## _cr1556 ## Source details **Canonical URL:** [_cr1556](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1556.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1556.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1556.pdf.json) --- ### Executive summary — role, size and reforms - Assets held by insurers accounted for nearly 23 percent of financial sector assets in South Africa in 2013. - Licensed entities as at end-2013: 78 long-term insurers; 87 short-term insurers; 6 reinsurers; 11 captive insurers (excluding cell captive insurers). - Long-term insurance concentration: top five conglomerates had over 73 percent of total industry assets in 2013; top 10 life insurers capture 88 percent of the market; Old Mutual Life Assurance Company (South Africa) Limited captures over 22 percent of market share. - Institutional reform trajectory: - Proposed shift to Twin Peaks: prudential supervisor to be part of SARB; FSB-SA to be transformed into a dedicated market conduct supervisor; Government (Minister of Finance) to retain policy framework responsibility. - Public consultation on Twin Peaks February 2013; transition in two phases (supporting legislation first phase (2013/14); broader harmonization second phase). - Recent/proposed regulatory enhancements: - Formal group supervision framework. - Risk-based Solvency Assessment and Management regime (SAM), sharing broad features of Solvency II. - Treating Customers Fairly (TCF) approach for conduct. - Formal legal authority for FSB-SA to supervise insurance groups and direct powers over group holding companies. - Explicit regulatory requirements on corporate governance and risk management (interim Board Notice). - Areas requiring further fine-tuning (selected): - Proportionate licensing for friendly societies and clearer boundaries between medical schemes and insurance products. - Priority ranking for policyholders in winding-up. - Enhance group supervision with explicit intra-group transaction requirements (e.g., intra-group reinsurance). - Explicit conduct of business requirements on product development and supervisor authority to require notification/prohibit products. - Public disclosure requirements for all insurers and clear legal authority to supervise compliance. - Address remaining legal deficiencies in the AML-CFT regime. - Develop appropriate indicators for assessing systemic risk of insurers and reinsurers. - Establish crisis management and resolution framework for cross-border crises. ### Market structure and performance — size, penetration, concentration, distribution - Importance and scale: - Long-term (life) insurance assets = 64 percent of GDP at end-2013. - Short-term (non-life) insurance assets = 3.4 percent of GDP at end-2013. - Life insurance penetration (premiums/GDP) = 21.6 percent. - Approximately 50 percent of long-term insurers’ balance sheets are composed of retirement savings. - Licensed insurers (counts by year): - Life (long-term): 2009: 80; 2010: 80; 2011: 80; 2012: 79; 2013: 78 - Non-life (general): 2009: 91; 2010: 89; 2011: 86; 2012: 89; 2013: 87 - Composite: 2009–2013: 4 (each year) - Reinsurance: 2009–2011: 7; 2012: 7; 2013: 6 - Captive: 2009–2013: 11 (each year) - Total: 2009: 193; 2010: 191; 2011: 188; 2012: 190; 2013: 186 - Market dynamics: - Total number of licensed insurers declined marginally since 2009; three small insurers failed in past 5 years. - One failed insurer resulted in estimated policyholder losses in the range of R20 million. - Gross written premiums increased by 9.6 percent in 2012. - Distribution and intermediaries: - Approximately 10,992 licensed FSPs as at March 31, 2014 (down from 12,051 in 2011). - Brokers dominant distribution channel; in-house agents popular for individual life sales; bancassurance significant in urban centers. - Policyholder behavior: - High lapse ratio around 50 percent (percentage of new policies issued over the period). ### Assets and liabilities — long-term asset mix and technical provisions - Long-term asset mix (Rand million; percentages where provided) - 2011 total assets: 1,285,756 (100%) - Cash and Deposits 143,269 (11%) - Government & semi-government 147,131 (11%) - Equities and CIS 623,864 (49%) - Debentures and loan stock 112,544 (9%) - Immovable properties 58,822 (5%) - Fixed Assets 135,247 (11%) - Debtors 64,879 (5%) - Other Assets 2,243 - 2013 total assets: 1,648,274 (100%) - Cash and Deposits 125,846 (8%) - Government & semi-government 111,038 (7%) - Equities and CIS 1,071,350 (65%) - Debentures and loan stock 187,716 (11%) - Immovable properties 48,702 (3%) - Fixed Assets 2,348 - Debtors 99,031 (6%) - Asset trends: - Total assets increased 13.2 percent in 2012. - Equities and CIS constituted 65 percent of total assets as at end-2013, up from 49 percent in 2011. - For unit-linked business, policyholders assume market risks of underlying portfolios. - Long-term technical provisions (Rand millions) - 2009: Technical provisions 1,211,104; Participating policies 338,075; Non-participating policies 357,978; Unit-linked policies 515,051; Gross premiums 310,560 - 2010: Technical provisions 1,350,640; Participating 357,460; Non-participating 388,266; Unit-linked 604,914; Gross premiums 289,032 - 2011: Technical provisions 1,454,806; Participating 256,517; Non-participating 519,309; Unit-linked 678,981; Gross premiums 316,273 - 2012: Technical provisions 1,650,788; Participating 275,198; Non-participating 582,525; Unit-linked 793,065; Gross premiums 361,124 - Guarantees and product features: - Investment business with guarantees in 2012 ≈ R45 billion or 3 percent of total policyholder liabilities. - With-profit portfolios = 14 percent of total liabilities. - Legacy minimum rates typically in the 3 percent to 5 percent range; some products sold with a guarantee of around 7 percent. - Some policies reset the capital guarantee every five years. ### Short-term insurance profile and performance indicators - Short-term asset allocation and exposures: - Short-term insurers: approximately 38 percent weighted in cash and deposits and South African government securities. - 38 percent of total assets of short-term insurers deposited or invested in banks including the Big-4 banks. - Significant use of reinsurance exposes sector to reinsurer credit risk. - Sector composition of gross premium income (2013): - Motor and property combined = 86.7 percent of total gross premium income for short-term sector. - Performance indicators (Table 7: 2012, 2013) - Net premiums increase (year over year % change): 4, 7 - Claims or Loss ratio: 58, 58 - Combined ratio: 89, 89 - Management Expenses: 23, 23 - Commission: 8, 8 - Underwriting profit (loss): 11, 11 - Investment Income ratio: 16, 17 - Surplus asset ratio: 55, 55 - Capital Adequacy Ratio (median): 1.6, 1.9 - Observations: - Management and commission expenses marginally down; loss ratios stabilized around 58 percent. - Underwriting profits stabilized but remain susceptible to pricing, reserving and catastrophe risk. ### Solvency, capital adequacy and stress testing - Solvency ratios (Assets Available Over Required) - Life (Available capital resources over Minimum Capital Requirement): 2011: 19.53; 2012: 18.49; 2013: 15.85 - Life (Available capital resources over Prescribed Capital Requirement): 2011: 3.44; 2012: 3.56; 2013: 3.62 - Short-term (Available capital resources over Minimum Capital Requirement): 2011: 68.68; 2012: 12.89; 2013: 4.80 - Short-term (Available capital resources over Prescribed Capital Requirement): 2011: 3.83; 2012: 2.39; 2013: 1.99 - Free assets to Capital Adequacy Requirement — number of life insurers covering ranges (2012, 2013) - Covered 0–1 times: 2012: 0; 2013: 0 - Covered 1–2 times: 2012: 28; 2013: 20 - Covered 2–5 times: 2012: 31; 2013: 34 - Covered 5–10 times: 2012: 16; 2013: 10 - Covered 10+ times: 2012: 2; 2013: 5 - Median: 2012: 2.6; 2013: 2.8 - *Excluding information on reinsurers, run-off companies under curatorship or liquidation.* - Observations and stress testing: - Long-term insurers’ solvency position relatively stable; short-term insurers’ ratios decreased since 2011 under enhanced capital requirements. - Five large conglomerate life insurers have an average of 3.4 times the free assets to capital adequacy requirement. - Coverage ratios expected to be lower under SAM as denominator increases with more focus on available capital. - FSB-SA conducts stress tests; a market-risk-only stress found only two small insurers unable to remain solvent under the combined scenario. ### Valuation, margins and SAM transition - Current valuation practices: - Long-term: discounted cash flow basis with best-estimate assumptions and compulsory/discretionary margins; compulsory margins range 7.5 percent to 25 percent applied to best-estimate assumptions (mortality, morbidity, medical, lapses, terminations, surrenders, expenses, expense inflation, charge against investment returns). - Short-term: technical provisions not discounted for statutory accounting; prescribed development factors for IBNR with full development over six years. - SAM Framework valuation approach (summary): - Economic balance sheet at market-consistent values; insurance liabilities = probability-weighted present value of future cash flows plus explicit risk margin to reflect cost of capital. - Default discounting: government bond rates; may allow swap rates for specific components. - Embedded options and guarantees explicitly provided. - Insurer’s own credit standing not taken into account. - Assessment: valuation regime under SAM will be based on economic valuation with explicit margins over current estimate for technical provisions. ### Supervisory framework, practice and resource implications - Supervisory approach: - FSB-SA uses a risk-based supervisory framework (PRSFI) with RADs and composite risk ratings; supervisory cycle target: at least one on-site visit every three years per insurer/reinsurer. - 2013/14 on-site activity: 80 market conduct and prudential on-site visits; 33 CoB on-site visits. - On-site findings included poor governance (especially small insurers), poor outsourcing oversight, undue reliance on individuals, and IT system challenges. - On-site process and follow-up: - Structured workflow: pre-notice letter, draft RAD, information request, query letter, on-site inspection, peer review panel, management letter, and insurer remedial responses assessed. - FSB-SA completed two prudential group holding company on-site visits in 2012. - Supervisory resources: - Insurance Division staff as of end-March 2014: one DEO, management team of 7 heads of departments, 59 staff members and 10 administrative staff. - Actuarial Insurance Team: three qualified actuaries and 10 actuarial students. - FSB-SA allocates about 26 percent of overall budget to supervision of insurers and about 33 percent to regulation and supervision of FSPs; about 1.5 percent of HR budget towards training. - Assessors noted further resources needed to cover full on-site inspections for large insurers and conglomerate groups. - Group supervision and reporting: - Group supervision currently informal; five largest insurance groups requested to submit quarterly unaudited group-wide returns. - No explicit legislative powers for group-wide supervision at assessment date; draft Financial Sector Regulation Bill and Insurance Bill expected to provide group supervision powers and reporting requirements. ### Coordination, information sharing and crisis management - Coordination structures: - Interim FSOC established (no tools/legislative backing); final FSOC expected to have clear mandate, powers and accountability. - CFR will provide interagency coordination; FSOC to comprise SARB, FSB-SA and NT (observer), chaired by SARB Governor. - CFR membership includes BSD, FSB-SA, NCR, South African Revenue Service, FIC, IRBA, Accounting Standards Board, Competition Commission and Department of Trade and Industry officials. - Supervisory cooperation: - FSB-SA concluded 78 MoUs and 3 Multilateral MoUs with local and international authorities; application submitted to IAIS Multilateral MoU January 10, 2013. - Participates in supervisory colleges; hosted first supervisory college with SARB and regional supervisors in 2013. - Crisis management: - Limited formal crisis planning for insurers; no explicit statutory priority for policyholders in winding-up (policyholders rank pari passu with unsecured creditors). - FSB-SA participates in Resolution Policy Working Group with NT and SARB; proposed Financial Sector Regulation Bill to establish crisis management and resolution framework with SARB as resolution authority for systemic institutions. - Recommendation: enhance pre-crisis preparation, coordination and supervisory college engagement to develop common tools and contingency plans. ### Observance summary (ICP implementation snapshot) - Summary of Observance Level (Table 9): - Observed (O): 6 - Largely observed (LO): 11 - Partly observed (PO): 9 - Not observed (NO): - - Total: 26 - Selected ICP assessments: - ICP 1 (Regulatory Objectives): LO - ICP 2 (Supervisor governance/independence): PO - ICP 3 (Information exchange): O - ICP 4 (Licensing): LO - ICP 5 (Suitability): O - ICP 7 (Corporate governance): PO - ICP 9 (Supervisory review & reporting): LO - ICP 12 (Winding-up and exit): PO - ICP 16 (ERM/ORSA): PO - ICP 20 (Public disclosure): PO - ICP 22 (AML-CFT): PO - ICP 24 (Macroprudential surveillance): LO - ICP 26 (Cross-border crisis management): LO ### Principal supervisory recommendations (selected by ICP) - ICP 1: - Expedite finalization of the Financial Sector Regulation Bill and the Insurance Bill to establish supervisory objectives and legal authority for group supervision. - ICP 2 (Supervisor): - a) Revise criteria for appointment of Board members to reduce undue political/industry interference. - b) Expedite legislative amendments for explicit appointment/dismissal provisions for head of supervisor and governing body members. - c) Review adequacy of supervisory resources and augment skill sets. - d) Consider exempting supervisors from government austerity measures to strengthen effectiveness and financial autonomy. - e) Enhance internal audit effectiveness within the supervisor. - ICP 4 (Licensing): - a) Expedite Board Notice to formalize licensing requirements relating to governance, risk management and group structure. - b) Review exemptions for friendly societies and adopt proportionate approach. - c) Clarify boundaries between medical schemes and insurance products. - ICP 7 (Corporate Governance): - Implement proposed Board Notice, Financial Sector Regulation Bill and Insurance Bill; plan adequate supervisory resources for implementation. - ICP 9 (Supervisory Review and Reporting): - a) Ensure three year supervisory cycle completed for all insurers and reinsurers with more intensive on-site visits for complex insurers. - b) Formulate group supervision plan covering all insurance groups in a risk-based manner including joint on-site visits of financial conglomerates. - c) Increase off-site monitoring of intra-group transactions and aggregate exposures and establish reporting procedures. - d) Capture Conduct of Business risks in RAD and strategize CoB on-site visits supported by CoB return. - e) Ensure