performance (2021): - Combined loss ratio total market: 107 percent in 2021 (2016–2020 average 98 percent). - Claims ratio total market: 86 percent in 2021 (2016–2020 average 75 percent). - Industry solvency ratio: 300 percent by end-2021. - LISF and CUSF implementation features: - Technical provisions: Best Estimate of Liabilities (BEL) plus Risk Margin (RM). - SCR: VaR 99.5 percent one-year horizon via Monte Carlo with 100000 scenarios (SCRCS system). - SCRCS contains models and parameters; code and parameters shared with authorities, insurers, and associations. - Parameters initially stable for first three years; comprehensive review in 2019 with industry coordination. - Valuation and accounting: - Investments at market; technical provisions as BEL + RM; promotes a single balance sheet approach and increased balance-sheet focus by boards. - Transitional measures: 24-month gradual phase-in for valuation impact where recognition represented a decrease in technical provisions. - Quantitative impact (December 2015 → March 2016; current billion pesos): - Assets: December 2015 = 1188.8; March 2016 = 1245.8; Difference = 56.9. - Liabilities: December 2015 = 1029.5; March 2016 = 1061.0; Difference = 31.5. - Capital: December 2015 = 159.3; March 2016 = 184.4; Difference = 25.4. - SCR: December 2015 = 55.5; March 2016 = 62.4; Difference = 6.9. - In March 2016 technical provisions gross decrease: 14.8 billion pesos; net impact after reinsurance recoverable: decrease of 10 billion pesos. - Governance and Pillar 2: - Board responsibilities strengthened; board composition 5–15 members with at least 25 percent independent. - ERM and ORSA requirements: ORSA annually, board-reviewed, including solvency needs and risk profile analyses. - Internal functions: explicit roles for risk management, internal control, internal audit, actuarial. - Pillar 3 disclosures: - Report on Solvency and Financial Condition (RSFC) required with qualitative and quantitative information. - Companies must publish audited financial statements in a national newspaper and Official Gazette. - Implementation considerations: - SCRCS complexity and opacity can limit firms’ understanding and disincentivize internal model development. - Transition period trade-offs: dual-framework operation costly; longer periods reduce stress but may dilute attention; recommendation to balance analysis, stress, and continuity. --- ### Implementing Risk-Based Solvency — South Africa (case study highlights) - Project: SAM (Solvency Assessment and Management) — began circa 2009; primary legislation enacted 2017; implementation effective July 1, 2018. - Market profile (end March 2022): - About 160 insurers; combined assets ~R4 trillion or $270 billion; life industry ~R3.6 trillion or $248 billion (~92 percent of assets; ~65 percent of GDP). - Exchange rate reference: R14.6038 for March 2022. - RBS objectives and intended benefits (selected): - Quantify risks sensitive to insurer-specific mitigations; enhance risk management; increase data granularity; make boards ultimately responsible; improve capital management; enhance governance and control functions. - Pre-SAM regulatory context: - LTIA and STIA (1998) with Board Notices; interim risk-based factor regime for non-life introduced January 1, 2012. - PRSFI introduced 2010 for prudential risk-based supervisory framework. - SAM project organization and consultation: - SAM unit: about five staff with actuarial skills. - Steering Committee: 63 members including insurers, industry associations, South African Reserve Bank, National Treasury, professional bodies. - Extensive position papers (117+), QIS1–QIS3, LPR and CPR parallel runs; mandatory CPR for all insurers before implementation. - Pillar I — valuation and SCR: - Economic balance sheet starting from IFRS with prudential recognition limits; regulator-published risk-free yield curve for discounting. - SCR confidence interval: 99.5 percent over one-year horizon. - SCR components: BSCR (Market, Life, Non-life aggregate with correlation matrix); Participation Risk; Operational Risk; LACDT. - Calibration principles: reasonability, consistency, data-based derivation with expert judgement where data limited. - Pillar II — governance and ORSA: - GOI (Governance and Operational Prudential Standards) covering board structure, risk strategy, risk management, internal controls, control functions, outsourcing. - ORSA: annual free-form report evidencing solvency resilience, risk profile and embedding of risk management. - Pillar III — reporting and assurance: - Annual qualitative/quantitative templates and reduced quarterly templates; senior official sign-off and independent assurance requirements. - Microinsurance: - Microinsurer composite licence; simplified, not fully risk-based; capital requirement MCR = 15 percent of premiums written in 12 months; simplified technical provisions (four reserves). - Timeline and milestones: - Project start January 2010; legislation 2017; implementation July 1, 2018. - Drivers of long timeframe: human resource constraints, Twin Peaks architecture development, influence of EU Solvency II timing. - Key takeaways and lessons: - Clear project plan, SAM structures, mandatory SAM coordinators, dedicated skilled regulator staff, parallel runs (LPR/CPR) critical for readiness. - Need for greater capacity for data analysis, broader regulator team involvement, preservation of institutional knowledge, conservative timelines. --- ### Conclusions and advice — cross-cutting recommendations - Buy-in and governance: - Obtain industry buy-in; do not rely exclusively on consultants. - Establish reporting and working structures (task groups, working groups, steering committees) with appropriate representation. - Dedicated regulator project team and top-management participation are mission-critical. - Implementation approach: - Start from an existing framework (e.g., ICS, Solvency II, SAM) and customize to local conditions. - Keep models and processes "as simple as possible and only as complicated as necessary." - Use phased rollouts, tolerance/forbearance early on, and staged data collection. - Templates, documentation, and data: - Design focused, value-adding reporting templates; define data elements and validations. - Document reasoning, methodologies, data sources, and calibration processes in detail. - Invest in data management and SupTech where resources permit. - Capacity building: - Provide general training to avoid silos; foster cooperation across specialized areas. - Build actuarial, financial, accounting, legal, and IT skills across regulator and industry. - Transition management: - Transition is iterative: communication, consultation, testing, review, and amendment. - Balance transition duration against costs of dual-framework operation and participant fatigue. *Source: wpiea2024240-print-pdf (IMF Working Paper — Introduction, country case studies, annexes, and executive summary).* ### Introduction ........................................................................................................... ### wpiea2024240-print-pdf - Introduction ### Major themes and structure - The document comprises an Introduction and three country case studies on implementing Risk-Based Solvency (RBS) for insurers: Kenya, Mexico, and South Africa. - Each country case study follows a similar structure: Overview of the insurance industry, conditions prior to RBS, regulation and supervision, description of the regulator, the journey to RBS (project organization and timeline), key lessons or takeaways, and conclusions/advice. - Annexes provide "Selected Details of RBS Implementation" for each country: - Annex I. Kenya—Selected Details of RBS Implementation (page references present in source) - Annex II. Mexico—Selected Details of RBS Implementation - Annex III. South Africa—Selected Details of RBS Implementation ### High-level chapter and section headings (as listed) - Introduction (page 5) - RBS and Risk-Based Supervision (page 7) - Implementing Risk-Based Solvency in Kenya (page 8) - Overview of the Insurance Industry in Kenya (page 8) - Prior to RBS (page 13) - Regulation and Supervision (page 13) - The Regulator (page 16) - The Journey to RBS (page 17) - Key Lessons from the Project (page 20) - What was Implemented (page 21) - Conclusions (page 21) - Implementing Risk-Based Solvency in Mexico (page 23) - Overview of the Insurance Industry in Mexico (page 23) - Prior to RBS (page 32) - Regulation and Supervision (page 32) - The Regulator (page 34) - The Journey to RBS (page 37) - Key Lessons Learnt (page 46) - Conclusions and Advice (page 48) - Reasons and Objectives (page 48) - Existing Conditions (page 49) - Procedure and Methodology (page 49) - Implementing Risk-Based Solvency in South Africa (page 51) - Overview of the Insurance Sector in South Africa (page 51) - Prior to RBS (page 56) - Regulation and Supervision (page 56) - Regulator (page 59) - Journey to RBS (page 60) - Project Scope (page 61) - Project Organization (page 61) - Timeframe (page 64) - Reconsideration of Existing Models (page 65) - Key Milestones (page 65) - Challenges in Moving from Compliance-based Supervision (page 65) - Key Takeaways from the Project (page 66) - Conclusion and Advice (page 68) ### Figures (enumerated) - 1. Insurance Penetration and Density - 2. Distribution of Premiums Per Class of Non-Life Business - 3. Premiums for Life Business - 4. Growth in Gross Premiums for Life Business - 5. Annual Inflation Rate - 6. Composition of Industry Assets - 7. Solvency Assessment - 8. Supervisory Review Process - 9. Timeline of Risk-Based Supervision and RBS Project - 10. Insurance Penetration Rate in Mexico - 11. Assets of Insurance Industry vs GDP - 12. Number of Insurers in Mexico - 13. Life and Non-Life Composition - 14. Social Security Pension Insurance - 15. Life Composition by Term and Currency - 16. Non-Life Composition in - 17. Assets Composition by Type - 18. Securities Composition by Type and Currency in 2021 - 19. Liabilities Composition by Type in 2021 - 20. Technical Provisions Composition by Type and Currency in 2021 - 21. Combined, Claims, and Expenses Ratio - 22. Claims Ratio per Insurance Operation - 23. ROE of Insurance Industry in Mexico - 24. Evolution of CNSF’s Budget - 25. Evolution of Number of Permanent Employees - 26. General Outline of the Implementation Process - 27. Industry Aggregate Non-life and Life Gross Technical Provisions for - 28(a). Industry Aggregate Non-Life Gross - 28(b). Industry Aggregate Non-Life Gross Written - 29(a). Industry Aggregate Life Gross Technical - 29(b). Industry Aggregate Life Annualized - 30. Total Assets and Policyholder Liabilities for the Life Insurance - 31(a). Asset Composition Insurance Sub-Sectors - 31(b): Total Assets for Collective Investment - 31(c): Asset Allocation for Life Insurers’ - 32. Regulator’s Organogram for Prudential Supervision before Risk - 33: SAM Governance Structure ### Tables (enumerated) - 1. Comparison of Selected African Insurance Markets (2020) - 2. Premium Growth Rate - 3. Asset Base Compared to GDP - 4. Loss Ratio of Non-life Business - 5. Composition of Assets - 6. Capital Requirements Prior to RBS - 7. IRA Staff Qualifications - 8. Challenges of Moving to RBS in Kenya - 9. Challenges of Moving to RBS in Kenya - 10. Main Aspects of the Regulation Prior to the LISF - 11. General Description of the Characteristics of the Regulation at - 12. Incorporations to the Regulation Prior to the LISF ### Key focal points for readers and analysts (inferred from section titles) - Comparative country experiences in implementing Risk-Based Solvency frameworks. - Institutional and regulatory prerequisites for RBS, including supervisory structures and resource implications (e.g., regulator organization and staff qualifications). - Project management aspects: timeline, project organization, scope, milestones, and challenges when transitioning from compliance-based supervision to RBS. - Quantitative diagnostics and industry metrics presented via multiple figures and tables covering penetration, premiums, asset and liability composition, technical provisions, loss/claims ratios, and regulatory capital frameworks. *Source: wpiea2024240-print-pdf - Introduction (IMF Working Paper table of contents and figure/table listings).