adequate skilled supervisory resources. - ICP 12 (Winding-up): - Expedite legislative changes to give high legal priority to protection of policyholders’ rights and entitlements. - ICP 13 (Reinsurance and ART): - a) Adopt systematic approach to evaluating supervision of reinsurers and counterparties. - b) Formulate clear policy on treatment and accounting for ART. - c) Establish explicit requirements on reinsurance with related companies including liquidity, concentration and contagion risk management. - ICP 16 (ERM/ORSA): - Implement Board Notice and SAM Framework to enhance ERM and ORSA regime; require ORSA at least annually and on material changes. - ICP 17 (Capital Adequacy): - Implement SAM Framework and Insurance Bill, including group financial soundness requirements aligned with ICP 17. - ICP 19/TCF (Conduct of Business): - a) Explicitly require insurers to consider interests of different customer types in product development and marketing. - b) Provide explicit CoB requirements on product development and authority to require notification/prohibit products. - c) Strengthen governance on conflicts of interest. - d) Review adequacy of FSB-SA supervisory resources for TCF and proactive CoB supervision. - ICP 20 (Public Disclosure): - Establish explicit public disclosure requirements for all insurers and give FSB-SA clear legal authority to supervise compliance. - ICP 21 (Countering Fraud): - Board Notice to require insurers to establish explicit insurance fraud risk management policy including prompt reporting. - ICP 22 (AML-CFT): - a) Expedite amendments to AML-CFT legislation to address technical deficiencies. - b) Improve supervisory coordination and industry engagement for compliance. - c) Periodically assess ML-FT risk in short-term insurance and consider applying FATF standards. - ICP 23 (Group-wide Supervision): - Establish clear regulatory regime with explicit powers for group-wide supervision, solo and consolidated reporting, and formal risk assessment for group heads. - ICP 24 (Macroprudential Surveillance): - Formulate macro-prudential surveillance framework under Twin Peaks; develop robust systemic risk indicators and account for cross-sectoral linkages. - ICP 26 (Cross-border Crisis Management): - Continue engaging supervisory colleges on preparations and common tools; Resolution Policy Working Group to inform crisis management and resolution framework. ### Notable supervisory statistics and operational items - On-site activity (2013/14 financial year): - 80 market conduct and prudential on-site visits. - 33 Conduct of Business on-site visits. - FSB-SA conducted 412 on-site visits on FSPs rendering insurance services and 35 on-site visits on insurers for FAIS compliance (selected statistics). - Reporting timeliness: - Annual returns due within four months after year-end; quarterly returns due within one month after quarter-end. - Service level commitment for licensing: 180 calendar days; in practice average processing seen less than 30 days. - Enforcement: - Enforcement Committee penalties in 2013 ranged from R50,000 to R2 million. - Insurance Acts authorize penalty of R5 000 for every day a required return/information/document is late (LTIA s68; STIA s66). *Italic: Source — INTERNATIONAL MONETARY FUND, content unit _cr1556 (excerpts) from the IMF country report PDF.* ### EXECUTIVE SUMMARY ___________________________________________________________________________ 5 ### EXECUTIVE SUMMARY ### Role and size of the insurance sector - Assets held by insurers accounted for nearly 23 percent of financial sector assets in South Africa in 2013. - As at end-2013, licensed entities included: 78 long-term insurers, 87 short-term insurers, 6 reinsurers and 11 captive insurers (excluding cell captive insurers). - The long-term insurance sector is highly concentrated with the top five conglomerates dominating the market with over 73 percent of total industry assets in 2013. - The insurance sector is served by a wide range of intermediaries, with approximately 10,992 financial services providers (FSPs) as at March 31, 2014. ### Institutional framework and ongoing reforms - At the time of assessment, the Financial Services Board (FSB-SA) regulates the non-banking financial services industry, including insurers, under the Financial Services Board Act (FSBA). - Key government policy objectives for financial sector reform: financial stability, consumer protection and market conduct, financial inclusion and combating financial crime. - A shift to a Twin Peaks supervisory structure is proposed: - Prudential supervisor to be part of the South African Reserve Bank (SARB), serving as micro-prudential and macro-prudential supervisor. - FSB-SA to be transformed into a dedicated market conduct supervisor. - The Government, through the Minister of Finance, to remain responsible for the policy framework for the financial sector. - Public consultation on implementing Twin Peaks occurred in February 2013; transition to be implemented in two phases (supporting legislation in the first phase (2013/14) and broader harmonization in a second phase). ### Recent and proposed regulatory enhancements - Authorities have implemented or proposed: - A formal group supervision framework. - A risk-based Solvency Assessment and Management regime (SAM). - Treating Customers Fairly (TCF) approach to conduct of business supervision. - Formal legal authority for the FSB-SA to supervise insurance groups including direct powers over a group holding company. - Explicit regulatory requirements on corporate governance and risk management frameworks to support SAM. - The TCF approach combines principles and rules to embed fair treatment of customers in regulated entities’ culture. ### Areas requiring further fine-tuning - The assessment identifies scope for enhancement in several specific areas: - A proportionate licensing and supervisory approach for friendly societies and clearer boundaries between medical schemes and insurance products. - Priority of ranking for policyholders in the event of winding-up. - Enhance group supervision framework with explicit requirements on intra-group transactions and risk exposures (e.g., intra-group reinsurance). - Provide explicit conduct of business requirements on product development and give the supervisor authority to require notification of certain new insurance products and prohibit products that do not meet prescribed standards. - Public disclosure requirements for all insurers and clear legal authority to supervise compliance. - Address remaining legal deficiencies in the AML-CFT regime. - Develop appropriate indicators for assessing systemic risk of insurers and reinsurers. - Establish a crisis management and resolution framework to deal with cross-border crises effectively. ### Supervisory practice and suggested improvements - The FSB-SA has introduced a risk-based supervision framework that is evolving to improve intensity and effectiveness. - Recommendations for supervisory enhancements include: - More intensive on-site visits with a baseline supervision cycle proportionate to insurers’ and reinsurers’ risk profiles. - A systematic approach to evaluating supervision of reinsurers and other counterparties used by insurers. - Group supervision to cover all insurance groups with holistic off-site monitoring of intra-group transactions and aggregate group exposures, including joint on-site visits of financial conglomerates. - Ensure conduct of business risks are addressed in the Risk Assessment Document. - Strategize an appropriate risk-based supervisory cycle to cover the large number of FSPs. - Adopt a more structured macro-prudential surveillance framework that considers cross-sectoral inter-linkages and system-wide market conduct issues. - Pending Twin Peaks implementation, further strengthening of the FSB-SA is advised in: - Formalizing objectives for insurance supervision and legal authority for group-wide supervision in legislation. - Strengthening operational independence to minimize undue political or industry interference. - Reviewing adequacy of supervisory resources and augmenting skill sets in light of current and impending regulatory initiatives. - Continuing positive engagement with domestic and international counterparts to ensure effective supervisory cooperation. - The effectiveness of the enhanced regulatory regime and holistic supervision under Twin Peaks depends on the adequacy and quality of supervisory resources of the FSB-SA. *Source: INTERNATIONAL MONETARY FUND — EXECUTIVE SUMMARY* ### 10. Coordination and information sharing amongst all financial regulators will be ### _cr1556 - 10. Coordination and information sharing amongst all financial regulators will be ### Coordination and regulatory initiatives - Coordination and information sharing amongst all financial regulators will be enhanced through the FSOC and the Council of Financial Regulators (CFR). - An interim FSOC has been established although it has no tools available and lacks legislative backing. - The final FSOC is expected to have clear mandate, powers and accountability arrangements. - The CFR will provide interagency coordination between regulators on issues of legislation, enforcement and market conduct. - The CFR will be supported by technical committees comprising officials from the regulatory agencies, NT and other key stakeholders. - The FSOC will comprise the SARB, FSB-SA and the NT (as observer) and chaired by the SARB Governor. - The CFR will comprise the heads of key financial regulators such as the BSD, the FSB-SA and NCR; agencies such as South African Revenue Service and the FIC; relevant standard-setters such as the Independent Regulatory Board for Auditors (IRBA) and the Accounting Standards Board; and nonfinancial regulators such as the Competition Commission and officials from the Department of Trade and Industry. - Major insurance regulatory initiatives since the 2010 ICP assessment: - Insurance Laws Amendment Bill (ILAB) was tabled on June 21, 2013, introducing interim measures on governance, risk management and internal controls of all insurers, and insurance group supervision. - The ILAB was withdrawn in April 2014; provisions will be given effect through a Board Notice and other means. - The necessary legislation to give effect to SAM was to be enacted and implemented in two phases: Phase 1 was the ILAB (now replaced with subordinate legislation in the form of a Board Notice to be issued pursuant to the enactment of the FSLGAA); Phase 2 will be the Insurance Bill, targeted for implementation from 1 January 2016 and will repeal the existing insurance legislation. - Specific initiatives: - Solvency Assessment and Management regime (SAM) - Shares broad features of the European Union’s Solvency II regime, adapted for local market circumstances. - Risk-based solvency regime applying to all insurers (including government owned insurers) except for micro-insurance business (which will be subject to a simplified regime). - Requirements on corporate governance and risk management frameworks (interim measures) to be addressed through a Board Notice to be published by November 2014 for implementation by January 1, 2015. - SAM is expected to be fully implemented in January 2016. - Treating Customers Fairly (TCF) approach to conduct of business supervision - Seeks to ensure that fair treatment of customers is embedded within the culture of regulated entities. - Will use a combination of market conduct principles and explicit rules to drive clear and measurable fairness outcomes. - Insurance group supervision framework - A formal framework will be introduced giving the FSB-SA direct powers over a group holding company. - Certain regulatory provisions currently applicable to solo undertakings will apply, with necessary changes, to a controlling (holding) company of an insurance group and to the insurance group. - Framework to be provided in the next version of the draft Financial Sector Regulation Bill, expected to be published for comment in mid-2014 and with effect from January 1, 2015. ### Market structure and industry performance - Importance and scale - In 2013, assets held by insurers accounted for nearly 23 percent of financial sector assets in South Africa. - Long-term (life) insurance assets were equivalent to 64 percent of GDP at end-2013. - Short-term (non-life) insurance assets contributed to 3.4 percent of GDP at end-2013. - Life insurance penetration (premiums in relation to GDP) is 21.6 percent. - Approximately 50 percent of long-term insurers’ balance sheets are composed of retirement savings. - Licensed insurers (Table 1: Insurance Market–Licensed Insurers) - Life (long-term): 2009: 80; 2010: 80; 2011: 80; 2012: 79; 2013: 78 - Non-life (general): 2009: 91; 2010: 89; 2011: 86; 2012: 89; 2013: 87 - Composite1: 2009: 4; 2010: 4; 2011: 4; 2012: 4; 2013: 4 - Reinsurance: 2009: 7; 2010: 7; 2011: 7; 2012: 7; 2013: 6 - Captive2: 2009: 11; 2010: 11; 2011: 11; 2012: 11; 2013: 11 - Total: 2009: 193; 2010: 191; 2011: 188; 2012: 190; 2013: 186 - Notes: 1/ Only reinsurers are allowed to underwrite both life and non-life within the same composite entity. 2/ An insurer that insures risks within the group and only a small part (if any) of its portfolio covers risk from unrelated parties. - Market dynamics and concentration - Total number of licensed insurers declined marginally from 2009; decline partially due to consolidation and orderly exits; three small insurers failed in the past 5 years. - One failed insurer resulted in estimated policyholder losses in the range of R20 million. - Inter-linkages: domestic banks indirectly own two of the larger long-term and three short-term insurers; some insurance groups dominated by securities firms offering unit-linked and other retirement investment products. - Top five conglomerates dominated long-term insurance market with over 73 percent of total life insurance assets in 2013. - Top 10 life insurers capture 88 percent of the market. - Old Mutual Life Assurance Company (South Africa) Limited captures over 22 percent of market share. - Short-term insurance: top five insurers produce 44 percent of total non-life premiums in 2013. - Gross written premiums increased by 9.6 percent in 2012. - Distribution and intermediaries - As at March 31, 2014, there were approximately 10,992 licensed FSPs, down from 12,051 in 2011. - Brokers are the dominant distribution channel for both long-term and short-term insurers; in-house agents popular for individual life insurance sales. - Bancassurance is a significant distribution channel in urban centers. - Potential for mis-selling and poor outcomes persists; TCF and the Retail Distribution Review (RDR) initiatives currently underway. - Policyholder behavior - High lapse ratio around 50 percent, calculated as a percentage of new policies issued over the period. - Lapses driven by large number of lower income segment policies (funeral and assistance), consumer consolidation of unsecured loans, transfers of large group schemes due to commission incentives, and replacement with new generation products. ### Assets and liabilities - Long-term asset mix and trends - Total assets increased 13.2 percent in 2012. - Biggest exposure on asset side relates to equities and CIS which together constituted 65 percent of total assets as at end-2013, up from 49 percent in 2011. - For unit-linked business, policyholders assume the market risks of the underlying investment portfolios. - Composition of Assets—Long-term (Table 3) (in Rand million) - 2011: Cash and Deposits 143,269 (11%); Government & semi-government 147,131 (11%); Equities and CIS 623,864 (49%); Debentures and loan stock 112,544 (9%); Immovable properties 58,822 (5%); Fixed Assets 135,247 (11%); Debtors 64,879 (5%); Other Assets 2,243; Total 1,285,756 (100%) - 2013: Cash and Deposits 125,846 (8%); Government & semi-government 111,038 (7%); Equities and CIS 1,071,350 (65%); Debentures and loan stock 187,716 (11%); Immovable properties 48,702 (3%); Fixed Assets 2,348; Debtors 99,031 (6%); Total 1,648,274 (100%) - Related-party transactions and group supervision - Asset transfers between parent and insurance subsidiaries are permitted for capital management (capital injections and dividend payments). - The FSB-SA reviews related party transactions under current risk-based supervisory framework; scope for further controls when a formal group-wide supervision framework is introduced. - Liabilities and technical provisions (Table 4) - Long-term technical provisions (In Rand millions): - 2009: Technical provisions 1,211,104; Participating (with profits) policies 338,075; Non-participating policies 357,978; Unit-linked policies 515,051; Gross premiums 310,560 - 2010: Technical provisions 1,350,640; Participating policies 357,460; Non-participating policies 388,266; Unit-linked policies 604,914; Gross premiums 289,032 - 2011: Technical provisions 1,454,806; Participating policies 256,517; Non-participating policies 519,309; Unit-linked policies 678,981; Gross premiums 316,273 - 2012: Technical provisions 1,650,788; Participating policies 275,198; Non-participating policies 582,525; Unit-linked policies 793,065; Gross premiums 361,124 - Short-term technical provisions and gross premiums (Trend in Technical Provisions—Short-term) - Technical provisions: 27,619; 26,317; 47,688; 59,547 (periods correspond to table rows) - Gross premiums: 7,352; 6,730; 7,049; 7,495 - Guarantees and product features - In 2012, investment business with guarantees constituted approximately R45 billion or 3 percent of total policyholder liabilities. - With-profit portfolios comprised 14 percent of total liabilities; some have elements of guarantees attached. - Legacy policies offer minimum rates of return typically in the 3 percent to 5 percent range; some products sold with a guarantee of around 7 percent, typically fully matched. - Some policies reset the capital guarantee every five years for as long as the original capital remains invested. - For statutory accounting, short-term technical provisions are not discounted. - Short-term investment profile and risks - Short-term insurers: approximately 38 percent weighted in cash and deposits and South African government securities. - Significant usage of reinsurance exposes sector to potential credit risk from reinsurer default. - 38 percent of the total assets of short-term insurers were deposited or invested in banks including the Big-4 banks in South Africa. - Intermediary premium collection: intermediaries must provide security in the form of a guarantee before collecting premiums and being registered as a financial services provider under the FAIS. ### Operating performance and solvency - Solvency ratios (Table 5: Solvency: Assets Available Over Required) - Life (2011, 2012, 2013): - Available capital resources over Minimum Capital Requirement: 19.53; 18.49; 15.85 - Available capital resources over Prescribed Capital Requirement: 3.44; 3.56; 3.62 - Short-term (2011, 2012, 2013): - Available capital resources over Minimum Capital Requirement: 68.68; 12.89; 4.80 - Available capital resources over Prescribed Capital Requirement: 3.83; 2.39; 1.99 - Observations and stress testing - Solvency position for long-term insurers has been relatively stable while ratios for short-term insurers have decreased since 2011 under enhanced capital requirements. - Prior to 2011, minimum and prescribed capital requirements were largely based on Solvency 1 calculations that were less risk-sensitive. - Market risk pressures have increased for long-term insurers; the FSB-SA has been conducting stress tests and further tests are planned under the SAM framework. - The five large conglomerate life insurers have an average of 3.4 times the free assets to capital adequacy requirement. - Coverage ratios are expected to be lower under the SAM framework as calculations will increase the denominator with more focus on the capital available. - Free Assets to Capital Adequacy Requirement (Table 6) - Number of Life insurers* (2012, 2013) - Covered 0–1 times: 2012: 0; 2013: 0 - Covered 1–2 times: 2012: 28; 2013: 20 - Covered 2–5 times: 2012: 31; 2013: 34 - Covered 5–10 times: 2012: 16; 2013: 10 - Covered 10+ times: 2012: 2; 2013: 5 - Median: 2012: 2.6; 2013: 2.8 - *Excluding information on reinsurers, run-off companies under curatorship or liquidation. *Source: _cr1556 - 10. Coordination and information sharing amongst all financial regulators will be* ### 26. For short-term insurers, the underwriting profits have stabilized but susceptible to ### _cr1556 - 26. For short-term insurers, the underwriting profits have stabilized but susceptible to ### Short-term insurers: performance indicators and recent developments - In 2013, motor and property insurance combined made up 86.7 percent of the total gross premium income for the short-term insurance sector. - Management and commission expenses have been coming down marginally and loss ratios have generally stabilized around 58 percent in recent years. - Table 7. Performance Indicators for Short-term Insurers (2012, 2013) - Net premiums increase (year over year % change): 4, 7 - Claims or Loss ratio: 58, 58 - Combined ratio: 89, 89 - Management Expenses: 23, 23 - Commission: 8, 8 - Underwriting profit (loss): 11, 11 - Investment Income ratio: 16, 17 - Surplus asset ratio: 55, 55 - Capital Adequacy Ratio (median): 1.6, 1.9 - Source of indicators: FSB-SA and SARB. ### Key risks and vulnerabilities for the insurance sector - Macroeconomic and structural environment - Slow growth and prolonged labor unrest have exacerbated high unemployment, inequality and other vulnerabilities. - South African financial markets face a transition to a tighter external environment as US monetary policy begins its gradual process of normalization. The transition to higher interest rates is likely to be accompanied by higher volatility and lower capital inflows amid slowing domestic growth. - Market risk (long-term insurers) - Exposures include steep drops in equity markets; significant adverse developments in the level of volatility of interest rates across the term structure; significant adverse currency movements; and significant drops in price levels of property investments. - A recent FSB-SA stress test, considering market risk in isolation, found only two small insurers unable to remain solvent under the combined scenario. - Underwriting risks (long-term insurers) - Lapse and surrender risk is a major driver, particularly in the retirement fund space. Increased unemployment led many policyholders to lapse policies and cash in savings or invest in other regulated entities, e.g., CIS. - Other underwriting risks include mortality and morbidity catastrophes (pandemic or unexpected worsening in HIV/AIDS mortality) and longevity risk on annuities business. - FSB-SA has stepped up consumer education and market conduct oversight, including greater intermediary oversight and an impending RDR review. - Short-term insurers’ exposures - Exposed to premium pricing and reserving risk, severe catastrophe risks (natural and man-made), and counterparty default risks. - FSB-SA’s combined stress test scenario revealed that a few insurers might be under solvency strains; this is still under investigation. - Concentration and interconnectedness risks - Dominance and interconnectedness of major financial conglomerates create systemic risk: a default by a major bank could pose credit risk to affiliated insurers and contagion risk to banks if insurers withdraw deposits. - Insurers, pension funds and unit trusts hold substantial assets in bank deposits, exposing them to counterparty and liquidity risks. - Diversified cash management is challenging given a concentrated banking system, particularly for short-term insurers with significant shares of deposits and money market funds in the banking system. ### Preconditions for effective insurance supervision - Sound macroeconomic and financial policies - Flexible inflation-targeting framework and a flexible exchange rate provided policy anchors during global shocks in 2008–09. - Fiscal position enabled responses to substantial falls in domestic tax revenue and increased spending needs. - Authorities were proactive on rapid credit expansion through raising capital adequacy requirements and setting conservative leverage ratios. - National Credit Act helped protect households from reckless lending. - South Africa is signatory to the SADC memorandum of understanding on macro-economic convergence, which sets a government debt to GDP benchmark at 60 percent. - IMF-estimated debt to GDP ratio was 42.3 percent in 2012 (SARB Financial Stability Review September 2013 noted increases in total loan debt due to countercyclical fiscal responses). - National Government laid the basis for a new, more inclusive growth path guided by the National Development Plan. - Financial inclusion initiatives - Financial Sector Charter (2004) promotes financial inclusion; in 2010, 37 percent of 33 million South African adults did not have a bank account and only 40 percent had a formal long-term insurance product. - Initiatives include promoting entry into the banking sector, enabling co-operative banks, facilitating smaller dedicated banks, improving Postbank governance, introducing deposit insurance for co-operative banks, and improving access to housing and small business finance. - Authorities are working on regulatory reforms to implement a micro-insurance policy framework. - Institutional and market infrastructure - South Africa ranked 53rd in global competitiveness by WEF in 2013-14 (out of 148 countries); strengths include institutions, intellectual property protection, property rights, and legal framework efficiency. Top three problematic factors: inadequately educated workforce, restrictive labor regulations, inefficient government bureaucracy. - High unemployment rate of over 20 percent; youth unemployment estimated close to 50 percent. - Independent judiciary structure defined by the Constitution. - Accounting and auditing frameworks: ASB sets GRAP and adopted IFRS for the private sector; international auditing standards adopted in 2005; IRBA regulates auditors; SAICA has about 28,000 members. - ASSA issues technical guidance for actuaries and has established an Actuarial Governance Board; insurers must appoint statutory actuaries to opine to the FSB-SA on valuation of assets, liabilities and capital requirements. - A wide range of statistics available from SARB, Statistics South Africa, and ASSA; SARB reports on summary insurance sector developments in its half-yearly Financial Stability Report. - Corporate governance and consumer protection - Companies Act corporate governance supplemented by King III (effective March 1, 2010) with an “apply-or-explain” approach; insurers expected to observe King III. - Industry ombudsman schemes exist for contractual complaints; Financial Services Ombud Schemes Act regulates voluntary ombudsman schemes and establishes a statutory ombudsman for gaps. Ombudsman system under review. - No policyholder protection scheme/fund exists to protect policyholders against insurer insolvency; in 2013 FSB-SA sought inputs on establishing a Policyholder Protection Scheme, to be taken forward by a joint NT/SARB/FSB Resolution Policy Working group. - Financial market functioning - Financial markets generally function well though exchange controls continue to apply. - WEF ranked South Africa 3rd for financial market development. - JSE: 397 companies listed in 2013; turnover of shares for 2012/13 was R 3,529.5 billion with an average number of trades per day of 120, 172; liquidity (equity turnover as a percentage of market capitalization) was 43.5 percent in 2012/13. - Market capitalization of all securities on the JSE: R 8,644.5 billion (approximately US$930 billion) as at March 31, 2013; ranks JSE 19th largest by market capitalization. - Institutional investors (including long-term insurers) eligible for foreign portfolio investment allowance under Exchange Control Regulations; allowance up to 25 percent of the underwritten policy business of long term insurers and 35 percent of the investment linked business of long term insurers. - Insurers must submit quarterly reports to SARB on allocation of assets and proposed portfolio adjustments to bring foreign asset levels back in line (if applicable). Insurers reported exchange controls did not have a material impact on investment operations. *Source: FSB-SA and SARB; text extracted from IMF country report content unit _cr1556 - 26.