* ### Introduction ### Introduction ### Benefits and motivation for Risk-Based Solvency (RBS) - RBS offers quantitative requirements to enhance judgements about the financial soundness of insurers when supervisory authorities assess insurer risks, facilitating a more forward-looking and proactive approach to supervision. - A key driver toward RBS adoption is improved prospects for compliance with international standards after transition to RBS. While RBS adoption is not necessary to comply with the Insurance Core Principles (ICPs) of the International Association of Insurance Supervisors (IAIS), proper implementation improves prospects for compliance. - The IAIS provides guidance in its ICPs for insurance regulators seeking to make the transition to a RBS regime and the risk-based supervisory approach. - Practical guidance is much sought after by insurance regulators in emerging market and developing economies given the complexity and medium-to-long-term nature of RBS transitions. ### Challenges and implementation considerations - RBS transition is a significant, medium-to-long-term undertaking and a complex project for regulators in emerging and developing economies. - Core constraints highlighted include shortages of resources, notably specialist expertise and appropriate information technology (IT) systems, as identified by the Financial Sector Assessment Program conducted by the IMF and the World Bank. - Dedicated resources and a clear project plan with milestones and timelines are necessary. Legislative changes usually occur toward the end of the project, so ongoing government support and industry buy-in from the start are critical. - Implementation of RBS requires substantial change in supervision; being clear on objectives and reasons for undertaking RBS is critical to success. - Jurisdictions should contextualize international experiences rather than adopt an “off-the-shelf” advanced economy RBS regime; Kenya, Mexico, and South Africa learned from advanced regimes but significantly tailored and simplified implementation. ### Common factors identified as important to successful RBS transition - Regulator must implement risk-based supervision alongside RBS: - A regulator transitioning to RBS without risk-based supervision is unlikely to achieve the objectives of RBS. - RBS focuses on an insurer’s financial position; effective management of risks by the firm is vital. Risk-based supervision assesses the quality of risk management practices employed by insurers. - Change management and skills upgrade: - Supervisors need different skill sets, such as actuarial skills, to ensure smooth RBS implementation. - Risk-based supervision involves professional judgement and moves away from compliance-based processes; expert judgement is needed to interpret RBS results and design supervisory actions. - Consistent communication with industry: - Insurers need to adjust expectations about interactions with their regulator; cultural change affects both regulators and industry. - Limits and prescriptive requirements previously imposed by regulators should be replaced with high level principles, recognizing that management of insurers are responsible for business decisions and the risks they entail. - IT and data infrastructure upgrades: - RBS requires significant regulatory data capture and analysis. Early in the project, data for calibration of capital requirements must be acquired, with some data provided by insurers. - Regulators need adequate systems to process and analyze data, invest in data warehouses, and design regulatory reporting templates to capture necessary data without undue burden on insurers. ### Nature of RBS as an evolving journey - Implementing an RBS regime is a journey; no RBS regime will be static over time. As insurance markets, capital markets, and regulator capacity evolve, the RBS regime is expected to evolve and be reviewed. - The case studies demonstrate the waypoint of implementing a first iteration of RBS regimes; over 10-, 20-, or 30-years these frameworks will likely evolve based on lessons learned. ### Structure of the paper - The paper distinguishes RBS from the related concept of risk-based supervision. - It presents detailed studies of RBS implementation in Kenya, Mexico, and South Africa covering pre-transition regulatory and supervisory arrangements, changes entailed by RBS adoption, and lessons learned. - Three annexures provide additional technical details on the three pillars of RBS regimes and regulatory reporting requirements after transition. --- ### RBS and Risk-Based Supervision - RBS and risk-based supervision are distinct but symbiotic; one is difficult to implement without the other. - RBS: - A comprehensive, formally structured approach to solvency regulation including quantitative and qualitative elements. - Sets out requirements that insurers maintain capital adequacy commensurate with their risk profiles—enough financial resources to withstand severe but plausible financial stresses based on their risk profile. - Quantitative requirements are supported by a regulatory framework for sound corporate governance including an enterprise risk management system. - Requires a supervisory framework responsive to emerging risks and providing oversight of board and senior management decisions about business models and associated risks. - The risk-based supervision framework must be attentive where quantitative capital requirements are not fully reflective of risks due to unique business model features or poor governance or risk management. - Risk-based supervision: - Seeks to increase supervisory effectiveness in resource-constrained environments by allocating resources to insurers and issues that pose the greatest risk to supervisory objectives (policyholder protection and ensuring financial stability). - Does not seek to eliminate risks inherent in insurance but provides supervisors a framework and toolkit to address risks efficiently and effectively. - Includes legislative powers and supervisory practices based on clear objectives and a comprehensive supervisory toolkit: offsite supervision, onsite supervision, and an escalating set of corrective measures where necessary. - Encompasses licensing, oversight of changes in control or significant influence, oversight of transfers of portfolios, and oversight of key transactions such as reinsurance. - The paper focuses on RBS while indicating how supervisory frameworks evolved concurrently in case studies, reflecting the symbiotic relationship. --- ### Implementing Risk-Based Solvency in Kenya ### Purpose and scope of the Kenya case study - The section sets out the journey of Kenya’s Insurance Regulatory Authority (IRA) in its transition to a RBS regime. - It covers: context of the insurance sector in Kenya; how the IRA managed and executed its journey; regulatory and supervisory approach before RBS; key challenges and milestones; lessons from the IRA’s experience. - Annex I (in the source) contains additional technical information on what was implemented for the RBS regime and reporting templates. ### Overview of the Insurance Industry in Kenya - Kenya rankings and comparative metrics: - Kenya was ranked fourth in Africa in terms of gross premium income in 2020 and third in 2019. - Kenya was ranked 57th in terms of insurance penetration in the world. - Table 1 (summary from Swiss Re Sigma 2020): - South Africa: Non-Life Premiums (USD in Billions) 7.38; Life Premiums (USD in Billions) 33.26; Total Premiums (USD in Billions) 40.64; Penetration rate (Percent) 13.7; Global Ranking 4 - Morocco: Non-Life Premiums 2.84; Life Premiums 2.24; Total Premiums 5.08; Penetration rate 4.5; Global Ranking 34 - Kenya: Non-Life Premiums 1.22; Life Premiums 0.98; Total Premiums 2.20; Penetration rate 2.2; Global Ranking 57 - Tunisia: Non-Life Premiums 0.69; Life Premiums 0.21; Total Premiums 0.90; Penetration rate 2.3; Global Ranking 55 - Egypt: Non-Life Premiums 1.30; Life Premiums 1.09; Total Premiums 2.39; Penetration rate 0.7; Global Ranking 85 - Industry growth and composition: - The insurance industry in Kenya experienced moderate growth over the last nine years, with the annual growth rate declining from 15 percent to 2 percent between 2012 and 2020. - The insurance market recorded an average annual growth rate of 9.7 percent over the last nine years. - The industry was moderately impacted by the COVID-19 pandemic in premiums written and investment returns. - In 2020, the industry recorded $2.3 billion in gross premium (2019: $2.3 billion) translating to a nominal growth of 2.3 percent (-2.9 percent in real terms). - Non-life insurance accounted for about 60 percent of total premium written in Kenya in 2020 according to IRA insurance statistics. - Life insurance penetration averaged 1 percent over the last 10 years (2020: 0.95 percent). - Non-life insurance penetration declined over the last nine years with the lowest rate in 2020 at 1.2 percent. - World average insurance penetration rate stood at 7.4 percent. - Insurance density in Kenya was $47.87 in 2020. - Premium growth rates (Table 2: IRA data): - Yearly Total Premiums (USD Billions): 2012 1.12; 2013 1.29; 2014 1.56; 2015 1.73; 2016 1.95; 2017 2.08; 2018 2.15; 2019 2.28; 2020 2.33 - Life Premiums (USD Billions): 2012 0.37; 2013 0.44; 2014 0.57; 2015 0.62; 2016 0.74; 2017 0.83; 2018 0.87; 2019 0.97; 2020 1.02 - Non-Life Premiums (USD Billions): 2012 0.73; 2013 0.85; 2014 0.99; 2015 1.10; 2016 1.22; 2017 1.25; 2018 1.28; 2019 1.31; 2020 1.31 - Growth rate (percent): 2013 15.46; 2014 20.59; 2015 10.72; 2016 13.18; 2017 6.33; 2018 3.52; 2019 6.05; 2020 2.29 - Asset base and relation to GDP (Table 3: IRA data): - Asset Base (USD Billions): 2012 3.11; 2013 3.66; 2014 4.31; 2015 4.79; 2016 5.29; 2017 5.91; 2018 6.35; 2019 7.11; 2020 7.66 - GDP (USD Billions): 2012 42.61; 2013 47.45; 2014 54.02; 2015 62.84; 2016 75.94; 2017 84.83; 2018 93.40; 2019 102.56; 2020 107.53 - Asset Base to GDP (percent): 2012 7.3; 2013 7.7; 2014 8.0; 2015 7.6; 2016 7.0; 2017 7.0; 2018 6.8; 2019 6.9; 2020 7.1 - Asset composition and trends: - Industry asset base increased by 8 percent to $7.7 billion in 2020 (2019: $7.1 billion). - The asset base was largely composed of investments (85.7 percent of total assets), mainly government securities (67.1 percent). - The insurance industry asset base compared to GDP averaged 7 percent over the last 10 years. - Observed trends (Figure 1 summary): - Insurance penetration has been declining for non-life insurance. - Insurance density has been increasing, suggesting increased awareness, economic growth, increased pricing, or market expansion. *Implied source: IMF Working Papers Implementing Risk-Based Solvency for Insurers — Introduction (Kenya, Mexico, and South Africa case studies).* ### 2. Insurance Density in Kenya ### 2. Insurance Density in Kenya ### Industry structure and ownership - 61 insurers and reinsurers licensed in Kenya in 2020. - 33 underwriters conducting non-life insurance business. - 19 conducting life insurance business. - 4 composite firms conducting both life and non-life insurance business. - 3 composite reinsurers. - 2 reinsurers conducting non-life reinsurance business only. - 7 foreign majority owned non-life insurers and 6 foreign majority owned life insurers. - Legislation requires that 33 percent of the shares of any insurer must be owned by Kenyan or east African citizens. - Foreign insurers account for about 20 percent of the business written in Kenya; expected to increase due to acquisitions by international companies. ### Distribution channels and market participants - Distribution of total industry premium in 2020: - 37.7 percent through insurance brokers. - 37.1 percent through insurance agents. - 25.2 percent directly by insurers. - Market participants and service providers: - Over 10,000 insurance agents. - 204 brokers. - 189 reinsurance brokers. - 34 medical insurance providers. - Over 300 insurance service providers. ### Non-life business composition and major classes - In the non-life insurance sector, Medical and Motor are the largest classes of business. - Medical accounted for 34.4 percent of premium income in 2020. - Motor accounted for 34.1 percent of premium income in 2020. ### Non-life loss ratios and underwriting performance - Aggregate non-life loss ratios, 2016–2020 (percent): - 2016: 62.7 - 2017: 61.5 - 2018: 62.5 - 2019: 64.2 - 2020: 63.6 - Selected line loss ratios (percent): - Motor Loss Ratio: 65.3, 63.3, 64.5, 73.8, 71.0 (2016–2020) - Medical Loss Ratio: 75.6, 72.6, 75.6, 74.1, 70.3 (2016–2020) - Non-Life Combined Ratio (percent): 102.4, 101.1, 102.8, 103.4, 102.0 (2016–2020) - Non-Life Investment Income Ratio (percent): 5.8, 7.8, 6.3, 8.4, 7.8 (2016–2020) - Observations: - Loss ratios for aggregate non-life industry ranged between 61.5 percent and 64.2 percent over 2016–2020. - Individual lines show wide variation and significant volatility in some lines. - Non-life insurers have traditionally relied on investment income as a cushion for underwriting results. - Investment income has been on average above 6 percent over the last five years. - The benchmark interest rate of the Bank of Kenya has consistently been at or above 7 percent over this period. ### Life business composition and trends - Life insurance business classes include: life assurance, annuities, group life, group credit, investments, pensions, and permanent health. - Share of premiums for life business in 2020 (percent): - Pensions: 40 - Life Assurance: 29 - Other classes (Annuities, Group Life, Group Credit, Investments, Permanent Health) make up the remaining 31 percent. - Pensions and Life Assurance are the largest shares of premiums and the fastest growing business segments. - Guaranteed business has reduced. - Figure references show growth in gross premiums for life business by class (data as provided in source). ### Reinsurance arrangements and mandatory cessions - Legislation requires mandatory reinsurance placements with locally licensed reinsurers. - The Kenyan insurance sector has two reinsurers operating under regional charters and a locally incorporated reinsurer. - Two regional reinsurers receive mandatory cessions of 10 percent and 5 percent respectively of all Kenyan insurance business. - The locally incorporated reinsurer receives mandatory cessions of 20 percent. - Reinsurers are required to have retrocession arrangements, mainly with large international reinsurers. ### Industry assets, returns, and inflation context - Total industry assets: - End-2019: $7.1 billion. - End-2020: $7.7 billion (growth of 8 percent from $7.1 billion). - Average annual inflation rate in Kenya between 2013 and 2019: 5 percent. - Average asset return over the same period: 7.2 percent, yielding a real return of 2.2 percent. - Asset allocation in 2020: - Life insurance business assets: $5.1 billion (67 percent). - Non-life insurance business assets: $2.5 billion (33 percent). - Composition of assets: investments 85.7 percent, current assets 11.7 percent, fixed assets 1.5 percent, intangibles 1.1 percent. - Government securities accounted for 67.1 percent of total investments. ### Composition of assets (USD bilions) — selected years - Government Securities: - 2016: 2.11 - 2017: 2.57 - 2018: 3.01 - 2019: 3.66 - 2020: 4.41 - Investment Property: - 2016: 0.73 - 2017: 0.79 - 2018: 0.83 - 2019: 0.84 - 2020: 0.85 - Shares: - 2016: 0.48 - 2017: 0.39 - 2018: 0.48 - 2019: 0.55 - 2020: 0.42 - Bank Deposits: - 2016: 0.45 - 2017: 0.54 - 2018: 0.50 - 2019: 0.53 - 2020: 0.52 - Investment in Subsidiaries: - 2016: 0.14 - 2017: 0.15 - 2018: 0.15 - 2019: 0.16 - 2020: 0.19 - Loans and Mortgages: - 2016: 0.12 - 2017: 0.12 - 2018: 0.13 - 2019: 0.13 - 2020: 0.14 - Other Investments: - 2016: 0.24 - 2017: 0.26 - 2018: 0.13 - 2019: 0.06 - 2020: 0.04 ### Prior supervisory