* ### 42. The limited liquidity in longer term debt instruments poses challenges for insurers’ ### _cr1556 - 42. The limited liquidity in longer term debt instruments poses challenges for insurers’ ### Limited liquidity and investment environment - The limited liquidity in longer term debt instruments poses challenges for insurers’ asset liability management. - This was an issue noted in the 2008 FSAP Update and partly reflects the low level of outstanding government debt. - South African investors have access to assets issued and traded abroad, subject to exchange control. - There is an emerging interest amongst some insurers in long-term investments in infrastructure or sustainable/renewable energy projects. ### Summary of supervisory observance and key findings - Table 9. Summary of Observance Level: - Observed (O): 6 - Largely observed (LO): 11 - Partly observed (PO): 9 - Not observed (NO): - - Total: 26 - The FSB-SA is the primary authority responsible for insurance supervision with powers clearly defined in legislation, though objectives are not explicitly stated in legislation; the Mission and Vision statement of the FSB-SA gives effect to supervisory objectives (ICP 1: LO). - The FSB-SA supervises insurance groups currently through moral suasion or an informal framework based on general powers to require information (ICP 1: LO). - The Financial Sector Regulation Bill and the Insurance Bill are expected to provide for supervisory objectives and group supervision powers. - Governance and board independence concerns: some Board members continue to hold active managerial or board membership in regulated entities; some Board members are related to regulated entities and may not be fully independent (ICP 2: PO). - Information exchange: FSB-SA empowered to coordinate and share information with domestic and foreign regulators with appropriate regard for confidentiality; recent amendments further facilitate information exchange (ICP 3: O). - Licensing framework: clear and transparent, but current legislation does not specifically include licensing requirements relating to governance, risk management and group structure (ICP 4: LO). - Suitability of persons: scope covers board, senior management and significant owners; Key Persons in Control Functions are not covered due to absence of requirements to establish such functions (ICP 5: O). - Corporate governance: no explicit corporate governance requirements in Insurance Acts; FSB-SA relies on registration requirements and reviews governance via questionnaires and on-site visits; Board Notice and proposed legislative changes expected to strengthen framework with comprehensive corporate governance at group level expected January 2016 (ICP 7: PO). - Risk management and internal controls: Insurance Acts do not specifically require insurers to establish risk management, compliance and internal audit functions; proposed Board Notice will establish comprehensive provisions (ICP 8: PO). - Supervisory review and reporting: uses risk-based approach; limited group-level reporting—only a few large insurance groups subject to group-related information requirements; planned dedicated quarterly CoB return is positive for monitoring lapses, surrenders and churning issues (ICP 9: LO). - Preventive and corrective measures and enforcement: FSB-SA has adequate powers and applies progressive escalation; Enforcement Committee can impose unlimited penalties and has been active (ICP 10: O; ICP 11: O). - Winding-up and exit: winding-up regime tested with three insurer failures in past five years; policyholders do not currently have priority over unsecured creditors (ICP 12: PO). - Reinsurance and other forms of risk transfer: review during licensing; no established ongoing regulatory requirements for intra-group reinsurance or formal policy on ART; short-term insurers required to conduct stress tests covering default by largest reinsurer (ICP 13: LO). - Valuation: regime intended to be prudently realistic, based on financial reporting standards with prudential filters; long-term insurers must observe SAPs by ASSA with best-estimate assumptions and explicit compulsory and discretionary margins (ICP 14: LO). - Investment: requirements exist for eligible assets, diversification, non-admitted assets, prohibition of encumbrances, use of nominees and derivatives; proposed Board Notice will require explicit investment and asset-liability management policies (ICP 15: LO). - Enterprise Risk Management for Solvency Purposes: pending SAM implementation, no regulatory ERM/ORSA requirements; FSB-SA introduced semi-annual economic stress tests for six largest insurers and annual tests for all insurers; 85 percent of insurers were either weak or needed improvement with respect to ORSA preparations in the 2012 Pillar II Readiness exercise (ICP 16: PO). - Capital adequacy: current solvency regime transparent; CAR has been largely sufficient due to prudence in technical provisions; moving closer to minimum CAR triggers intensified supervisory action (ICP 17: LO). - Intermediaries and conduct of business: FSP authorization required; potential for mis-selling persists; TCF initiative and Retail Distribution Review underway; Conduct of Business Return to require reporting on lapses, surrenders, claims ratios, complaints, etc. (ICP 18: O; ICP 19: LO). - Public disclosure: no explicit public disclosure requirements in Insurance Acts; adoption of IFRS partially addresses ICP 20; under SAM, Pillar III will establish disclosure requirements (ICP 20: PO). - Countering fraud in insurance: FSB-SA has minimal direct legislative powers but expects insurers to implement fraud prevention procedures; Board Notice will require explicit insurance fraud risk management policy (ICP 21: PO). - AML-CFT: legislative framework comprises FICA, MLTFC Regulations and Exemptions; FSB-SA is designated AML-CFT competent authority with inspection and sanction powers; some guidance by FIC not legally enforceable due to legal gaps; disclosure to foreign FIUs subject to written agreement and reciprocity (ICP 22: PO). - Group-wide supervision: no explicit regulatory powers; in practice supervision is informal relying on general authority; development of standardized reporting and group supervision framework is underway (ICP 23: PO). - Macroprudential surveillance: FSB-SA uses supervisory and external information to assess macro vulnerabilities; no formal process to assess systemic importance of insurers; under Twin Peaks, SARB will serve as macro-prudential supervisor (ICP 24: LO). - Cross-border cooperation and crisis management: FSB-SA willing to support and participate in crisis resolution; pre-crisis preparation, coordination and cooperation should be enhanced; proposed Board Notice and crisis management/resolution framework are positive initiatives (ICP 26: LO). ### Principal recommendations (selected, by ICP) - ICP 1: - Expedite finalization of the proposed Financial Sector Regulation Bill and the Insurance Bill to establish objectives of insurance supervision and confer legal authority on the FSB-SA to conduct group supervision. - ICP 2 (Supervisor): - a) revise criteria for appointment of Board members to ensure no undue political or industry interference; - b) expedite legislative amendments for explicit legal provisions regarding appointment and dismissal of head of supervisor and governing body members; - c) review adequacy of supervisory resources and augment skill sets; - d) consider exempting supervisors from government austerity measures to strengthen effectiveness and financial autonomy; - e) enhance effectiveness of internal audit functions within supervisors. - ICP 4 (Licensing): - a) expedite legislative amendments to formalize licensing requirements relating to governance, risk management and group structure; - b) review exemptions for friendly societies and adopt proportionate approach; - c) formulate clearer boundaries between medical schemes and insurance products under the Insurance Acts. - ICP 5 (Suitability of Persons): - a) expedite proposed Board Notice for governance and ongoing suitability requirements including Key Persons in Control Functions at solo and group holding company levels; - b) consider encouraging annual self-assessments by Board Members, Senior Management and Key Persons in Control Functions. - ICP 6 (Changes in Control and Portfolio Transfers): - a) introduce a definition of “significant” owner based on control and percentage; - b) expedite legislative amendments to authorize FSB-SA to approve significant increases and decreases in control. - ICP 7 (Corporate Governance): - Implement proposed Board Notice, Financial Sector Regulation Bill and Insurance Bill; plan adequate supervisory resources for implementation. - ICP 8 (Risk Management and Internal Controls): - Implement proposed Board Notice; provide guidance to short-term insurers on monitoring ML/TF risks. - ICP 9 (Supervisory Review and Reporting): - a) Ensure three year supervisory cycle completed for all insurers and reinsurers with more intensive on-site visits for complex insurers; - b) Formulate appropriate group supervision plan covering all insurance groups in risk-based manner including joint on-site visits of conglomerates; - c) Increase off-site monitoring of intra-group transactions and aggregate exposures and establish reporting procedures; - d) Capture CoB risks in RAD and strategize risk-based CoB on-site visits facilitated by CoB return; - e) Ensure adequate skilled supervisory resources. - ICP 12 (Winding-up and Exit): - Expedite legislative changes to give high legal priority to protection of policyholders’ rights and entitlements. - ICP 13 (Reinsurance and ART): - a) Adopt systematic approach to evaluating supervision of reinsurers and counterparties; - b) Formulate clear policy on treatment and accounting for ART; - c) Establish explicit requirements on reinsurance with related companies, including liquidity, concentration, contagion risk management and qualitative/quantitative acceptability criteria. - ICP 14 (Valuation): - Under SAM, valuation regime will be based on economic valuation with explicit margins over current estimate for technical provision. - ICP 15 (Investment): - Implement Board Notice provisions on investment activities and asset-liability management; formulate investment requirements at insurance group level. - ICP 16 (ERM for Solvency): - Implement Board Notice and SAM Framework to enhance ERM and ORSA regime. - ICP 17 (Capital Adequacy): - Implement SAM Framework and Insurance Bill, including group financial soundness requirements to align with ICP 17. - ICP 18 (Intermediaries): - Maintain momentum embedding TCF; expedite Retail Distribution Review; monitor persistence rates; ensure governance for intermediaries; consider simplifying FSP structure; consider cyber-surveillance; ensure adequate supervisory resources. - ICP 19 (Conduct of Business): - a) Explicitly require insurers to consider interests of different customer types in product development and marketing; - b) Provide explicit CoB requirements on product development and authority to require notification/prohibit products; - c) Strengthen governance on conflicts of interest; - d) Review adequacy of FSB-SA supervisory resources for TCF and proactive CoB supervision. - ICP 20 (Public Disclosure): - Establish explicit public disclosure requirements applicable to all insurers and give FSB-SA clear legal authority to supervise compliance. - ICP 21 (Countering Fraud): - Board Notice to require insurers to establish explicit insurance fraud risk management policy including prompt reporting. - ICP 22 (AML-CFT): - a) Expedite amendments to AML-CFT legislation to address technical deficiencies; - b) Improve supervisory coordination and industry engagement for compliance; - c) Periodically assess ML-FT risk in short-term insurance and consider applying FATF standards. - ICP 23 (Group-wide Supervision): - Establish clear regulatory regime with explicit powers to enforce group-wide supervision for unregulated companies; require regulatory reporting at solo and consolidated levels; formal risk assessment for heads of group; group-wide market conduct requirements; ensure adequate supervisory resources and enhanced cross-sectoral coordination. - ICP 24 (Macroprudential Surveillance): - Formulate macro-prudential surveillance framework under Twin Peaks; develop robust indicators for systemic risk; account for cross-sectoral linkages and system-wide market conduct risks. - ICP 26 (Cross-border Crisis Management): - Continue engaging supervisory colleges on preparations and common tools; Resolution Policy Working Group to inform crisis management and resolution framework addressing plans, tools, information requirements, contingency plans and testing. *Source: Assessment and recommendations as presented in the IMF mission report excerpt.* ### 43. The FSB-SA would like to thank the Assessors for the report on the detailed assessment of ### _cr1556 - 43. ### Acknowledgment - The FSB-SA would like to thank the Assessors for the report on the detailed assessment of the IAIS Insurance Core Principles. ### Assessment observations - We believe the report is comprehensive and displays a good understanding of the FSB-SA regulatory and supervisory frameworks (both existing and planned). ### Utility of the assessment - The assessment was extremely useful exercise in terms of providing an independent and objective benchmarking of the standards of insurance regulation and supervision in South Africa against international standards. *Excerpt from _cr1556 - 43.* ### 44. The report accurately reflects the various ways in which the FSB-SA is already well-advanced ### _cr1556 - 44. The report accurately reflects the various ways in which the FSB-SA is already well-advanced ### Overview and Purpose of the Assessment - The assessment served as a useful tool in the refinement of regulatory and supervisory framework enhancements currently underway. - The FSB-SA is recognized as the primary authority responsible for prudential and market conduct regulation and supervision of insurers. ### Regulatory Structure, Objectives and Responsibilities (ICP 1) - Institutional arrangements involve multiple government authorities, advisory and oversight committees and self-regulatory organisations; lead responsibility for financial regulatory policy lies with the Minister of Finance (MoF) through the NT. - NT policy reform objectives rest on five pillars: financial stability, consumer protection, better access to financial services, improved regulatory coordination, and comprehensiveness. - Authorities responsible for insurance supervision at time of assessment: - FSB-SA: primary authority for prudential and market conduct regulation and supervision of insurers. - SARB: prudential regulator and supervisor of banks. - NCR under the DTI: regulates market conduct of consumer credit providers. - CMS: regulates medical insurance schemes (reports to the Department of Health). - FIC: unit under the MoF for administering the broader AML-CFT regime. - The LTIA and the STIA (collectively referred to as “the Insurance Acts or Acts”) and the Financial Services Board Act (FSBA) define FSB-SA authority; responsibilities centralized in the executive officer of the FSB-SA. - FSB-SA Mission and Vision: - Vision: “to have a sound and trusted financial services and investment environment in South Africa.” - Mission: “to regulate and supervise financial institutions and markets to protect consumers of financial services.” - Assessment: Largely Observed. - Recommendation (ICP 1): Expedite finalization of legislative amendments to establish objectives of insurance supervision and confer legal authority to conduct group supervision. ### Legal Powers, Enforcement and Conduct of Business - MoF issues regulations; FSB-SA issues Board Notices, Directives, Rules, information letters and supervisory guidelines. Except information letters and supervisory guidelines, all are legally binding and enforceable. - Enforcement Committee (EC) penalties in 2013 ranged from R50,000 to R2 million. - Insurance Acts supplemented by: - Inspection of Financial Institutions Act No. 80 of 1998 (IFIA); - Financial Institutions (Protection of Funds) Act No. 28 of 2001 (FIPFA); - The Financial Intelligence Centre Act (FICA). - Critical supervisory measures to protect policyholders cannot be suspended pending appeal. - Intermediaries and financial advisors must be registered under the FAIS Act; Insurance Acts cover other CoB aspects via policyholder protection rules. - Group-wide supervision currently undertaken on an informal basis; FSB-SA can request group information through insurers under Insurance Acts and coordinate under FSBA (LTIA s4; STIA s4; FBSA s22). - Microinsurance: NT issued microinsurance policy document July 2011; NT and FSB-SA established steering committee and working groups to draft a dedicated microinsurance regulatory framework. ### Corrective Legislative Actions and Ongoing Reform Initiatives - Financial Services Laws General Amendment Act (FSLGAA), effective February 28, 2014, aligned Insurance Acts to Companies Act, closed gaps, enhanced supervisory powers. - Insurance Laws Amendment Bill (ILAB) tabled June 21, 2013 but withdrawn; issues to be addressed under Financial Sector Regulation Bill and Insurance Bill. - Financial Sector Regulation Bill (second draft) to announce insurance group supervisory powers; Bill to provide governance requirements for holding companies and related notification/fit-and-proper provisions. Envisaged effective date: “by next year” (context: assessment timeframe). ### Governance, Independence, Accountability and Resources (ICP 2) - Governance: - FSBA defines FSB-SA governance; Minister appoints Board and Executive Committee (Executive Officer, five Deputy Executive Officers, Chief Actuary). - Board consists of eleven directors; noted that some Board members hold active managerial or board roles in regulated entities (potential independence concerns). - Board oversight, Board Committees including Audit and Risk Committee; Board Charter governs mandate. - FSB-SA subject to Public Finance Management Act (PFMA) and Public Audit Act. - Appointment/Dismissal: - FSBA does not include explicit procedures for appointment/dismissal of EO or Board members or obligation to publicly disclose reasons for dismissal; administrative and labour statutes provide protections and review rights. - Funding and Resources: - FSB-SA funded through levies and fees; receives no government funding. - Approximately 26 percent of the overall FSB-SA budget is allocated to supervision of insurers. - Approximately 33 percent of the overall budget is allocated to regulation and supervision of FSPs. - Insurance Division staff as of end-March 2014: one DEO, management team of 7 heads of departments, 59 staff members and 10 administrative staff. Actuarial Insurance Team: three qualified actuaries and 10 actuarial students. - FSB-SA allocates about 1.5 percent of its human resources budget towards training. - Transparency and Procedures: - Regulatory requirements published in Government Gazette; directives, guidance notes, information letters, reporting templates supplement. - Risk-Based Supervision (RBS) framework adopted (ICP 9); supervisory panels and review mechanisms in place. - Assessment: Partly Observed. - Recommendations (ICP 2): - a) revise criteria for appointment of Board members to minimize political or industry interference; - b) expedite legislative amendments for explicit appointment/dismissal provisions for head of supervisor and governing body members; - c) review adequacy of supervisory resources and augment skill sets for current and impending initiatives; - d) consider exempting supervisors from government austerity measures and administrative guidance to strengthen effectiveness and financial autonomy; - e) enhance effectiveness of internal audit functions, including regulatory/supervisory expertise in audits. ### Information Exchange and Confidentiality (ICP 3) - Legal authority: - FSB-SA empowered to direct insurers to furnish specified information and to request information relating to an insurance group, including non-regulated entities (LTIA s4; STIA s4). - FSLGAA (effective February 28, 2013) strengthened information exchange and confidentiality under FSBA. - Disclosure permitted in specified circumstances (FSBA s22 (1)-(4)); MoU not pre-requisite for exchange. - Supervisory Practice: - FSB-SA concluded 78 MoUs and 3 Multilateral MoUs with local and international authorities; application submitted January 10, 2013 to IAIS Multilateral MoU (pending at time of assessment). - Participates in supervisory colleges; has confidentiality agreements for college information. - Only EO or a DEO may disclose information to another regulatory authority. - A register is maintained for information requests; department and International and Local Affairs Unit coordinate requests. - Assessment: Observed. ### Licensing (ICP 4) - Licensing requirements set out in LTIA, STIA, Guidelines and Information Letter 6 of 2012 (service level commitments). - No person may conduct insurance business unless registered; registration exclusions exist (pension funds, friendly societies under thresholds, certain funds, medical schemes, agricultural co-operatives, UIF, Land and Agricultural Bank). - Registration may not be granted if applicant lacks necessary financial resources (minimum R10 million in fully paid up capital), organisation or management; fit and proper criteria not met; contrary to policyholders’ interests; cannot comply with Act; or contrary to public interest. - Application process requires a 5 year business plan addressing governance, risk management, capital, reinsurance, products, outsourcing, reporting. - Foreign branches/cross-border service basis not provided for; foreign subsidiaries subject to same requirements. - Timeliness: service level commitment of 180 calendar days; in practice average processing seen to be less than 30 days (Info Letter p3.3 -3.5). - Licensing Committee in place to advise on applications; standard practice allows conditions pre/post registration. - Ongoing initiatives: - Proposed Board Notice and legislative initiatives to prescribe specific fit and proper requirements, governance framework requirements and group structure restrictions. - Microinsurance policy objectives outlined (July 2011) with drafting of regulatory reforms in progress. - Assessment: Largely Observed. - Recommendations (ICP 4): - a) expedite proposed Board Notice formalizing governance, risk management and group structure licensing requirements; - b) review exemptions for friendly societies and adopt proportionate approach; - c) clarify boundaries between medical schemes and insurance products under the Insurance Acts. ### Suitability of Persons (ICP 5) - High level fit and proper requirements set out in LTIA, STIA, Guidelines for Registration and Risk-Based Supervisory Framework for Insurers. - Suitability scope includes directors, managing executives (CEO and manager reporting directly to CEO), public officers, auditors, statutory actuaries and significant shareholders. - Specific forms and notification requirements in place; outsourced verification agent used for credit, criminal and qualification checks for directors/managing executives/public officers. - Statutory provisions require FSB-SA approval for auditors/statutory actuary appointments and approval required for significant owners to acquire or hold shares; notification of termination/resignation within 30 days. - FSB-SA empowered to disqualify or remove persons not suitable; Court orders can compel reduction of shareholding to 25 percent and limit voting rights to 25 percent (LTIA s25-27; STIA s25-27). - Ongoing initiatives: Insurance Bill and proposed Board Notice to impose obligations for notification of material changes and enhance governance requirements including Key Persons in Control Functions. - Assessment: Observed. - Recommendations (ICP 5): - a) expedite regulatory initiatives to ensure ongoing suitability requirements, including for Key Persons in Control Functions, at solo and group holding company levels; - b) consider encouraging annual self-assessments by Board Members, Senior Management and Key Persons in Control Functions to confirm ongoing suitability and identify skills gaps. ### Changes in Control and Portfolio Transfers (ICP 6) - Legislative authority: LTIA, STIA, CA, applications and guidelines; Information Letter 6 of 2012 service level commitments. - Definition of control amended by FSLGAA: control if person alone/with related parties holds 25 percent or more of nominal value of issued shares; or 25 percent or more of specific class of shares; or directly/indirectly able to exercise more than 15 per cent of voting rights; or right to appoint/control appointment of directors who control more than 15 per cent of Board votes (LTIA s26, STIA s25). - Notification of changes in control now required (post-FSLGAA). Annual statutory returns include significant shareholder information. - Insurance Acts do not require notification for significant decrease below thresholds; Insurance Bill will require approval for disposing beneficial interest that results in no longer being a significant owner. - Review process: change-in-shareholding applications use Licensing Committee; FSB-SA may require information on ultimate beneficial owner and liaise with home regulator for foreign ownership. - Portfolio transfers: FSB-SA empowered to approve transfers; requires policyholder notification; independent actuary usually appointed for long-term insurer transfers; in last three years FSB-SA approved 22 portfolio transfers; no declined applications. - Ongoing initiatives: Insurance Bill to reduce control thresholds to 15 percent (consideration to reduce to 10 percent) and introduce definition of significant owner. - Assessment: Largely Observed. - Recommendations (ICP 6): - a) introduce a definition of “significant” owner based on control and percentage; - b) expedite legislative amendments to authorize FSB-SA approval for significant increases above predetermined control levels and for significant decreases. ### Corporate Governance (ICP 7) - Insurance Acts did not explicitly require boards to set/oversee governance framework; registration and Companies Act (CA) provisions interpreted to require effective governance. - King III (2009) applies on an “apply or explain” basis; sets best practice principles for boards (risk tolerance, independence, committees, CEO/Chair separation, remuneration, audit committee). - Supervisory practice: FSB-SA reviews governance through statutory returns, check-lists and on-site discussions; no formal role in checking insurer explanations for King III departures. - Pillar II Readiness survey (2012) findings: - About 60 percent of respondents indicated chairpersons of their boards are not independent. - Less than half had reviewed board performance. - Approximately 45 percent rated board functions as weak (IT governance, fit and proper policy). - Two out of three insurer failures in last five years attributable to inadequate corporate governance; main shareholder also CEO in both cases. - Ongoing initiatives: - Proposed Board Notice consultation June 2014, final expected November 2014 to introduce explicit governance requirements including independent Chairperson, board responsibilities, separation of oversight and management, remuneration policy, oversight of risk management, and supervisory powers for FSB-SA. - Group-level governance framework to be introduced under Insurance Bill (expected implementation January 2016). - Assessment: Partly Observed. - Recommendation: FSB-SA should plan for adequate supervisory resources to implement enhanced corporate governance framework. ### Risk Management and Internal Controls (ICP 8) - At time of assessment, no explicit legislative requirement for insurers to maintain effective risk management and internal controls; FSB-SA relied on registration requirements and King III principles. - Statutory actuary: - Appointment requires FSB-SA approval; statutory actuary must be a permanent resident, a Fellow of the Actuarial Society of South Africa and have appropriate experience (LTIA s20; STIA s19). - Statutory actuary required to report concerns to board and to FSB-SA if not rectified within 30 days; statutory actuary has legal protection for good faith reporting. - Long-term insurers cannot introduce a policy or award bonus unless statutory actuary satisfied with actuarial soundness (LTIA s20, s46; STIA s19A). - No explicit requirement for firms to have dedicated risk management, compliance and internal audit functions; King III addresses internal audit on apply-or-explain basis. - Outsourcing directives exist (Directive 159.A.i) covering outsourcing policy, contracts, oversight and notification; binder regulations issued. - Supervisory practice: - PRSFI and risk-based supervision include actuarial guidance, RAD and Section Notes; on-site visits and management letters used to communicate findings and required corrective actions. - Pillar II Readiness survey: majority have risk management and compliance functions, lower levels for internal audit and separate actuarial function; almost 90 percent outsource some control functions. - Ongoing initiatives: - Proposed Board Notice to require insurers to: - establish and maintain effective risk management and internal controls, reviewed by internal audit or external reviewer; - develop written risk management policies including asset-liability management, investment, reinsurance, remuneration, underwriting and fraud risk; AML-CFT policy for long-term insurers; - establish control functions: risk management, compliance, actuarial control and internal audit with provisions on authority, responsibilities and appointments; - replace Directive 159.A.i with Board Notice provisions on outsourcing. - Assessment: Partly Observed. - Recommendation: Provide supervisory guidance to short-term insurers on monitoring potential ML/TF risks to support ML/TF risk profile review (ICP 22). ### Supervisory Review and Reporting (ICP 9) - Legal authority: LTIA, STIA, FAIS Act, CA, FIPFA, IFIA and the Prudential Risk-based Supervisory Framework for Insurers (PRSFI). - Supervisory approach: - PRSFI evaluates insurer risk profile via financial condition, strategy, governance, management and compliance; revised in 2012 to incorporate international developments. - PRSFI methodology steps: - Understand insurer environment, Significant Activities and materiality. - Assess level of risk and quality of risk management to determine Net Risk and Direction of Risk. - Determine Overall Net Risk rating (weighted aggregation). - Decide Composite Risk Rating (CRR): combines Overall Net Risk with earnings, liquidity and capital. - Oversight functions identified: board, senior management, internal audit, risk management, actuarial, compliance, financial analysis. - Regulatory reporting: - Prescribed annual audited statutory returns and unaudited quarterly returns required; consolidated group reporting required from the five largest insurance groups. - Annual returns due within four months after year-end; quarterly returns due within one month after quarter-end. - Auditors’ statement included and submitted within six months from year-end. - Annual returns include quantitative and qualitative reporting on off-balance sheet exposures, governance and related party transactions; no approval process currently for significant related-party transactions. - Insurers must notify FSB-SA of director or managing executive appointments/resignations within 30 days; auditor/statutory actuary appointments require FSB-SA approval. - High-risk insurers may be required to submit monthly returns. - FSB-SA can direct corrected returns or require additional reports/nominated persons at insurer cost. - Off-site monitoring and review: - Unified supervisory teams perform off-site and on-site functions; RADs and Section Notes used to support risk assessment. - Industry analysts produce quarterly commentary and write-ups; Financial Stability Review Report by SARB used for macro-prudential context. - Bi-annual stress and scenario test returns for major insurers analysed. - FSB-SA maintains documentation and follow-up processes for off-site prudential monitoring. - On-site inspections: - FSB-SA strengthened approach to on-site supervision (detail truncated in source extract). - Assessment: (ICP 9 assessment text appears but full on-site description truncated in provided content). *Source: IMF Detailed Assessment (excerpts) — “The report accurately reflects the various ways in which the FSB-SA is already well-advanced”* ### introduction of PRSFI and added additional supervisory resources. It is authorized to ### _cr1556 - introduction of PRSFI and added additional supervisory resources. It is authorized to ### On-site supervision process - A workflow process ensures a structured approach to conducting on-site visits. - A supervisory plan is drawn up on an annual basis at the beginning of each financial year. - Preparation for an on-site visit: - A letter is sent to the insurer informing them of the intention to conduct an on-site visit, the scope of the visit and a request for information. - Prior to an on-site visit, a draft RAD is prepared and persons to meet (e.g., chairpersons of board committees, senior management, internal audit function, statutory actuary) are identified and communicated to the insurer. - After review of statutory returns and requested information, a query letter is issued; the insurer must respond within a specified period and the response is assessed to determine if regulatory action is needed. - Post on-site process: - A report and findings are presented to an internal peer review panel to ensure quality and consistency. - A management letter is issued to the insurer communicating findings and outlining required preventative or corrective action plans. - The insurer is required to respond within a specified period; responses are assessed to determine if further regulatory action must be taken. - The insurer’s willingness and promptness in taking preventative or corrective actions are considered in ongoing supervision. ### On-site visits and key findings - The FSB-SA conducted 80 (market conduct and prudential) on-site visits in the 2013/14 financial year. - Weaknesses revealed included: - poor governance systems, particularly amongst small insurers; - poor oversight over outsourcing arrangements; - undue reliance on individuals (key-person risk); - IT system challenges. - The FSB-SA conducted post-registration/licensing on-site visits with no major concerns identified. - In 2012 the FSB-SA conducted two prudential group holding company on-site visits, assisting development of a risk-based on-site program for insurance groups. - CoB on-site activity: - 33 CoB on-site visits were conducted in the 2013/14 financial year. - CoB visits highlighted similar concerns as prudential visits and additional compliance issues with Binder Regulations, STIA, LTIA, and FAIS Act (e.g., false advertising, naming contraventions, inadequate disclosures). - There were instances of joint prudential and CoB on-site visits. ### Supervisory resources and capacity - The Insurance Division size has increased to enhance frequency and intensity of on-site supervision and to build technical expert support for front-line supervisors. - At the time of assessment the Insurance Division had adequate resources to deliver its supervisory plan. - Assessors noted more resources will be needed to conduct full on-site inspections on large insurers and conglomerate insurance groups, especially given inter-connectedness in financial conglomerates. ### Supervisory plan and cycle - The FSB-SA Insurance Division develops an annual on-site plan focused on higher-risk insurers and insurance groups. - The risk-based prudential supervisory approach prioritizes supervisory attention based on insurer risk profile; this approach is communicated to industry and updated regularly. - Supervisory cycle requirement: each insurer and reinsurer is expected to have at least one on-site visit every three years. - Responsibility for coordinating supervisory cycle steps is assigned to Relationship Managers (RM); each registered insurer is allocated to a supervisory team. - Assessors found instances where on-sites were not completed according to the supervisory cycle. - Supervisory stances by composite risk rating: - Low to moderate risk rating: assess financial condition and operating performance; review statutory returns; meetings; regular risk-based supervisory reviews; on-site visits; follow up on corrective measures. - Moderate to above average composite risk rating (early warning): issue management letters; meetings to discuss remedial actions; escalate reporting requirements; conduct enhanced supervisory reviews; require increase in capital; impose conditions. - Above average to high composite risk rating (Risk to financial viability or solvency): enhanced monitoring and supervisory reviews; require a business plan with remedial measures; enlarge scope of external audit or require a special audit; adopt alternative valuation methods for assets or liabilities; require a special actuarial review. - High composite risk rating (Future financial viability in serious doubt): engage external specialists; impose/vary registration conditions. - High composite risk rating with an increasing trend (Non-viability/solvency imminent): prohibit new business; curatorship or applying for liquidation. ### Insurance groups and group supervision - No legislative requirements currently mandate group-level information submissions; FSB-SA relies on general authority rather than specific provisions. - The five largest insurance groups are requested to submit quarterly unaudited returns on a group-wide basis; smaller groups with supervisory concerns may also be requested to submit unaudited group-wide returns. - In 2012 an information request asked insurance groups to provide: - the material functions outsourced within the group and to third parties outside the group; - the structure of the insurance group; - a risk indication identifying the top four risk areas of the various material entities within the group. - Joint on-site visits occur between different divisions of FSB-SA and the FIC for dual-regulated insurers. - For groups with banks and insurance subsidiaries, the SARB and FSB-SA have conducted joint on-site visits with appropriate risk assessment recorded in the RAD. ### Ongoing regulatory initiatives (supervision, reporting, reinsurance) - The FSB-SA intends to introduce a dedicated quarterly CoB return in late 2014 to enable enhanced offsite analysis of conduct of business and customer treatment practices. - Annual and quarterly reporting by insurance groups as described in the ILAB will be subject of further consultation in the second phase of the draft Financial Sector Regulation Bill. - For reinsurance: - The FSB-SA will issue a Board Notice requiring insurers to have an explicit reinsurance and other forms of risk transfer policy that: - outlines appropriate strategies and procedures for selection of suitable reinsurance programs and other risk transfer techniques; - ensures transparent reinsurance arrangements and associated risks to understand economic impact; - provides processes and procedures to ensure implementation, compliance, and appropriate systems and controls. - In 2012 the FSB-SA commissioned a reinsurance review project to inform a policy paper, planned for release in mid-2014, on whether to allow reinsurance to be conducted on a branch basis in South Africa. ### Assessments, observations and recommended enhancements (supervision) - Assessment for supervisory approach: Largely Observed. - Key comments: - FSB-SA uses a risk-based supervisory approach considering financial condition, future strategy, governance, management processes, and compliance. - Adequate documentation and follow-up processes exist for off-site monitoring and on-site visits; risk-based process is continuously refined. - Group-level reporting is limited to a few large groups; need for standardized reporting of intra-group transactions and aggregate exposures due to interconnectedness. - Market conduct supervision for groups is not addressed in group risk-based supervision framework; solo insurer market conduct supervision is adequate. - Planned CoB quarterly return is a positive step given issues with lapse rates, surrenders and churning. - Recommended measures to strengthen supervision: - a) Ensure three year supervisory cycle is completed for all insurers and reinsurers and conduct more intensive on-site visits for more complex insurers. - b) Formulate appropriate group supervision plan covering all insurance groups in a risk-based, proportionate manner, including joint on-site visits of financial conglomerates. - c) Increase off-site monitoring of intra-group transactions and aggregate group exposures and limits; establish procedures for insurer/groups to report group related risks and risk direction for off-site monitoring. - d) Institute procedures to capture CoB risks in the current RAD so prudential and CoB supervision form part of risk assessment. - e) Strategize an appropriate risk-based supervisory cycle for CoB on-site visits to cover the large number of licensed FSPs, facilitated by the proposed CoB return. - f) Ensure adequate skilled supervisory resources are in place to achieve appropriate coverage and supervisory intensity. ### ICP 10 Preventive and Corrective Measures - Assessment: Observed. - Description and powers: - Legislation prohibits carrying on insurance business without registration (LTIA s7(1), STIA s7(1)). - FSB-SA powers against unregistered insurers include: - issue a directive to cease unregistered insurance business (LTIA s4; STIA s4); - bring criminal charges (LTIA s66; STIA s64); - take action under FIPFA including referral to the Enforcement Committee for a penalty; enter into an enforceable undertaking to cease the business; apply to Court to compel cessation, prevent concealment/removal/dissipation/destruction of assets or evidence; seize and remove assets pending legal remedies. - In practice many matters were detected through consumer complaints and other insurers; FSB-SA uses public warning notices and press releases to alert public to unauthorized operators. - Preventive and corrective measures available: - Ad hoc on-site visits or intensifying off-site monitoring through monthly reporting and information requests. - Directives to undertake or desist from specific actions (s4 of the Insurance Acts). - Varying registration conditions (s11 of the Insurance Acts). - Prohibiting non-insurance business (LTIA s15; STIA s15). - Requiring termination of appointment of directors, managing executive, public officer, auditor or statutory actuary on fit and proper grounds (LTIA s22; STIA s21). - Measures relating to ownership: apply to Court to compel reduction of shareholding or limit voting rights (s26 of LTIA; s25 of STIA). - Specific powers when insurer fails to maintain financial soundness: direct insurer to furnish information on nature/causes and proposals; authorize modifications of course of action including transfer of assets/liabilities, customer property, data and systems, ownership changes, or increase capital levels (s35 of LTIA; s34 of STIA). - Progressive escalation: - The PRSFI includes a supervisory regime supporting progressive escalation of remedial measures as risks increase. - FSB-SA decision-making structures are relatively flat allowing immediate action in emergencies; minor actions often achieved through communication given generally good industry relations. - Engagement occurs with Chairperson of the Board or Chief Executive when preventative/corrective measures are required; management letters must be shared with entire Board and external auditors; appropriate follow-up and increased reporting frequency are used. - Ongoing regulatory initiatives will extend circumstances for requiring compliance plans for financial soundness and allow certain preventive/corrective measures to be applied directly to insurance groups. ### ICP 11 Enforcement - Assessment: Observed. - Legal authority and enforcement powers include: - Issue formal directives; failure to comply is a criminal offence (LTIA s4; STIA s4). - Limit or prohibit all or part of insurance business for inappropriate operation or misleading information (s12 of the Insurance Acts). - Enter into enforceable undertakings (FIPFA). - Require termination of key persons on fit and proper grounds (LTIA s22; STIA s21). - Apply to Court to compel reduction of shareholding or limit voting rights (LTIA s26; STIA s25). - Conservatorship, curatorship and taking control of insurer (Part VI of the Insurance Acts). - Fines and penalties: - Under FIPFA, FSB-SA may refer cases to the Enforcement Committee (EC), an administrative body that adjudicates contraventions and may impose penalties, compensation orders and cost orders enforceable as if a High Court judgment. - No prescribed maximum amount for sanction; discretion rests with EC. FIPFA provides guidance on factors EC considers. All sanctions imposed by EC are publicly disclosed by law. EC can order insurer to pay financial penalty to FSB-SA or any person who suffered loss (FIPFA s6D(3)). - Insurance Acts authorize a penalty of R5 000 for every day a return, information or document required are late (LTIA s68; STIA s66); FSB-SA regularly imposes penalties for late submission. - Supervisory practices: - FSB-SA schedules follow-up on-site visits where enforcement matters occurred. - FSB-SA maintains a register of penalties and EC decisions and has applied to Court to place an insurer in curatorship; such applications were granted with wide-ranging powers for curator. - A dedicated Insurance Enforcement Department provides legal support and assists in facilitating quicker, appropriate, consistent and legally sound enforcement. - Enforcement Unit enforces sanctions imposed by EC; criminal sanctions enforced by National Prosecuting Authority and South African Police Service; other sanctions enforced by Insurance Enforcement Department with Legal department collaboration. - Commentary: FSB-SA has wide enforcement powers, frequently applied; EC adjudicates contraventions and can impose unlimited penalties; criteria guiding sanctions are clear, objective and publicly disclosed. ### ICP 12 Winding-up and Exit from the Market - Assessment: Partly Observed. - Legal framework and powers: - FSB-SA may cancel registration where insurer is unable to commence business within a reasonable period after registration; ceases to write policies to extent no longer justifying registration; or all insurance business has been discontinued (LTIA s13; STIA s13). - Insurance Acts provide for winding-up by Court order; Companies Act and Insolvency Act apply to winding-up processes and specify “acts of insolvency” (LTIA s42, s13; STIA s41, s13). - An “act of insolvency” includes inability to maintain a financially sound position; in winding-up the interests of policyholders must be considered. - FSB-SA may apply for winding-up; applications by third parties must serve relevant documents on FSB-SA; FSB-SA may join applications and oppose if contrary to policyholders’ interests. - In practice FSB-SA has supported third-party winding-up applications when in policyholders’ interest; insurers have exited market via amalgamation or transfer of business. - Policyholder