framework (prior to RBS) - A compliance-based supervisory model in place since 2006; applied up to 2013 when the Insurance Act was amended. - Prior to amendments, the Insurance Act included statutory requirements related to solvency, capital, and net worth with prudential rules generally written into the law. - The IRA applied a one size fits all supervisory approach. ### Capital requirements prior to Risk-Based Solvency (RBS) - Minimum capital requirements (Amounts in USD): - Non-Life Insurer minimum capital: 3,000,000. - Life Insurer minimum capital: 1,500,000. - Solvency Margin prior to RBS: - Non-Life Insurer: 100,000 or 15 percent of Net Written Premium (whichever greater). - Life Insurer: 100,000 or 5 percent of Net Actuarial Liabilities (whichever greater). - Characteristics and limitations: - Flat nominal minimum capital plus solvency margin did not distinguish between risk profiles, business mix, size, or scale. - No capital requirements explicitly relating to market and credit risk; capital bases were volume-based (percent of written premiums or actuarial liabilities). - Market and credit risk were managed through asset rules and reinsurance counterparty restrictions (haircuts, ineligibility of certain assets). ### Actuarial liabilities, accounting, and solvency adjustments - Actuarial liabilities computed as prescribed by the IRA. - Financial statements required to be prepared annually in accordance with International Financial Reporting Standards (IFRS) and audited per International Standards on Auditing (ISA). - Insurance liabilities generally recorded on an accrual basis and required to be matched with the revenues they generate. - Insurers required to estimate future losses and set aside reserves; auditors required to verify policyholder reserves and benefits using generally accepted actuarial principles and conduct a liability adequacy test as required by IFRS. - Prescribed parameters for liabilities: mortality rates, discount rates, and margins set by the IRA. - Present value of all prospective cash flows used; reserves floored at zero at the individual policy level (negative reserves assumed zero). - Solvency assessment included adjustments to assets and liabilities via the concepts of admitted assets and admitted liabilities: - Admitted assets for solvency calculations excluded goodwill and other intangibles, deferred tax assets, prepayments, fixed assets, computer equipment, inventory, and other assets deemed fit for exclusion by the regulator. - Admitted liabilities comprised balance-sheet liabilities plus additional margins computed by the regulator for off-balance sheet exposures. *Source: wpiea2024240-print-pdf - 2. Insurance Density in Kenya* ### 1. Balance Sheet 2. Solvency Margin = Admitted Asset vs Admitted ### 1. Balance Sheet 2. Solvency Margin = Admitted Asset vs Admitted Liabilities ### Supervisory framework: onsite and offsite monitoring - Offsite monitoring - Assessment of financial ratios aligned to the CARAMELS rating system introduced in 2007. - The IRA received manual periodic returns on a quarterly and annual basis; the data was not centralized and physical submission was made in four sets of files as it was to be distributed across the four departments in the IRA. - Actuarial valuation reports were produced annually and only submitted by life insurers; there was no requirement for actuarial reports to be submitted to the IRA for non-life insurers. - Offsite monitoring was undertaken by the Financial Analysis team focusing on aggregating data and producing reports on performance and trends compared with wider industry figures. - The analysis did not provide a comprehensive set of key ratios and benchmarks for the ratios; there was no early warning system or stress testing applied to the data. - Onsite monitoring - Supervisors assigned specific ratings for individual components based on judgement. - Onsite monitoring focused on financial, operational and governance aspects of companies. - The regulator’s inspection plan focused on inspecting as many firms as possible without priority accorded to firms presenting greater risk; the rating scale used three levels: low risk, moderate risk, and high-risk categories, with a tendency to rank firms in the moderate risk category. - The IRA did not assign ratings using a matrix of finite ranges; overall risk was determined from individual risk scores on financial, operational and governance aspects. ### Governance, powers, and organizational structure - Legislative and governance requirements - Legislative requirements included very limited governance requirements; no specific requirement on risk management, albeit the IRA required approval of the appointment of senior management and the board of directors. - Law requires senior management and directors to possess requisite academic and professional qualifications, work experience and fitness-and-propriety (e.g., not convicted of an offence involving fraud or dishonesty and not adjudicated bankrupt). - IRA supervisory organization and coordination - Supervision department had four separate divisions: Compliance, Surveillance, Actuarial, and Financial Analysis. - Divisions did not coordinate effectively; each focused on its activities (compliance oversaw offsite assessments, surveillance oversaw onsite inspections), impeding effective determination of risk posed by regulated entities. - Resourcing and financing - Kenya applied a compliance-based approach where supervisory resources were equally distributed across all insurers regardless of risk profile and size. - The IRA is financed through a premium levy with the budget requiring approval from the Ministry of Finance. - The IRA had, on average, 62 staff members between the years 2007 and 2010, composed of qualified insurance professionals, qualified accountants, and partly qualified actuarial professionals. ### Actuarial capacity and human capital - Actuarial and specialist skills - The IRA did not have qualified actuaries; five staff members were pursuing the United Kingdom (UK) actuarial professional certification. - The industry faced a lack of specialized skills, especially in actuarial and risk management areas, to fully support RBS implementation. - In 2011, the IRA established an actuarial scholarship scheme to increase the pool of actuaries; first cohort of five students sent to the United Kingdom along with staff. - As of 2021, Kenya had 65 actuaries with qualification from the United Kingdom Institute and Faculty of Actuaries (IFOA), reflecting the IRA’s initiative (sending at least five students to the United Kingdom for training every year helped train 35 fully qualified actuaries). - The Actuarial Society of Kenya (TASK) was founded in 1993, officially launched in 2005, and has set up an Actuarial Academy offering mentorship and tutorials. - IRA staff qualifications (Table 7) - Masters’ degree: 10 - Bachelors’ degree: 26 - Postgraduate Diploma: 5 - ACII: 10 - Certified Public Accountants of Kenya (CPA(K)): 5 - Advanced Diploma in Insurance: 3 - Part Associateship of the Chartered Insurance Institute (ACII): 10 - Part Actuarial: 5 - Chartered Institute of Arbitrators (CIArb): 3 - Non-University Graduates — Diploma: 8 - Non-University Graduates — Certificates: 13 - Non-University Graduates — Others: 5 ### The journey to Risk-Based Supervision (RBS): timeline, components, and deliverables - Timeline highlights (select milestones and years) - 2008: Comprehensive review of Insurance Act initiated. - 2010: RBS Steering Committee established; high-level project timetable and roadmap published. - 2011: Implementation team established; consultant engaged; project to realign strategic plan to shift from Compliance Based Supervision to Risk-Based Supervision. - 2012: Risk-Based Supervision Workshops; Draft Risk-Based Supervision Manual; Draft Risk-Based Supervision guidelines. - 2013: Electronic Regulatory System development; Risk-Based Supervision Guidelines issued. - 2014: Electronic Regulatory System went live. - 2015: Draft RBS regulations; Draft Technical Valuation guidelines; framework development commenced. - 2016: Quantitative Impact Studies; Board and Senior Management engagement. - 2017: RBS Regulations passed in Parliament; RBS Transition; Risk-Based Supervision regime introduced. - It took Kenya seven years to develop and implement its Risk-Based Supervision approach which incorporated development of an RBS regime. - Nine key components targeted for RBS shift - First, training of staff and industry on risk-based supervision. - Second, formation of a project team to develop and test evaluation tools such as a risk profiling model. - Third, defining inputs and developing output reports. - Fourth, developing an RBS requirement. - Fifth, developing and implementing an early warning system. - Sixth, developing reporting requirements for insurers and brokers. - Seventh, acquisition of an electronic data reporting system for data collection and analysis. - Eighth, a review of the existing regulations and guidelines. - Ninth, the development of stress testing. - Project team and deliverables - Project team comprised of five people with skills including actuarial, insurance, legal, accounting and information technology (IT); three experienced supervisors with over 10 years of experience and two new employees. - A consultant was appointed to assist in developing the RBS framework. - Key deliverables: Risk-Based Supervision manuals, models and training of staff and industry; design and development of an electronic regulatory system (ERS). ### Challenges encountered during transition to RBS - Adaptation of models - Lack of actuarial skills for both regulator and insurers; IRA initiated long-term scholarship program. - Capacity constraints in resources and skills; IRA reorganized departments and reallocated resources. - Reorganization of regulator and supervision practices - Lack of coordination and silo approach led to reactive supervision; regulator reorganized from three departments (compliance, surveillance, financial analysis) into life insurance, non-life insurance and actuarial departments. - At most four companies were allocated to each supervisor per department to conduct offsite, onsite and data analysis. - Lack of holistic view of an insurer arising from siloed supervision. - Staff resistance to change required focused change management initiatives. - Supervisory process lacked detailed technical manual; IRA developed an RBS manual and arranged internships with other developed regulatory authorities. - Data and IT requirements - Changes to IT infrastructures and data systems were required to collect new, more granular data. - IRA overhauled data collection tools; developed new templates starting with monthly returns, then quarterly returns, before annual returns. - IRA developed an electronic regulatory system (ERS) to enable granular electronic submissions, analysis, report generation and risk dashboards. - Legal powers - Legislation lacked adequate enforcement or regulatory action powers, particularly powers to institute legal action against senior management or board of directors for mismanagement; changes to legislation were required and the Parliamentary process can be protracted. ### Key lessons and best practices from Kenya’s RBS project - Model selection and flexibility - Adapt available models and build in flexibility to upgrade models and systems; IRA studied Australia, Canada and the United Kingdom (Solvency II implementation in the UK). - IRA built a model in Excel enabling modification during the Quantitative Impact Assessment (QIA) stage; Excel templates standardized for quarterly and annual submissions. - Timeframe and change management - Allow plenty of lead time and do not underestimate the amount of change required; IRA took three years to conduct necessary supervisory changes for RBS adoption and continued to encourage principles-based approaches over time. - Start to move to RBS while the regulator has capacity; deliberate assignment of training supervisory staff in preparation for full implementation. - Training and international support - Ensure training for all staff; IRA developed a continuous training program with training conducted every fortnight for at least one hour. - Use international expertise and request international training assistance; IMF and World Bank provided technical assistance during model development and drafting of regulations. - Data collection and phased rollout - Make data collection a central part of planning and roll out in stages; IRA overhauled data collection tools and staged template development (monthly, quarterly, annual). - Make data submissions electronic where possible via an ERS to enable timely analysis and risk dashboards. - Industry engagement and communication - Issue guidance notes explaining requirements and standards to stakeholders; IRA developed guidance notes and guidelines. - Facilitate stakeholder buy-in through Board and senior management engagement, sensitization workshops and stakeholder forums. - Ensure good communication; IRA established a communication strategy and team to disseminate relevant information effectively. ### What was implemented - RBS regime introduction - Kenya introduced its risk-based supervision regime in 2017 following the review of its insurance law to strengthen regulatory and supervisory framework in line with RBS standards. - Review process included improving risk assessment approaches, industry governance, internal controls, and risk management requirements. - Development and consultation - RBS regulations and model development were largely completed internally by the IRA’s technical staff with input from the Actuarial Society of Kenya. - The IRA provided the industry an opportunity to comment on draft requirements and implementation timetable. - Systems and tools - Electronic Regulatory System (ERS) developed and went live in 2014 to collect granular data, enable analysis, generate reports and produce risk dashboards. - Quantitative Impact Assessment was conducted to test the framework prior to parliamentary adoption. - Finalization - Draft regulations and technical valuation guidelines were developed and the framework was tabled and passed in parliament in 2017. *Source: Author based on information from the IRA.