entitlements and concerns: - Policyholders do not currently have priority ranking in winding-up; they rank pari passu with unsecured creditors. - FSB-SA has engaged Department of Justice and Constitutional Development on insolvency law reform and appealed for policyholders to be ranked ahead of unsecured creditors. - Third party cell captives present complications: cell captive arrangements are governed by contract; there is no legal ring-fencing of funds in liquidation as current framework treats all assets and liabilities of third party cells as part of insurer’s assets and liabilities. - Ongoing initiatives: - FSB-SA participates in a Resolution Policy Working Group (supported by the World Bank) with NT and SARB to consider improvements to legislative frameworks for resolution of financial institutions, including establishing a policyholder protection scheme. - FSB-SA solicited industry input in July 2013 on benefits, risks and features for a policyholder protection scheme. - Recommendation: - Authorities should expedite legislative changes to give high legal priority to protection of rights and entitlements of policyholders. ### ICP 13 Reinsurance and Other Forms of Risk Transfer - Assessment: Largely observed. - Legal and supervisory framework: - Applicants must provide reinsurance projections, assumptions, strategy and a letter of reinsurance support as part of business plan (LTIA s9; STIA s9). - Registered insurers must submit prescribed reinsurance information in audited annual statutory returns: reinsurance premiums, reinsurance recoveries, extent of catastrophe cover, statements on overall reinsurance strategy and use of “financial relief arrangements” (such as finite reinsurance). - Supervision focuses on “approved reinsurance policy”: relief for reinsurance ceded in technical provisions only if reinsurance meets “approved reinsurance” definition. Approval for long-term foreign reinsurance is granted per contract, usually subject to security/collateral; short-term foreign reinsurance is automatically approved if adequate security/collateral provided in prescribed formats (LTIA Schedule 3; STIA s1). - Current regime does not explicitly require insurers to: - a) have explicit reinsurance and risk transfer strategies as part of underwriting and risk/capital management strategies; - b) maintain systems and procedures to ensure reinsurance strategies are implemented, including controls over risk transfer transactions; - c) promptly document and finalise principal terms and conditions of reinsurance contracts in a timely fashion. - No explicit regulatory requirements for intra-group reinsurance transactions in absence of group-supervision framework. - Supervisory practices: - FSB-SA reviews reinsurance arrangements via audited annual statutory returns; individual arrangements are not checked off-site unless concerns exist. - On-site visits review reinsurance programs via system walk-throughs and discussions with Senior Management, Board or Board-subcommittees overseeing reinsurance. - Since 2010 insurers must conduct annual stress tests that include scenario of 100 percent default by the largest reinsurer and 100 percent default by the largest reinsurer on maximum event retention for catastrophic events; FSB-SA uses results for peer comparisons and benchmarking. - FSB-SA analyses insurers’ liquidity on a quarterly and annual basis as part of assets diversification requirements, but does not specifically assess cedants’ liquidity control in light of reinsurance contract structures and payment patterns. - ART (alternative risk transfers) reporting: insurers must submit information on ART in annual statutory returns; ART commonly used in cell captive arrangements; financial reinsurance used more by smaller life insurers experiencing growth strain. No explicit policy on accounting treatment of ART, but FSB-SA monitors closely. - Recommended additional actions for FSB-SA: - d) adopt a systematic approach to evaluating nature of supervision of reinsurers and other counterparties used by insurers; - e) formulate a clear policy position on treatment and accounting for ART; - f) establish explicit requirements on reinsurance with related companies, including management of liquidity, concentration and contagion risk and potential conflicts of interest; assess acceptability of related-company reinsurance based on qualitative and quantitative criteria. ### ICP 14 Valuation (summary of current regime and issues) - Valuation regime: - Based on financial reporting standards, subject to prudential filters for assets and prudent valuation methodologies for certain assets and technical provisions prescribed by the FSB-SA. - For long-term insurers, ASSA’s actuarial standard also addresses valuation, recognition, de-recognition and measurement of assets and liabilities (Board Notice 14 of 2010; Board Notice 169 of 2011; SAP 104). - If calculation of asset, liability or capital adequacy does not reflect a reasonable value, FSB-SA may appoint another person to place a reasonable value or direct insurer to calculate value in manner determined by FSB-SA (LTIA s31(3), schedule 3; STIA s30(3)). - Assets: - Assets are stated at fair value (economic valuation) except where otherwise directed by FSB-SA. - Insurance Acts provide list of eligible and non-admitted assets (e.g., premiums outstanding beyond 60 days, goodwill, prepaid expenses and negative liability under long-term policies). - Certain valuation methods prescribed for investments in group undertakings (LTIA Schedules 1 & 3; STIA Schedules 1 & 2 & s31(1); Board Notice 169 of 2011 p3.1; Board Notice 14 of 2010, p7). - Only assets actually held by and registered in insurer name or approved nominee may be taken into account; assets encumbered are deemed not held; insurers shall not encumber assets without FSB-SA approval (LTIA s32(c), s34 & Schedule 3; STIA s31(c) & s33). - Liabilities and technical provisions: - Technical provisions for long-term and short-term insurers for statutory purposes are net of approved reinsurance; financial reporting separates gross technical provisions and reinsurance assets. - Where reinsurer is in default or at serious risk, ASSA expects actuaries to report such reinsurance explicitly rather than as component of net technical provisions. - Other liabilities determined per financial reporting standards applicable to widely-held companies (LTIA Schedule 3; STIA Schedule 2; APN 401 p3.11.7). - An insurer’s own credit standing is not taken into account when calculating value of technical provisions and other liabilities. - Short-term insurers’ technical provisions: - Technical provisions include outstanding claims reserve (OCR), incurred but not reported (IBNR) reserve, unearned premium provision (UPP), and unexpired risk provision (URP). - Prescribed methodology for calculating UPP, OCR and IBNR; IBNR is based on specified development factors for each class with no allowance for diversification; factors higher for long-tail/volatile classes and assume full development over six years. - URP computation determined in consultation with auditor and statutory actuary (STIA s32 & Schedule 2; Board Notice 169 of 2011). - ASSA APN provides guidance on calculation and alternative methods where approved by FSB-SA; actuary should conduct sensitivity analyses of key assumptions. No specified approach for margins; actuary may recommend margins guided by purpose (APN 401). - Technical provisions are not calculated based on discounted values of future cash flows. ASSA advised discounting should be applied if it will make a material impact; guideline: when discounted mean term of liabilities expected to exceed four years, discounting should be applied; disclose before and after discounting. - No explicit split between current estimate and margins; margins implicitly included in standard factors for IBNR. UPP based on office premium (net of reinsurance) and thus has implicit margin. Retrospective valuation for short-term insurers may not reflect full uncertainty of future cash flows (e.g., latent claims). - Long-term insurers’ technical provisions: - Supervisory guidance supplemented by ASSA SAP 104. Technical provisions calculated using discounted cash flow basis that must consider future premiums and assumptions on investment returns, bonus declarations, expenses, mortality, morbidity, lapses, surrenders and other factors. - Assumptions must be best-estimate, consider reasonable expectations of policyholders, and be modified by compulsory and discretionary margins. - Current discount rate is based on investment return earned on assets backing liabilities (Board Notice 14 of 2010). - Compulsory margins are calculated based on various factors (text truncated in source). *Source: _cr1556 - introduction of PRSFI and added additional supervisory resources. It is authorized to — INTERNATIONAL MONETARY FUND* ### 7.5 percent to 25 percent) applied to best-estimate assumptions: mortality, morbidity, ### _cr1556 - 7.5 percent to 25 percent) applied to best-estimate assumptions: mortality, morbidity, ### Technical provisions, margins, and policyholder expectations - Technical provisions must use best-estimate assumptions and include compulsory margins (7.5 percent to 25 percent) applied to best-estimate assumptions: mortality, morbidity, medical, lapses, terminations, surrenders, expenses, expense inflation, and charge against investment returns. - Compulsory margins: - Are intended to introduce prudence to allow for possible adverse deviations during the expected future lifetime of the business. - Must be added throughout the lifetime of policies except for regular renewable policies (e.g., group policies re-priced annually). - Discretionary margins: - May be included where the Statutory Actuary believes: a) compulsory margins are insufficient for prudent reserving; or b) a discretionary margin should be used to defer profit release consistent with policy design or company practice. - In practice, most insurers maintain discretionary margins. - Participating policies: - Liabilities should be increased by any positive bonus stabilization reserve where a policy of smoothing bonuses has been followed. - If smoothing has resulted in a negative bonus stabilization reserve due to a downward fluctuation in market value of backing assets, it is acceptable to reduce liabilities to reflect amounts reasonably expected to be recovered through under-distribution of bonuses during the ensuing three years, provided the Statutory Actuary is satisfied future bonuses will be reduced if asset values do not recover. - Linked products: - Technical provisions are not calculated on an economic basis because the discount rate is not necessarily market-consistent. - Linked products have implicit margins as not all future cash flows are valued (e.g., taking the current value of units, i.e., asset shares as the liability). - Long-term insurers must: - Allow for future bonuses (on discretionary participation contracts) and dynamic policyholder behavior if it is expected to cause a strain (if it creates a profit it is not allowed). - The ASSA recommends market-consistent stochastic models to quantify reserves for embedded investment derivatives (LTIA Schedule 3; APN110). - Policyholder reasonable expectations depend on product type, insurer practice, presentation of benefits, and marketing materials. - FSB-SA Directive on Governance of Discretionary Participating Business requirements: - a) Define Principles and Practices of Financial Management (PPFM) for discretionary participation products; - b) Publish the PPFM and disclose parameters for exercising discretion, including methodology to calculate emerging surplus allocation between policyholders and shareholders; approach for smoothing amounts payable; managing conflicts of interest between policyholders and shareholders and between different generations of policyholders; - c) Governance arrangements to ensure decisions are in accordance with PPFM and monitor changes. Preference is to establish Discretionary Participation Committee of the Board; - d) Annual confirmation of compliance to the PPFM in statutory returns (Directive 147.A.1). - ASSA expectation: Statutory Actuary should consider what policyholder expectations have been created and whether insurer has taken clear action to change previously held expectations (SAP 104 p3.5). *Assessment and comments* - Valuation regime intended to be prudently realistic and based on financial reporting standards, subject to prudential filters for assets and prudent valuation methodologies prescribed by FSB-SA. - Long-term insurers must observe ASSA SAPs in estimating technical provisions, using best-estimate assumptions, accounting for policyholders’ reasonable expectations, and maintaining explicit compulsory and discretionary margins. - Short-term insurers: no requirement for explicit margin over current estimate; implicit margin incorporated via prudent factors and no discounting policy. - SAM Framework valuation regime will be based on economic valuation, with explicit margins over current estimate for technical provision. *Italic: Source — content provided in the input.* ### Supervisory practice and SAM Framework valuation approach - FSB-SA supervisory authority and actuarial expertise: - Can assess adequacy of technical provisions maintained by insurers. - May allow alternative methods by statutory actuaries if methods reflect policy portfolio risks and for a limited period subject to supervisory review. - SAM Framework overview: - Economic balance sheet approach integrating interdependencies between all assets and liabilities, calculated at market-consistent values. - Asset valuation: - Market-observable values used where available. - If not available, insurer can use mark to market or mark to model approaches. - Insurance liabilities: - Valued as probability-weighted present value of future cash flows, with an explicit risk margin to allow for cost of capital associated with uncertainty of future cash flows. - Discounting: - FSB-SA plans to use government bond rates as default for discounting but may allow swap rates for certain liability components in line with investment policy. - Embedded options and guarantees under long-term policies explicitly provided. - Insurer’s own credit standing will not be taken into account in calculating technical provisions and other liabilities. - Assessment: Valuation regime under SAM will be based on economic valuation with explicit margins over current estimate. *Italic: Source — content provided in the input.