* ### Conclusions ### Conclusions ### Key lessons and implementation timeline - Collaboration and active and ongoing stakeholder consultation and industry engagement were key success factors. - The IRA conducted regular workshops with the insurance industry and worked closely with the local actuarial society throughout the process of change. - Intensive and regular discussions with insurer senior management were necessary to explain the changes and the cultural change needed to incorporate and embed risk-based processes within their business. - The changes increased the need for technical experts such as actuaries and risk management experts within insurers. - There were knock-on effects to other regulations, including the valuation requirements for insurance technical provisions; the IRA had to work with various arms of government to ensure that the necessary legislation was passed. - New guidelines for the valuation of technical provisions were developed as these interacted with the risk-based capital and solvency requirements. - The move towards a Risk-Based Supervision regime can take quite several years, from initial scoping to actual implementation and that includes a transition to RBS. The review process began in 2008, a project team was set up and started to work on the details in 2011 and the regime was fully implemented later in 2020. ### Implementing Risk-Based Solvency in Mexico — overview and regulatory transition - The introduction in April 2015 of the Ley de Instituciones de Seguros y de Fianzas (LISF) concluded a 25-year process of strengthening insurance regulation with a goal of adopting a risk-based approach by the Comisión Nacional de Seguros y Fianzas (CNFS). - The process began in 2007 with the preparation of the regulation that ended up embodied in the LISF. - The relevant elements related to technical reserves, capital adequacy, and investment policy came into force on January 1, 2016. - The section documents the CNSF’s transition to the RBS regime, covering: business scope and trends in financial performance of Mexico’s insurance sector; the regulatory and supervisory approach prior to the transition to RBS; and how the CNSF managed and executed its journey to RBS. Annex II contains additional information on what was implemented for the RBS regime and other relevant information. ### Industry structure and trends — key statistics and findings - Insurance penetration is calculated as the total amount of insurance direct premium divided by GDP. - Mexico’s insurance penetration rate rose to 2.5 percent by 2021. - Mexico’s insurance penetration rate remains below the Latin American and global averages of 3 percent and 6.8 percent respectively. - Asset under management to GDP rose to 7.6 percent by 2021, representing a 50 percent growth. - In 2021, there were 113 licensed insurers, of which 57 were locally owned and 56 were foreign owned. - The mix between local and foreign capital has remained stable. - Life insurance business increased from 44.9 percent in 2010 to 45.8 percent in 2021 in terms of total premium income for both sectors. - Specialized life insurers providing pension benefits related to social security contributed 7.2 percent to total premium income in 2021. - For life insurance business other than pension insurance, long-term contracts represented 61.9 percent of life insurance premium income for 2020. - Currency composition of life insurance premium income in 2020: - 73.9 percent denominated in pesos. - 15,2 percent denominated in foreign currency (primarily USD). - 10.9 percent inflation-indexed products (using the Unidad de Inversion, UDI, as reference). - UDIs: initial value equal to 1 peso on April 4, 1995; value of the UDI on December 31, 2021 was 7.11 pesos. - For non-life products, based on 2020 premiums the largest contributor is the motor class of business followed by large expenses health insurance (GMM). - Insurers’ assets composition in 2021: - 74.7 percent of assets were securities. - 9.7 percent were premium debtors. - 5.9 percent corresponded to reinsurance recoverables. - Investments in government securities represented 63.9 percent of the sector’s securities investment portfolio. - Equity investments represented 17.7 percent of securities. - Securities by currency composition: - 42.5 percent local currency. - 39.1 percent inflation indexed securities. - 18.4 percent foreign currency denominated securities. ### Institutional and product-specific notes - Life insurance includes pension benefits related to social security; these benefits can only be provided by specialized firms which cannot offer other types of life insurance products. - Specialized life insurers are required to submit a bespoke inflation-linked annuity offering for each pension application. - The social security pension system reform timeline: - Reformed in 1997 for employees other than government employees. - Reformed in 2007 for government employees. - Benefits are now based on private contributions and paid based on each individual fund’s rules and provided through specialized life insurers. - The changes applied mandatorily only to employees who began to contribute the year the changes came into effect; most employees are still contributing as they have not yet reached retirement age. - Foreign-currency life insurance in 2020 (15,2 percent of premium income) is made up almost entirely of benefits denominated in USD. - Since the 1980s, people in Mexico have not been allowed to have bank accounts in USD; only people who live on the northern border or companies can have bank accounts in U.S. dollars. - UDIs are units of value that BANXICO updates daily based on inflation. *Conclusions — Implementing Risk-Based Solvency for Insurers (IMF Working Papers).* ### 83.6 percent of the securities held by insurers were long dated. ### wpiea2024240-print-pdf - 83.6 percent of the securities held by insurers were long dated. ### Asset composition and yield characteristics - 83.6 percent of the securities held by insurers were long dated. - In terms of yield, 92 percent of the securities had a fixed rate and only 8 percent were variable rates. - High proportion of fixed-income investments reflects insurers’ risk appetite and liability profiles, and the characteristics and perceived safety of government debt (with more than half fixed rated and the yield on government debt). - Inflation-indexed securities operate using the UDI as a reference; nominal value and coupons are expressed in UDI. - Almost all foreign-currency investments correspond to securities denominated in U.S. dollars. - BANXICO data available include only securities issued in Mexico; a significant part of securities held by insurers denominated in foreign currency are issued abroad (including by the Mexican Federal Government, UMS securities). The presented percentages do not include these abroad-issued securities, but the author estimates they are representative for foreign-currency investments as well. ### Liabilities and technical provisions (2021) - Non-life insurers’ liabilities composition in 2021: - Unearned premium provision: 76.5 percent - Claims provision: 10.5 percent - Catastrophe or special provisions: 3.8 percent - Creditors: 3.6 percent - Reinsurance: 1.7 percent - Others: 3.9 percent - Technical provisions composition in 2021: - Life provisions: 77.4 percent (noting text: "In 2021, more than 75 percent") - Non-life (P&C) provisions: 14.3 percent (Figure labels) - Non-life (Health) provisions: 4.1 percent (Figure labels) - Catastrophe provisions: 4.2 percent (Figure labels) - Currency composition of technical provisions (Figure 20): - Local and inflation indexed: 80.7 percent - Foreign: 19.3 percent - The high proportion of life provisions is attributed to the long-duration nature of life products and explains insurers’ preference for long-term fixed-rate securities. ### Market performance and claims experience - Combined loss ratio of the total market: 107 percent in 2021; average from 2016 to 2020 had been 98 percent. - Claims ratio: - Total market claims ratio: 86 percent in 2021; average from 2016 to 2020 had been 75 percent. - Life insurance (excluding pension insurance) claims ratio: 91 percent in 2020 and 97 percent in 2021; average from 2016 to 2019 had been 76 percent (adjusted series removes effect of Individualized Separation Insurance). - Non-life health insurance claims ratio: 77 percent in 2021; average from 2016 to 2020 had been 69 percent. - Non-life P&C claims ratio: 51 percent in 2020 and 55 percent in 2021; average from 2016 to 2019 had been 61 percent. - The sector’s solvency position remained strong through the pandemic: - Industry solvency ratio: 300 percent by end-2021. - Return on Equity (ROE) of the industry rose steadily since 2013 until the pandemic; ROE was dented in 2020 and 2021 due to COVID-19. ### Regulatory history, structure, and supervisory approach - CNSF established in 1990; continuously strengthened regulatory framework culminating in implementation of the LISF in 2015. - Prior regulatory elements (selected dates and features): - 1993: Investment rules with limits by asset class and counterparty; liquidity-based limits for each type of technical provisions. - 2004: Calculation of technical provisions with sufficiency methods and actuarial standards; introduction of solvency self-assessment and projection exercises. - 2006: SCR incorporated underwriting, catastrophe, market, concentration, counterparty, and mismatch risks; detailed data requests on underwriting and claims began in 2006. - 2015: LISF entered into force (with transitional arrangements completed by 2016 for quantitative elements). - CNSF governance and resourcing: - CNSF is part of Secretaría de Hacienda y Crédito Público (SHCP). Governing Board includes CNSF President and Vice Presidents and representatives of SHCP, BANXICO, CNBV, CONSAR, and two independent members; all have voting rights. - CNSF budget is determined by the federation treasury; insurers pay supervision fees to the federation treasury. - Organizational structure includes Institutional Operation Division (supervision), Sector Analysis and Studies Division (analysis, SCR formula, internal models), Legal Division, and Planning and Information Technologies Division. - Budget and permanent staff headcount decreased starting 2018 due to Federal Government policies emphasizing efficiency and budgetary savings. ### Transition to risk-based solvency (RBS) and implementation of LISF - Drivers for transition included strengthening solvency and soundness, improving corporate governance and risk management, and aligning with international standards (Solvency II selected as main reference). - Three-stage journey: - Stage I (1990–2007): gradual strengthening. - Stage II (2007–2013): elaboration of LISF and CUSF. - Stage III (2013–2016): formal implementation and revision of CUSF. - Key implementation features: - Technical provisions: Best Estimate of Liabilities (BEL) plus Risk Margin (RM); companies use internal methodologies by line of business. - SCR measure: Value-at-Risk (VaR) 99.5 percent for one-year horizon calculated via Monte Carlo simulation (SCRCS) with 100000 scenarios. - SCRCS characteristics: - Models and methodologies published in CUSF; risk parameters are contained within the SCRCS. - Code and parameters available to other authorities, insurers, and representative associations. - Firms input balance-sheet data per SCRCS manuals; SCRCS contains models and parameters. - Quantitative and qualitative impact exercises: - Multiple Quantitative Impact Studies (QIS) and Corporate Governance CIS exercises were conducted; initial QIS led to postponement of quantitative elements to January 1, 2016 to allow calibration and data improvements. - QIS used to evaluate technical provisions, SCR, coverage metrics, and to refine CUSF drafts. - CIS exercises assessed compliance with corporate governance obligations using a five-point compliance scale and required action plans for gaps. - Deviations and prohibitions: - Three material deviations from Solvency II related to valuation basis, pension insurance, and catastrophe insurance. - Internal models for SCR are allowed with CNSF approval except for pension insurance and catastrophe lines of business (internal models not allowed for these). - For unearned premium provisions, internal models are not allowed for catastrophe LOB. ### Challenges identified during and after implementation - For insurers: - Defining firm-specific risk appetite and embedding risk appetite across short-, medium-, and long-term objectives. - Demonstrating benefits of comprehensive risk-based management versus implementation costs. - Internalizing risk management as central to business strategy and changing organizational culture to operate risk management at all levels. - Proportionality concerns: substantial initial investment and full corporate governance structure required for licensing can discourage new entrants. - For the regulator (CNSF): - Maturing risk-based supervision beyond compliance checks to effectiveness assessments. - Developing and maintaining IT systems and analytical capacity under budget constraints. - Building multidisciplinary supervisory teams with economics, accounting, finance, actuarial, and legal skills. - Retaining specialized staff given budget and compensation pressures. - Data and model understanding: - SCR calculation via SCRCS (Monte Carlo) can be opaque for many participants, limiting its use as a risk-management tool for firms that do not develop their own models. - Integration of risk models into SCRCS reduces incentives for some firms to develop proprietary methodologies. ### Key lessons learned and outcomes - LISF established a robust RBS framework that: - Provides more precise calculation of technical provisions aligned to obligations. - Determines SCR sensitive to individual insurers’ risk profiles, promoting efficient capital use. - Requires investment policies aligned to obligations and risk appetite. - Strengthens corporate governance and risk management through defined structures and lines of defense. - Improves disclosure and market discipline via expanded published information (noting published information may be complex for general public). - Promotes development of actuarial, financial, statistical, and IT capacities within firms. - Technical provisions as BEL + RM: - Advantages include precision by homogeneous risks, use of firm and market data, back testing and stress tests, audit and actuarial certification, and supervisory oversight. - Statutory method retained for extraordinary situations and used as a reference for many insurers developing their methodologies. - SCR via SCRCS (Monte Carlo VaR 99.5 percent one-year): - Advantages: efficient capital use by accounting for risk correlation and mitigation; enables firms without sophisticated models to benefit from a standardized risk-based calculation. - Drawbacks: complexity and opacity can limit managerial understanding and inhibit firms’ development of internal risk modeling capabilities. - Corporate governance requirements improved order and professionalization of boards, while still allowing regulatory flexibility to accommodate maturity of practices. - Market discipline was strengthened by greater transparency, though published information may not be readily understandable to consumers; no regulatory obligation exists to disclose premium composition (risk vs costs) in insurance contracts. *Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024240-print-pdf.pdf.* ### 2015. There are valid issues to be considered when deciding on a transition period for both the regulator and ### wpiea2024240-print-pdf - 2015. There are valid issues to be considered when deciding on a transition period for both the regulator and ### Transition period considerations - Keeping systems operating on two solvency calculation frameworks is very costly. - Overload on financial resources of the insurers during periods of transformation encourages them not to be continued for a long period. - Human resources involved in transformation are usually those already operating in the sector; additional work can create challenges in their performance. - Knowledge and skills acquired, new reporting requirements and availability of data helped to improve performance. - Using a longer implementation time period with a less intensive process can lead to less attention from the participants. - A longer time could allow: - better analysis of the results, - reduced stress of all the participants, - exercises in parallel that guarantee the appropriateness of the regulatory obligations. ### Capacity building and skills - Both the insurance sector and CNSF had to increase their financial, actuarial, accounting, legal and risk management knowledge and skills. - Importance of quantitative and qualitative elements of the regulation requires experts in each subject to have general knowledge about many other elements so they can clearly understand the companies. - At the CNSF, these skills were obtained through research and development required to modernize the regulation and through training programs given to all its personnel regarding the skills required for the new regulation. - Recommendation: general training for all staff on each of the topics; avoid working in silos and foster cooperation between specialized areas. - Data management is essential and regulation should promote or oblige proper management of data, especially given digital transformation. ### Conclusions and Advice — objectives and reasons - The process of modernizing insurance regulation in Mexico occurred with clear objectives, conducive conditions, and a transparent plan for implementation. - Main objective: generate a regulatory framework that strengthens the solvency and soundness of insurers and that would accompany the potential growth expected due to the macroeconomic conditions in Mexico, giving it greater solidity, efficiency, and order. - Economic stability, technical capacity of the regulator, financial and technical strength of the sector enabled design of a regulation meeting the proposed objective. - General recommendations for other jurisdictions heading down the path of RBS: - Identification of reasons for adopting a risk-based regulation regime and clarity of objectives are fundamental starting points. - Clear objectives help get buy-in and allow establishment of key indicators to evaluate results. - Authorities should consider potential misalignment between proposed objectives and those of the industry or parts of it; validity of reasons and objectives becomes essential to justify changes. ### Existing conditions and adaptation to jurisdictional characteristics - Adoption of RBS depends on jurisdictional characteristics; ICP preconditions, principles, standards, and guidelines provide a general outline but specific design must be prepared based on local characteristics. - Mexican adaptations: - Treatment of LOB of catastrophe risks considers valuation of provisions through a statutory model which is also used to calculate the capital charge based on a PML. Internal models are not allowed for this capital charge. - Constitution of catastrophe provisions is required to cover losses derived from catastrophes. - For social security pension insurance, the previous model is maintained, calculating technical reserves with regulatory interest rates and demographic tables with prudential surcharges. Internal models for the SCR are not allowed for this type of insurance business. Special provisions are calculated to cover deviations due to mortality or investment issues. - Adaption of method to calculate technical provisions and the SCR and of the valuation basis were necessary: - Development of a statutory methodology for technical provisions and its parameters on which many companies' provisions valuation methodologies are based. - SCRCS is an information technology system that creates a common calculation methodology for the SCR but also prevents companies from using their own balance sheet projection methodologies and disincentivizes development of internal systems — described as having both benefits and issues. - Simplification in general purpose financial reporting by aligning financial statements with the valuation basis used for solvency purposes: investments valued at market and technical provisions as BEL plus RM. - Detailed secondary regulation for corporate governance was necessary to establish clear guidance on regulatory minimums and to serve as principal guide for companies’ corporate governance systems and supervisory system. ### Procedure and methodology for implementation - Maintain a close dialogue between regulator and industry to allow discussion, debates, and the transition to strengthen regulation. - Regulator must be able to listen to industry requests and either improve regulation based on them or clearly point out reasons for refusal. - Self-governance is a solvency pillar of risk-based supervision; substantive adoption requires continuous and open communication between regulator and industry. - Adoption of risk-based regulation requires significant resources for all participants; regulator should define and share clear and transparent planning. - Two identified stages: - Analysis and development stages: regulator analyzes and develops regulatory projects based on international principles and maintains communication with industry about direction or concerns. - Formal stage of implementation: generate a well-structured plan with objectives, deadlines, and methodologies to communicate to stakeholders. - Considerations: - Change from compliance-based to risk-based regulation is long-term; requires gradual transformation and continuity of supervisory resources and staff. - Gradual adaptation contributes to better adoption; regulator can make elements gradually more precise and robust. - Tolerance and regulatory forbearance in first years can allow companies to adapt, particularly relevant for corporate governance and risk management. - Continuity of regulator resources and staff allows development of skills and experience necessary for risk-based regulation. - Models and measurements should balance precision and simplicity according to participants’ characteristics; standard formula for SCR can contribute to sound management while internal models allow more precise measurement by sophisticated companies. - For technical provisions, regulators are recommended to generate statutory methodologies serving as starting points for company internal methodologies. ### Implementing Risk-Based Solvency in South Africa — overview and sector profile - Timeline and context: - As early as 2009, the then Financial Services Board (FSB) and the South African insurance industry embarked on the Solvency Assessment and Management (SAM) project. - Insurance penetration rates: - 13 percent for life and 3 percent for non-life business. - Market structure and size (as of end of March 2022): - About 160 insurers split almost equally between life and non-life insurers (including reinsurers and microinsurers). - Combined assets of about R4 trillion or $270 billion, with the life industry making up 92 percent or R3.6 trillion or $248 billion, about 65 percent of GDP. - Exchange rate referenced: R14.6038 for March 2022. - Ownership and market segments: - Insurers predominantly owned by local shareholders; some have direct ownership by foreign holding companies. - Introduction of branches of foreign reinsurers has been well received with two foreign reinsurers opting to use the branch structure. - Sector includes captive insurers (4), cell captive insurers (11), and microinsurers (10). - For microinsurers, the new framework recognized that a simpler regime with lower costs can increase transformation and address affordability of insurance products. - Distribution and product mix: - Insurance is conducted mostly as direct business, with a few direct insurers writing inwards reinsurance business. - Non-life bulk business measured by share of gross technical and written premiums is property and motor insurance. - For life insurers, investment lines of business account for most of total technical provisions; many risk products and combined products typically have negative technical provisions due to discounted cash flow and recognition of future profits as an asset. - Investment business is large due to tax benefits and significant private pension fund sector; much is unit linked where policyholder bears investment risk. - Assets and allocations: - Both life and non-life sectors showed steady increase in assets and policyholder liabilities over the years without notable change after SAM implementation. - Life companies allocate large share to markets through investment funds and lesser direct equity; low direct investments in corporate and government bonds; small share of liquidity on call. - Non-life companies hold large liquid assets and distribute investments across direct securities and indirect holdings via funds. - Composites invest mostly in government bonds, cash, and deposits. - Collective investment schemes (CIS) have increasing trend in assets; CIS asset allocation around 45 percent equities, 20 percent across debt and money market funds, and 28 percent in asset allocation funds. ### Prior to RBS — regulatory evolution in South Africa - Insurance Act of 1943 repealed and replaced by: - Long-term Insurance Act, 1998 (LTIA) and Short-term Insurance Act, 1998 (STIA). - 1998 legal framework: - Transitioned life insurers into an initial RBS regime for some major risk factors. - Introduced Board Notices as a new regulatory instrument, giving the FSB more powers and flexibility for technical requirements. - These powers were used to transition the non-life sector into an interim risk-based regime. *Source: wpiea2024240-print-pdf - 2015. There are valid issues to be considered when deciding on a transition period for both the regulator and* ### introduction of more prescribed governance requirements. ### wpiea2024240-print-pdf - introduction of more prescribed governance requirements ### Insurance Regulation - Pre-RBS legal framework had three layers: primary legislation (LTIA and STIA); regulations issued under LTIA and STIA; board notices issued under LTIA and STIA prescribing technical requirements (solvency and governance). - Three-pillar structure: - Pillar I: solvency requirements. - Pillar II: governance. - Pillar III: reporting and disclosures. - Pillar I — life sector: - Statutory valuation method (SVM) considered lapse, mortality, morbidity, expense, and investment for a one-year survival probability. - SVM allowed prescribed additional margins and discretionary reserves; required negative technical liabilities to be zeroised. - All assets backing policyholders’ liabilities and assets reserved for capital requirements were included in valuation and capital calculation. - Pillar I — non-life sector: - Initially akin to Solvency I: capital requirement equal to the greater of R5 million or 15 percent of premium income during a set twelve-month period. - Interim risk-based factor regime effective from January 1, 2012 (Board Notice 169 of 2011) prescribed valuation rules and capital adequacy calculations. - Interim regime prescribed: limitations on assets for group undertakings; risk-based methodologies for unearned premium and IBNR reserves (365th method and factor-based method); capital requirement composed of Basic Solvency Capital Requirements (BSCR) and Operational Risk capital requirements: - BSCR used factor-based approach for insurance risk, market risk and credit risk. - Operational Risk capital requirement calculated by applying factors to premiums and liabilities. - Governance (Pillar II) pre-SAM: - LTIA and STIA required insurers to have adequate organisation/management and to appoint fit and proper directors, managing executives, and a public officer; regulator approval required for certain appointments. - Life insurers required a statutory actuary with regulator approval; non-life insurers could be required to appoint a statutory actuary with regulator approval. - Mandatory audit committee with specific membership requirements and appointment of external auditor with regulator approval. - Interim governance and risk management framework introduced in Board Notice 158 of 2014, covering overall governance, board composition, risk management, internal control systems, and establishment of control functions. - Pillar III (reporting and disclosure) pre-SAM: - LTIA and STIA prescribed regulatory returns focused on summarized information; no formal public disclosure requirements—information could be obtained from the regulator on request for a fee. - Listed insurers required to publish annual financial statements (did not include statutory information by default). ### Insurance Supervision - PRSFI (Prudential Risk-Based Supervisory Framework for Insurers) introduced in 2010 focused on prudential matters; continuously updated insurers’ risk assessments. - Objectives: assess insurers’ risk profiles, risk management, financial position, and legislative compliance. - Eight key elements of PRSFI: - Risk-focused supervision. - Reliance on oversight risk management control functions (including internal audit). - Reliance on third parties (external auditors, statutory actuaries). - Producing regulatory risk ratings for each insurer. - Confidential, clear, timely communication of findings and requests. - Linking supervisory scrutiny level/frequency to insurer risk rating. - Promoting appropriate regulatory action aligned to insurer risk profile. - Facilitating benchmarks for industry best practice. - Supervisory resource and approach implications: - Supervisors required to apply sound judgment in risk identification/evaluation. - Staff conducting risk assessments needed detailed knowledge of insurer structure, organisation, and business. - Need for specialist support with detailed industry knowledge. - Supervisory tools: - Regular reporting: four quarterly submissions and an annual submission tied to insurers’ financial year-ends (balance sheet, capital requirements, supporting detail). - Offsite analysis: compliance checks and use of other published information (e.g., rating agency reports). - Onsite visits: confirm operational understanding and validate offsite risk ratings. ### Regulator (organisational structure and capacity) - Organogram components before RBS: - Legal Drafting team: one person (the Drafter), Head of Regulatory Framework Department. - Insurance Prudential Department: 25 staff (graduates specialising in financial management/accountancy), supervised small-to-medium insurers and reinsurers. - Insurance Groups Supervision Department: 19 staff (graduates specialising in financial management/accountancy), supervised larger life and non-life insurers and groups (group supervision conducted on a moral-suasion basis). - Actuarial Department: 11 staff reporting to the Chief Actuary. - Secretarial role: regulator performed secretariat for SAM structures and chaired/nominated key chairs/vice-chairs in project governance. ### Challenges (pre-SAM compliance gaps and supervisory limits) - Non-compliance and legislative constraints: - South Africa not fully compliant with IAIS Insurance Core Principles (ICPs). - Rules-based legislation limited proportionality and supervisory discretion. - Limited available information hindered comprehensive insurer risk understanding. - Limited legislated Pillar II requirements impeded assessment of governance effectiveness; ultimate financial soundness responsibility often placed with statutory actuary rather than boards. - Limited legal powers for enhanced supervision (e.g., group supervision relied on moral suasion). - No specific/detailed audit and disclosure requirements. - Unlevel playing field in reinsurance market. - Legal framework did not support financial inclusion and transformation. - Larger locally owned groups faced challenges expanding into developed markets due to non-equivalent or non-mutually recognised regimes. ### Journey to Risk-Based Solvency (RBS) - Primary driver: align South African regime with international insurance standards (IAIS ICPs) and modernise post-1998 legislation. - Intended benefits of RBS (ten items): - Quantify risks with sensitivity to insurer-specific risk mitigations. - Enhance risk management behaviour and practices. - Improve quality and availability of industry and FSB-submitted data. - Increase data granularity. - Better analysis of systemic risk. - Develop consistent robust process for assessment of significant owners across financial sector. - Reduce regulatory arbitrage between banking and insurance approaches. - Make Boards of Directors ultimately responsible for oversight of insurers/insurance groups. - Improve capital management linked to business profile and strategy. - Enhance governance framework, roles/responsibilities of control functions and key persons. - Addressed specific market practices via new legislation: level playing field for domestic/foreign reinsurers; microinsurance framework for financial inclusion and transformation; clearer differentiation between life and non-life; dedicated cell captive requirements; conversion of licences to remove dormant classes and reassess governance/financial projections. ### Project Scope and Objectives (SAM) - Project name: SAM (Solvency Assessment and Management). - SAM based on international developments; principle-based regulation using economic balance sheet and three-pillar structure. - Primary purpose: protection of policyholders and beneficiaries. - Additional objectives: - Align capital requirements with underlying insurer risks. - Develop proportionate, risk-based supervision for small and large insurers, including internationally active insurance groups. - Provide incentives for use of internal capital models (full and partial). - Promote financial stability. ### Project Organization and Stakeholder Engagement - SAM unit added to regulator: about five staff with actuarial skills, a project manager, and an administrative assistant. - Inclusive consultation via SAM governance structures: - SAM Coordinator nominated by each insurer to liaise with SAM structures and disseminate documents/minutes. - Steering Committee (chair nominated by regulator) acted as highest authority and sole decision maker; total members: 63. - Membership included insurers (larger groups), industry associations, South African Reserve Bank (Banking Supervision Department and Financial Stability Department), South African Revenue Services, Independent Regulatory Board of Auditors, South African Institute for Chartered Accountants, Actuarial Society of South Africa, National Treasury. - Three subcommittees representing three pillars; subcommittees set up task groups and working groups. - Document types and progression (governance framework): - Discussion Documents (under development). - Final Discussion Documents (accepted by task group, ready for further consultation). - Position Papers (approved by Steering Committee, published for public consultation). - Final Position Papers (no further public comments, accepted as final by Steering Committee). - Only Final Position Papers were considered in drafting legislation. - Regulator reserved right to issue Steer and Phase II documents explaining non-incorporation of certain recommendations and listing issues deferred beyond parliamentary processes. ### Quantitative Impact Studies (QIS) and Parallel Runs - QIS approach: - Three QIS launched to establish South African technical specifications; QIS1 based on EIOPA’s QIS4 technical specifications. - QIS1: first South African numbers, informed direction and impact. - QIS2: revised technical specifications addressing South African industry, market, demographics. - QIS3: close-to-final technical specifications incorporating most SAM structures’ suggestions. - Parallel runs: - Two parallel runs: Light Parallel Run (LPR) followed by Comprehensive Parallel Run (CPR). - LPR: voluntary for most insurers and some larger groups; used last QIS technical specifications; simplified aggregated reporting templates. - CPR: mandatory for all insurers and extended to groups under group supervision; required full adherence to SAM Technical Specifications and quarterly/annual reporting using prescribed templates. - Purpose: operationalise calculation/reporting, prepare industry for SAM implementation, fine-tune technical specifications. - Outcome: ongoing calibration culminated in final regulations in the Financial Soundness Standards. ### Timeframe and Key Milestones - Project formally commenced January 2010; legislation enacted in 2017; implementation effective July 1, 2018. - Key interim deliverables: - More than 117 Position Papers published for industry comment. - LPR and CPR before implementation. - Three QIS and two Qualitative impact studies and follow-ups. - Legislative development and consultation using discussion documents and position papers. - Factors lengthening timeframe: - Human resource constraints at regulator and industry. - Concurrent development and implementation of Twin Peaks regulatory architecture requiring primary legislation changes and longer parliamentary processes. - Delay in EU Solvency II final implementation influencing South African decisions. ### Challenges in Transitioning from Compliance-based Supervision - Industry challenges: - Significant project investment in time and money. - Data availability and quality for more granular reporting. - Automation and system development deferred until SAM specifications stabilised. - Strain on scarce skilled staff; heavy consultant reliance. - Need to upskill Boards of Directors for greater responsibilities. - Increased judgment in a principles-based regime made business decisions more complex and slower. - Perceived greater regulatory intrusiveness (more frequent data, new supervisory questions). - Regulator challenges: - Attracting and retaining appropriately skilled staff. - Effective change management for non-project staff. - Understanding diverse insurer business models. - Managing and analysing large volumes of QIS/LPR/CPR data to derive policy recommendations. - Ensuring consistency in supervisory application under a judgment-based, proportionate approach. - Lack of supervisory guidance notes during early implementation. - Absence of a SupTech technical solution increased staff burden. ### Key Takeaways and Lessons Learned - Success factors: - Clear and detailed project plan. - SAM structures providing a single point of reference and consistent secretariat support. - Mandatory nomination of SAM coordinators fostering industry buy-in and co-ownership. - Dedicated allocation of appropriately skilled regulator staff to SAM structures. - Regular stakeholder communication: information letters, annual updates, newsletters. - Parallel runs (LPR and CPR) were invaluable for readiness, upskilling, and progressive refinement of requirements; CPR acted as an effective non-official transition period. - Requirement for insurers to commence ORSA via mock ORSA to familiarise boards and management; provided the regulator with a first-time ORSA-type document. - Areas for improvement identified by the FSB: - Greater capacity to manage and analyse project data. - Broader involvement of different regulator teams to share exposure to the new regime. - Preserve institutional knowledge and policy reasoning during transition from project to operational phases. - More conservative initial timelines; multiple extensions were needed. - Effective expectation management of stakeholders throughout the project. *Source: IMF staff summary of the provided content.* ### Conclusion and Advice ### Conclusion and Advice ### On buy in - Vital to get industry buy-in; the project is "too big and resources too scarce to try and do it alone." - Do not exclusively rely on consultants, though consultants "usually have a big part to play." - Industry buy-in is reflected in participation by non-consultants. - Create reporting and working structures (task groups, working groups, steering committees with sub-committees) populated by the right persons. - Separate technical work (done by technical teams) from formal and strategic decision makers. - Regulator should set up a dedicated project team with technical and project admin people. - Top management buy-in and participation is "mission critical." ### On how and where to start - Start with an existing framework (example frameworks cited: "Insurance Capital Standard (ICS) or Solvency 2 or SAM") and customize to local conditions, products, market features. - Keep things "as simple as possible and only as complicated as necessary." ### On templates - Design reporting templates to be focused and value adding; avoid overly burdensome templates. - Ensure template usage (types of analysis and reports it could feed) matches their design. - Spend time setting the context behind the data elements to be collected. - Invest significant time in improving data quality of collected elements. - Ensure consistency by defining data elements as far as necessary and designing appropriate data validations. ### On documents and documentation - Documentation should include the reasoning and context behind requirements. - Documentation should include exact processes, methodologies, and data (including details of source, types, etc) used for any calibration. ### On transition process - Transitioning to an RBS regime is iterative and requires: communication, consultation, testing, review, amending, and repetition. *IMF WORKING PAPERS Implementing Risk-Based Solvency for Insurers — Conclusion and Advice; Annex I. Kenya—Selected Details of RBS Implementation* ### Annex I. Kenya — Pillar 1: Implementation highlights and key parameters - RBS regulations published in 2017 with intended two-year transition period for planned implementation in 2019; effective date changed to June 30, 2020 to allow more time because of impact of COVID 19 pandemic. - RBS in Kenya requires a total balance sheet approach recognizing interdependence between assets, liabilities, regulatory capital requirements and capital resources. - Insurance law requires market consistent valuation of assets and liabilities. - Financial statements required to be prepared in accordance with International Financial Reporting Standards (IFRS). - IRA issued circular in 2019 on implementation of IFRS 9; all insurers required to fully adopt, implement, and comply with IFRS 9 and all provisions under the Expected Credit Loss (ECL) model for all the outstanding premiums and other receivables as at the end of the year 2019. - IRA working on implementation of IFRS 17; IRA issued a circular focusing on level of aggregation, determination of discount rates and risk adjustment. - Level of aggregation: insurers required to create portfolios based on classes and sub classes of insurance business as defined in the Insurance Act. - Discount rates: regulator allows bottom-up or top-down approaches; insurers must provide justification and details of inputs. - Risk adjustment: IRA has recommended insurers should adopt at least 75 percent confidence level for risk adjustment. - Capital requirements based on potential adverse changes in qualifying capital resources from unexpected changes or events. - RBS provides holistic approach and incentives for appropriate risk management infrastructure and prudent practices. - Capital adequacy ratios and regulatory thresholds: - Insurers required to hold 200 percent of a prescribed capital requirement (PCR); 200 percent is the level above which regulator will not impose any financial sanctions. - Insurance Act Section 41(1) requires insurers to always hold a minimum capital adequacy ratio (CAR) of at least 100 percent. - Failure to comply with subsection 41 (1), (2) or (3) is taken to be inability to pay debts within the meaning of Insolvency Act; Section 41(3) links to liquidation provisions in section 123. - Capital resources qualification criteria: loss absorbency, subordination, availability, permanence, absence of encumbrances and mandatory servicing costs. - Capital resources ranked into two tiers: - Tier 1: - issued and fully paid up ordinary shares of the insurer; - share premium; - statutory reserves maintained by the insurer; and - profits retained by the insurer - Tier 2: - irredeemable preference shares issued by the insurer; - capital loan stocks and other similar capital instruments held by the insurer; - subordinated loans subject to approval by the Authority; - convertible preference shares issued by the insurer; - revaluation reserves - general reserves held by the insurer - Items deducted from capital resources during computation of capital adequacy include: - goodwill and other intangible assets in the name of or held by the insurer; - deferred tax assets of the insurer; - assets pledged to support the credit activities obtained by an insurer or for other purposes; - assets over their concentration limits; - all credit facilities granted by an insurer and secured by the insurer’s own shares; - prepayments made by the insurer; - the fixed assets of the insurer; - receivables from other insurers; - inventory; and - other assets held or owned by the insurer as may be determined by the IRA. ### Annex I. Kenya — Pillar 1: Risk categories, approaches, and technical methods - Key categories of risk considered for capital requirements: insurance, market, credit and operational. - Kenya uses a deterministic approach to capital requirement, applying both factor-based approach and stress approach. - Factor-based approach: method to calculate capital requirements based on specified factor and a value of the balance sheet or income statement. - Stress-based approach: method to calculate capital requirements based on difference between cash flows before and after stress scenario. - Data limitations: Kenya adopted readily available information such as loss ratios, combined ratio, asset performance data due to lack of data granularity, market liquidity and capacity. - Where stress approach is used, projections of stressed cash flows should be conducted at same level of granularity as pre-stress cash flows to ensure consistency. - Factor-based approach for premium risk and claims risk: factors are set percentages of exposure measure. - Factors determined by computing the Tail Value at Risk (TVaR) at a confidence interval of 95 percent over one year time horizon of loss ratios using 10 years data. - Table (components of capital requirement) — categories and approaches (as implemented): - Insurance Risk: - Mortality risk/Longevity risk — Stress-based approach - Morbidity/disability risk — Stress-based approach - Expense risk — Stress-based approach - Lapse risk — Stress-based approach - Premium risk — Factor-based approach - Claim reserve risk — Factor-based approach - Market Risk: - Interest rate risk — Stress-based approach - Equity risk — Factor-based approach - Property risk — Factor-based approach - Currency risk — Factor-based approach - Concentration risk — Factor-based approach - Credit Risk — Factor-based approach - Operational Risk — Factor-based approach - Mortality and longevity risks captured via stress approach; factor-based approach considered inappropriate because risk is not proportional to balance sheet amount for many products. - IRA proposed simple stress where best estimate liability of mortality risk is increased and decreased by specified stress scenario depending on insurance product; mortality rate increased for risk products and decreased for annuities. - Stress-based approach required reliance on actuarial functions of insurers; initial challenges included inconsistent granularity of stressed cash-flow projections across products. - Lapse risk charge: calculated based on increase in insurance liabilities after subjecting lapse rates to shocks; IRA requires insurers to shock lapse rates up and down at a specific percentage. - Expense risk charge: calculated by applying an upward shock to expense assumptions; IRA requires insurers to apply the percentage shock on the expenses. - Market risk treatment: - Direct impact on balance sheet items for equity, real estate and currency exposures. - Interest rate risk charge: prescribed stress approach using specified up and down interest rate stress scenarios; the most significant impact on insurer’s net assets taken as the interest rate risk capital. (Net assets refer to assets less liabilities.) - Credit risk: considers direct impact on balance sheet items for loans, reinsurance assets and receivables; factor-based approach with factors determined by computing TVaR at confidence interval of 95 percent over one year time horizon of default rates using 10 years data. - Operational risk: computed as a proportion of the Market, Insurance and Credit risk or the volume of premiums. - Diversification: Kenyan model uses square root approach to aggregate risk charges to incorporate diversification among major risks. - Risk-based capital calculated as square root of sum of squares of capital required for insurance risk, market risk and credit risk with addition of capital required for operational risk. - No diversification recognition between operational risk and other risks. ### Annex I. Kenya — Pillar 2: Governance and risk management - Every insurer required to have authorized control functions for risk management, compliance, actuarial and internal audit. - Control functions required to be independent, free from senior management influence, and report directly to the board and its sub-committees. - Corporate governance provisions emphasize separation of ownership, management, and administration. - Regulators describe three lines of defense: internal audit, control functions (risk and compliance) and senior management; these are separated within the regulation. - Insurers required to have a risk management framework, including a risk appetite statement, approved by the board. - Law requires a functional and well-resourced risk management function capable of assisting insurer to identify, assess, monitor, mitigate and report on key risks and promote a sound risk culture. - Implementation strategy steps summarized (process to implement effective risk management): - Draft Risk Management Framework: - Outline approach to implement requirements - Identify gaps - Create work streams to fill gaps - Establish reporting lines - Hold an Internal Risk Workshop: - Define and document risks appetite - Identify risk management policies that need to be drafted - Determine governance structure given insurer size and complexity - Implement and Embed Risk Management Framework: - Risk reporting - Develop risk dashboard - Actuarial function guideline introduced Financial Condition Report (FCR), analogous to a simplified ORSA under Solvency II. - FCR produced annually and signed off by the appointed actuary (key difference from ORSA, which is a management responsibility). - FCR quality improving; subject to detailed review by the IRA. - Signing by actuary intended for independence. - Management teams and boards are starting to engage with FCR; exercise remains mostly for compliance at present. - Most insurers do not currently have underlying processes to develop a quality FCR; expected to improve over time. - FCR specific requirements summarized in Figure 3 (requirements include data requirements, business overview, recent experience, liability valuation, asset and liability management, capital management & capital adequacy, premium adequacy, reinsurance arrangements, risk management). ### Annex I. Kenya — Pillar 3: Reporting and disclosure - Pillar 3 distinguishes qualitative reporting and quantitative reporting. - Qualitative reporting includes the Financial Condition Report (FCR), which is confidential to the IRA. - Quantitative reporting includes technical provisions, capital adequacy reports and statutory returns on financial data. - Statutory returns provide detailed breakdown of assets, liabilities, income, and expenses. - Disclosed reports such as technical provision report provide valuation results and assumptions used. - Regulator requires qualitative and quantitative reports to be submitted on an annual and quarterly basis. - Regulator requires companies to publish their statement of financial position and income statement annually in at least two national newspapers of wide circulation. - Companies required to disclose loss ratio, combined ratio, expense ratio and capital adequacy ratio annually in national newspapers. - Kenya implemented Electronic Regulatory System (ERS): - ERS is a web-based application for companies to submit regulatory requirements and requests. - System enables financial data collection, financial data analysis, regulatory requests and approval, licensing, and onsite inspections. - Quantitative reporting templates (QRTs), the FCR and the technical provision or actuarial reports are reported privately to the regulator. - Regulator produces industry statistics on a quarterly and annual basis; statistics posted on regulator website. - Qualitative Pillar 3 reporting and disclosure requirements providing commentary over and above numbers are not published publicly in Kenya. *IMF WORKING PAPERS Implementing Risk-Based Solvency for Insurers — Annex I. Kenya—Selected Details of RBS Implementation* ### Annex II. Mexico—Selected Details of RBS ### Annex II. Mexico—Selected Details of RBS ### Implementation — Pillar 1 - Quantitative requirements of the LISF and CUSF cover: - Valuation. - Calculation of the SCR. - Determination of admissible own funds (AOF) according to quality. - Technical provisions required to be calculated by companies as the sum of BEL and RM. - SCR calculation is based on a VAR measure of change in own funds over a one-year time horizon with a confidence of 99.5 percent. - SCR must be covered by AOF divided into three levels according to quality. - Each company must have its own investment policy, approved by the board and consistent with the nature, duration, and currency of its obligations and in line with its risk appetite. ### SCRCS system (CNSF) - The SCRCS is an information technology system developed by the CNSF that companies use to calculate the SCR based on the standard formula. - The SCRCS is an autonomous system that does not require licensing for companies. - The system is shared only with other government authorities, with insurers and with their representative associations, distributed through the official distribution systems of the CNSF, which operate on the Internet. - The SCRCS contains in its programming code the risk methodologies defined in the regulation. - The code is available to entities to which the SCRCS is shared for analyses, use in risk management processes, or as the basis of an internal model. - Parameters used by the SCRCS to calculate the SCR are generated and updated by the CNSF. - Risk parameters remain constant for long periods to provide stability and temporal consistency to risk measurement. - During the first three years of implementation, these had no changes to allow companies to adapt to the new SCR. - In 2019, the CNSF made a comprehensive review of the risk parameters that resulted in adjustments, made in coordination with the industry. - The level parameters are adjusted monthly, the frequency indicated by the LISF for the calculation of the SCR, and are shared by the CNSF with stakeholders. - To calculate the SCR, companies must enter into the system details of investments, policies, provisions and reinsurance contracts, among others, through which the SCRCS generates 100,000 simulations of the projected balance sheet in a year. - The SCR is calculated as the VAR at 99.5 percent of the difference between the own funds projected for one year minus the own funds observed on the reporting date. ### Calibration of parameters and data sources - Underwriting and claims databases and historical financial market data enabled calibration for major balance-sheet components: - The underwriting and claims databases collected by the CNSF since 2007 allowed for calibration of parameters of the standard formula for modeling underwriting risks. - For market risk parameters, reliable data were available for government interest rates, exchange rates and financial indices with more than 10 years of daily information. - For spread risk, there was no historical information on interest rate curves by credit rating for the Mexican market; these parameters were calculated using the EIOPA Solvency II parameters. - For credit risks, transition matrices developed by credit agencies were used. - For operational risk, there was no information, so the EIOPA Solvency II formula and parameters were used. ### Valuation basis, accounting treatment, and transitional measures - Valuation basis for financial statements and solvency are the same: - Investments are valued at market. - Technical reserves are valued as BEL plus RM. - This methodology generates significant volatility in insurers' financial performance, particularly for firms with a high percentage of technical provisions from long-term life products. - A valuation like Fair Value through Other Comprehensive Income as set out in IFRS 9 and IFRS 17 is made to prevent temporary interest-rate variations from inappropriately affecting the income statement, producing: - Maintenance of a single balance sheet and prevention of companies being affected due to temporary variations in interest rates. - Operational complexity by doing a double calculation of technical provisions of long-term products: one with respect to interest rates observed at the time of valuation and another with respect to interest rates observed at the time of issuance of the policy. - Greater attention from boards and senior management to the balance sheet (previously focus was on the income statement). - A 24-month period was established to gradually phase in the impact on the valuation of technical provisions to allow companies to update and adjust their technical provisions methodologies. This temporary agreement was only valid if the impact represented a decrease in the value of the technical provisions. - Two main rules: - The recognition had to be done in a uniform way, that is, one twenty-fourth each month. - Companies could decide at any point in that period that they wanted to do full impact recognition. ### Impact on industry capital - The adoption of the regulation brought a benefit to the industry that represented an increase in its capital of 25.4 billion pesos between December 2015 and March 2016. - This impact was mainly due to calculation of technical provisions with a market consistent valuation and without excessive prudential margins, as well as market valuation of the investments. - The SCR went from 55.5 billion pesos in December 2015 to *Annex II. Mexico—Selected Details of RBS (IMF Working Paper excerpt).* ### 62.4 billion pesos in March 2016. Therefore, the regulation opened an important space in the capital of ### 62.4 billion pesos in March 2016. Therefore, the regulation opened an important space in the capital of ### Quantitative impact of LISF implementation (Table summary and March 2016 effects) - Asset: December 2015 = 1188.8; March 2016 = 1245.8; Difference = 56.9 (Current billion pesos). - Liabilities: December 2015 = 1029.5; March 2016 = 1061.0; Difference = 31.5 (Current billion pesos). - Capital: December 2015 = 159.3; March 2016 = 184.4; Difference = 25.4 (Current billion pesos). - SCR: December 2015 = 55.5; March 2016 = 62.4; Difference = 6.9 (Current billion pesos). - In March 2016, the impact on technical provisions due to the application of the valuation methodologies of the new regulation was a gross decrease of 14.8 billion pesos. - The net impact, when also considering the impact on reinsurance recoverable, represented a decrease of 10 billion pesos compared to the previous regulation. - Part of this decrease was compensated with an increase of 6.9 billion pesos in the SCR. - The industry on average closed 2021 with a solvency margin of 300 percent. ### Technical provisions, valuation methodology and rates - Under the new regulation technical provisions: moved from a sufficiency valuation with prudential margins to a valuation of fulfillment of obligations under expected conditions (BEL plus RM). - SCR objective: cover potential unexpected losses within the balance; prudential margins originally in technical reserves are transferred to the SCR. - In March 2016 nominal market rates: 28-day term = 3.8 percent; 10-year term = 6 percent; regulatory valuation rate = 5 percent. - The decrease in technical provisions was limited by: a high percentage of long-term provisions and market rates being low and similar to those used in the previous regulation. - Note on previous prudential valuation rates: when established they were low compared to the market; example December 2004 nominal rates were 8.5 percent for 28-day term and 9.7 percent for 10-year term. By the time LISF was implemented (around 2015–2016) that was no longer the case. ### Transition provisions and affected companies - A period of five years was established for companies that sold private annuity products (other than those of social security) to fully reflect the new requirements in technical provisions in case the impact represented an increase. - These private annuity products are very rare; only one company was affected by this exception. - Pension companies do not fall into this exception since their products come from social security; for them the new regulation brought minimal quantitative changes. ### Pillar 1 — Quantitative regulatory changes (prior vs LISF/CUSF) - Technical provisions (LISF/CUSF): - Calculated as BEL plus RM. - BEL = present value of expected future cash flows. - RM = cost of capital relative to the SCR necessary to cover insurance obligations throughout their term; cost of capital set at 10 percent. - Separation into homogeneous risks, at least by LOB. - Methodology developed under international actuarial practices standards and certified by a certified actuary. - Catastrophe provisions: no material changes with respect to previous regulation. - SCR (general formula or internal models under CNSF authorization): - Calculated monthly using the SCRCS. - CRTFRI = VAR with a confidence of 99.5 percent on change in own funds over a one-year time horizon; modeled with 100,000 scenarios. - SCR for traditional insurers = sum of CRTFRI, CRPML, CROCR, CROR (no diversification between these requirements). - CRPML: no material changes; internal models not allowed for this requirement. - CROCR: based on banking regulation by CNBV for credit products to avoid regulatory arbitrage. - CROR: based on the EIOPA Solvency II formula; calculation based on volume of operations and last-year growth. - AOF (available own funds) rules: - Level 1 must represent at least 50 percent of the SCR. - Level 2 must represent at most 50 percent of the SCR. - Level 3 must represent at most 15 percent of the SCR. - Investments and valuation: - Fixed-income instruments valued at market; pension companies may continue valuing as held to maturity. - Variable income instruments valued at market. - Real estate valued by a property appraiser. - Investments covering technical provisions: - Coverage calculated over net value (technical provisions minus reinsurance recoverable). - Limits by type of instrument and counterparty (relaxed relative to previous regulation), except government investments can cover all technical provisions. - Minimum limit of liquid instruments required for each type of provision unchanged. ### Pillar 2 — Corporate governance and risk management enhancements - Board responsibilities strengthened: responsible for corporate governance system; minor changes vs previous regulation. - Board constitution requirements consistent with financial system: - Members between 5 and 15. - At least 25 percent must be independent with established criteria. - Fit & Proper criteria for appointment. - ERM system and ORSA: - Requirement to establish an Enterprise Risk Management (ERM) system. - ORSA must be prepared at least annually, reviewed and approved by the board; must include compliance level of ERM, solvency needs analysis considering risk profile and tolerance limits (based on the dynamic solvency test), compliance with investments/technical provisions/reinsurance/SCR, degree to which risk profile differs from SCR assumptions, and proposals to address deficiencies. - Internal functions and controls: - Clear establishment of functions for risk management, internal control, internal audit and actuarial. - Internal audit: specific, objective, independent; reviews application of board policies, regulatory compliance, adequacy of internal control. - Actuarial: design and technical feasibility of products, calculation and valuation of technical provisions, support in risk modeling and SCR; operate under actuarial practice standards. - Outsourcing: - Policies and procedures to guarantee compliance when contracting third parties. - Services that can be contracted include underwriting, customer service, risk management, asset management, actuarial, information systems and technology. - Risk, assets and actuarial management services can only be complementary or supportive. - Internal control and internal audit services cannot be contracted to third parties. - Committees: - Objectives, obligations and rules for committees strengthened; LISF adds committees for audit, investments, reinsurance, underwriting and communication and control. - Dynamic solvency test: no material changes; companies performed annual prospective stress-scenario solvency assessments projecting 3 to 5 years. - External auditor: audit and certification requirements unchanged; auditor must be certified, independent, rotation at least every 5 years. ### Pillar 3 — Disclosure and transparency improvements - Requirement to disclose a Report on Solvency and Financial Condition (RSFC) with: - Qualitative information: business conditions and performance; corporate governance; risk profile; solvency assessment; capital management. - Quantitative reporting: technical provisions; investments; SCR and AOF; claims; reinsurance; performance; solvency margin and coverage of regulatory requirements. - Disclosure of the insurer's credit rating by a rating agency authorized by the CNBV introduced. - Financial statements and notes: former requirements largely unchanged; companies must publish audited financial statements in a national newspaper and in the Official Gazette of the Federation, adopted in accordance with international financial reporting standards. - External auditor report on financial statements must be disclosed; no material change from previous regulation. *Source: IMF WORKING PAPERS Implementing Risk-Based Solvency for Insurers (excerpt).* ### Annex III. South Africa—Selected Details of RBS ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### 1. INTRODUCTION AND PURPOSE - Outline the purpose of the document. ### 2. INTERNATIONAL STANDARDS: IAIS ICPs - Outline the relevant IAIS ICP. - 106 Implied Volatility Risk - 107 Own Risk and Solvency Assessment - Further Guidance - 108 Life SCR – Retrenchment Risk - 62a & 108a - Errata to Final Position Papers 62 (v 5) and 108 (v 4) Simplifications for Short Contract Boundaries - 109 Solvency Capital Requirement structure - 112 Loss-absorbing capacity of deferred taxes - 113 The calculation of tax in technical provisions - 114 Simplifications - IMF WORKING PAPERS Implementing Risk-Based Solvency for Insurers - INTERNATIONAL MONETARY FUND - 105 - [IAIS is the international standards setting body for insurance supervisors. The FSB as a member of the IAIS aims to adhere to these standards]. ### 3. EU DIRECTIVE ON SOLVENCY II: PRINCIPLES (LEVEL 1) - Outline the relevant Solvency II Level 1 principles. - This section should also explain how the relevant Solvency II Level 1 principles were incorporated into input for SAM primary legislation as well as any adaptations (if any). ### 4. MAPPING ANY PRINCIPLE (LEVEL 1) DIFFERENCES BETWEEN IAIS ICP & EU DIRECTIVE - Explain differences, if any, between the IAIS ICP and Solvency II Level 1 principles. ### 5. STANDARDS AND GUIDANCE (LEVELS 2 & 3) - This section should explore the options available, in terms of different approaches to achieving the same principles/outcomes outlined above. - Guidance on various approaches can be found in: - 5.1 IAIS standards and guidance papers - 5.2 CEIOPS CPs (consultation papers) - 5.3 Other relevant jurisdictions (e.g. OSFI, APRA) - [It is not expected that all jurisdictions should be considered, only those that are particularly relevant in the South African context]. - 5.4 Mapping of differences between above approaches (Level 2 and 3) ### 6. ASSESSMENT OF AVAILABLE APPROACHES GIVEN THE SOUTH AFRICAN CONTEXT - 6.1 Discussion of inherent advantages and disadvantages of each approach - Consider matters such as proportionality and efficiency (including cost & resources implications), flexibility, SA’s unique circumstances (e.g. skills shortage) and any other appropriate matters. - 6.2 Impact of the approaches on EU 3rd country equivalence - 6.3 Comparison of the approaches with the prevailing legislative framework - 6.4 Conclusions on preferred approach ### 7. RECOMMENDATION - It is important that the recommendation take into account the issue of proportionality. - It is proposed that the recommendation be split into essential requirements (recommendations on minimum requirements that should apply to all insurers) and advanced requirements (recommendations that should apply to larger, more complex insurance groups). *Source: wpiea2024240-print-pdf - EXECUTIVE SUMMARY* --- _Source: https://www.imf.org/-/media/files/publications/wp/2024/english/wpiea2024240-print-pdf.pdf_