* ### ICP 15 — Investment: legal requirements, constraints, and initiatives - Legal requirements: - Insurers must hold assets in South Africa that are not less than aggregate liabilities to be met in South Africa and capital adequacy requirement (LTIA s32(1)(a), Schedule 1; STIA s29(2), Schedule 1). - Insurance Acts require diversification and specify non-admitted assets for solvency purposes. - Long-term insurers must hold eligible assets covering liabilities under non-linked policies. - Short-Term Insurance Regulations and Long-term Insurance Regulations prescribe asset limitations and concentration limits. - Investments requirements apply at insurance entity level (LTIA s31(1),Schedules 3; STIA, s30(1), Schedule 2). - Derivatives and encumbrances: - Insurers shall not invest in derivatives except for: a) derivatives acquired out of surplus assets; b) reducing investment risk; c) efficient portfolio management; or d) assets designated for linked policies. - Short-term insurer must have the asset at the settlement date matching obligations under derivative instruments (LTIA s34(2); STIA s33(2)). - Insurers shall not, without FSB-SA approval: a) encumber assets; b) allow assets to be held by another on its behalf; c) directly or indirectly borrow any asset; d) give security in relation to obligations between other persons unless registered to write guarantee policy; e) include in assets shares directly or indirectly held in its holding company (LTIA s34; STIA, s33). - Nominees: - Standing approvals granted to use nominee services (local and foreign) subject to minimum conditions prescribed by FSB-SA. - Nominee companies are approved and a register is published (Directive 126 Ai). - FIPFA requires nominees to be controlled by regulated financial institutions; Nominee Steering Committee to consider further requirements (FIPFA, s2). - Statutory actuary responsibilities: - For long-term insurers, statutory actuary must be satisfied that kinds and spread of assets are proper and suitable given liabilities and maturity profile, including ALM requirements prescribed by FSB-SA (LTIA s31(2)). No such ALM requirement for short-term insurers. - Gaps: - No investment requirements at insurance group level (policy/restrictions on intra-group transactions, fungibility, centralized function). - On-going regulatory initiatives: - Proposed Board Notice to establish regulatory requirements on: - a) explicit investment policy specifying investment in accordance with Insurance Acts, nature/role/extent of investment activities and compliance with regulatory investment requirements; - b) explicit asset-liability management policy specifying ALM activities and relationship with product development, pricing, and investment management. - Insurance Bill will apply prudent person investment principle requiring insurers to invest: - a) only in assets/instruments whose risks insurer can properly identify, measure, monitor, manage, control and report and appropriately take into account in overall solvency assessment given risk profile, approved risk tolerance limits and business strategy; - b) assets held to cover technical provisions appropriate to nature and duration of insurance liabilities and in best interest of all policyholders and beneficiaries, with conflict of interest proviso; - c) assets in a manner that reasonably ensures security, quality, liquidity and profitability of whole portfolio and availability of assets. - Assessment: - FSB-SA has established requirements on investment activities including eligible assets, diversification, non-admitted assets, prohibition against encumbrance, use of nominees and derivative investment limits. - Proposed Board Notice will enhance regime by requiring explicit investment and ALM policies. - Authorities are advised to formulate appropriate investment requirements at insurance group level. *Italic: Source — content provided in the input.* ### ICP 16 — Enterprise Risk Management (ERM) and ORSA - Legal and supervisory framework: - Insurance Acts and supervisory guidelines do not specifically require insurers to establish ERM framework or perform ORSA at present. - No explicit legal requirement for insurers to maintain: - a) accurate documentation of risk measurements; - b) a risk management policy describing relationship between tolerance limits, regulatory capital, economic capital and monitoring processes; - c) explicit ALM policy (though statutory actuary for long-term insurers must be satisfied assets match liabilities); - d) explicit investment policy; - e) explicit underwriting risk policies; - f) risk tolerance statement embedded in operations. - Supervisory practice and insurer preparedness: - FSB-SA expects larger insurers to implement effective ERM; ERM reviewed as part of risk-based supervision. - 2012 Pillar II Readiness survey findings: - almost 85 percent of insurers rated themselves as either weak or needing improvement with respect to ORSA preparations. - more than 90 percent of insurers have documented their risk management strategy; - more than 90 percent of long-term insurers have a formal ALM policy; - almost 90 percent of insurers have a formal investment policy; - almost 72 percent of insurers have a formal policy on underwriting; - more than 80 percent of insurers have risk management systems fully or partly independently reviewed by internal audit or an objective third party. - FSB-SA conducting further assessment of ORSA progress. - Stress testing: - FSB-SA introduced semi-annual economic stress tests for the six largest long-term and short-term insurers, and annual economic and insurance stress test for all insurers. - Stress test scenario includes: steep equity drop, adverse developments in interest rate volatility across term structure, adverse currency movements, significant drops in property investment prices, counterparty risk deterioration, and concentration risk—representing significant overall economic deterioration. - Stress tests indicated insurers “continue to reflect resilience to adverse economic stresses and scenarios.” - SAM Framework: - Insurers required to conduct ORSA at least annually and when material risk profile changes occur. - Under SAM, current stress tests will no longer be required because standard capital formula provides a comprehensive stress test. - ORSA will require multiple stress tests, including reverse stress tests, to identify concentrations and stability risks. - Proposal to establish supervisory committee under Twin Peaks to review industry-level statistics and consider macro-prudential stress tests as needed. - Assessment: - Pending SAM implementation, statutory requirements for ERM and ORSA are incomplete; interim FSB-SA measures include stress testing and ERM reviews. - Proposed Board Notice and SAM implementation will significantly enhance ERM regulatory regime. *Italic: Source — content provided in the input.* ### ICP 17 — Capital adequacy: current regime, CAR, SAM transition - Capital Adequacy Requirements (CAR) legal basis: - Insurer must at all times maintain business in a financially sound condition: aggregate assets must not be less than aggregate liabilities and CAR calculated per prescribed valuation rules (LTIA s30, s31, Schedule 3; STIA s28, s29, s30, Schedule 2). - Current solvency regime: - Not based on total balance sheet approach; distinction between assets backing liabilities, assets backing CAR, and free assets. - Assets backing policyholder liabilities drive capital requirements for market and credit risk. - Market risk adjustment made for assets backing CAR for long-term insurers. - Risks inherent in free assets not accounted for in CAR calculation. - Transparency and consultation: - Regulatory capital requirements are prescribed in a transparent manner in consultation with industry and ASSA. - Long-term insurers — CAR determination: - CAR determined by statutory actuary as highest of: - a) termination CAR (ensures liability under each policy ≥ amount available on surrender/lapse, allowing for reasonable policyholder expectations); - b) ordinary CAR determined per ASSA guidelines calibrated at a 95 percent of sufficiency over the lifetime of the policy; - c) minimum CAR, the higher of: R10 million; operating expenses multiplied by 13 and divided by 52; or 0.03 percent of gross contingent liabilities under unmatured policies. - Credit for management actions under a) and b) recognized only where board approved and statutory actuary satisfied action will be taken (LTIA Schedule 3; Board Notice 14 of 2010). - ASSA methodology highlights: - CAR is higher of Termination Capital Adequacy Requirement (TCAR) and Ordinary Capital Adequacy Requirement (OCAR). - TCAR = Lapse CAR + Surrender CAR; ensures survival of a very selective “run-on-the-bank” scenario. - OCAR computed based on factors establishing capital needs for risk categories: lapse; surrender; mortality, morbidity and medical fluctuations; annuitant mortality fluctuation; mortality, morbidity and medical assumptions; expense fluctuation; investment; credit; operational and other risks. Results summed with adjustment for independencies and diversification. Intermediate OCAR calculated then grossed up to reflect assumed fall in fair value of assets backing OCAR and credit risk to get OCAR (SAP 104). - Current regime addresses risks: - a) Technical provisions via prescribed and discretionary margins in addition to best estimates; - b) CAR through risk charges for lapse, surrender, mortality, morbidity, medical, expense, longevity, investment, credit and operational risks; insurers may allow further risk capital for uncovered risks. Risk charges aggregated assuming independence except operational risk. - Short-term insurers — CAR determination: - CAR is highest of: - a) minimum CAR — higher of: R10 million; operating expenses multiplied by 13 and divided by 52; or 15 percent of net premium income; - b) solvency CAR — sum of Basic Solvency CAR and Operational Risk Capital. - Basic Solvency CAR considers insurance (by class), market (by asset category) and credit risks (depending on recognised credit ratings). - Operational Risk Capital is lower of 30 percent of Basic Solvency CAR or 3 percent of earned premiums/technical provisions (as defined) (Board Notice 169 of 2011). - Target criteria and own funds: - No overall target criterion specified for CAR; FSB-SA considers factors used are based on target criterion of 99 percent sufficiency over one year horizon. - No tiered approach in classifying own funds currently; essentially requires tier 1 capital. Insurers can make ad hoc applications to issue hybrid capital; tiered approach applied in assessing such applications on permanency, availability, subordination and mandatory servicing. - Solvency intervention: - If insurer notifies FSB-SA or FSB-SA satisfied insurer is breaching or likely to breach MCR, FSB-SA may direct insurer to furnish specified information and proposals. There is no other intervention point (LTIA s35; STIA s34). - No explicit power for FSB-SA to increase/vary CAR, but can direct insurer to place proper value on asset/liability/CAR or impose licensing conditions. Insurers may apply for reduced minimum CAR in limited circumstances (run-off). - Group solvency: - No legal framework for group-wide supervision; no formal group-level solvency requirement. - FSB-SA requests potential systemic insurance groups submit quarterly unaudited returns group-wide. - Group capital assessment uses aggregation and deduction technique — sum of solo CARs adjusted for intra-group transactions (loans and guarantees but not reinsurance) — does not allow diversification between solos. - Internal models: - Internal models subject to FSB-SA approval; in practice FSB-SA has not prescribed requirements allowing insurers to apply for approval under current Acts and has not allowed their use. - Supervisory practice: - FSB-SA uses a range of supervisory activities depending on insurer risk rating. Continuous assessment of regulatory capital requirements as part of risk-based supervision. - As insurers approach minimum CAR, supervisory action intensifies from monthly reporting to curatorship (ICPs 10 and 11). - SAM Framework transition: - SAM, based on Solvency II with local adaptations, applies to insurers and insurance groups and is a total balance sheet, risk-based solvency framework. - SAM calibrates SCR to correspond to VaR of eligible own funds at 99.5 percent confidence over one year. Two SCR approaches: internal model or standard formula. - MCR establishes lower bound roughly aimed at 85 percent VaR over one year; combination of factor-based formula and percentage of SCR. - Capital resources calculated as market-consistent value of assets less liabilities, then adjusted to exclude/limit certain capital resources; capital instruments tiered into 3 categories. - SAM provides predefined intervention ladder options. - Separate solvency regime for micro-insurers (SCR at 99.5 percent VaR maintained but calculation simpler). - Financial soundness requirements for insurance groups introduced in draft Financial Sector Regulation Bill. Group SCR via deduction and aggregation method; no group MCR in Phase 1. Phase 2 Insurance Bill additions: -  A group MCR introduced based on sum of solo MCRs; -  Option for groups to apply accounting consolidation methodology to South African insurance-related entities subject to FSB-SA approval. - Insurance Bill requires internal model approval process for SCR calculation; FSB-SA published guidance and commenced internal model pre-application process. - Assessment: - Current solvency regime is transparent and more risk-based for long-term insurers; CAR has largely prevented insurer failures due to prudence in technical provisions. - Single statutory intervention point exists, but continuous monitoring allows early identification of breaches and timely intervention. - SAM Framework and Insurance Bill implementation will align solvency regime with ICP 17. *Italic: Source — content provided in the input.* ### ICP 18 — Intermediaries: FAIS framework, licensing, conduct, and supervision - Regulatory authority and scope: - Financial Advisory and Intermediary Services Act, 2002 (FAIS Act) regulates rendering of financial services (including insurance) by Financial Service Providers (FSPs). - Applicable instruments include FAIS Act; General Code of Conduct for Authorised FSPs and Representatives (General Code); Codes of conduct for Administrative and Discretionary FSPs; LTIA and regulations; STIA and regulations; FIPFA and IFI Act. - FAIS Act applies to persons domiciled outside South Africa rendering financial services in South Africa. FAIS Regulations prohibit canvassing/marketing/advertising related to financial services by persons not authorized FSPs or representatives (FAIS Reg s3(a)). - Licensing of FSPs: - All persons rendering financial services must be authorized FSP or appointed representative of authorized FSP (FAIS s7). - FSPs classified into categories; insurance-related FSPs mainly Categories I and IV. - Individuals as representatives are not directly licensed by FSB-SA but must comply with FSP requirements. FSB-SA records approximately 124,776 representatives. - FSP licensing application requires specified forms and documentation on business information, directors/officers/substantial shareholders (>25 percent), representatives, compliance officer, operational ability, financial soundness, external auditor, business plan, policies/procedures/systems, internal controls. Licensing Committee reviews applications; typical review time ~8 weeks. - FSB-SA may impose conditions/restrictions on licence; exemptions allowed to facilitate microinsurance access (e.g., funeral insurance). - Fit and proper and competency: - FSPs and key individuals/representatives must comply with fit and proper standards: honesty and integrity, competency, financial soundness, operational ability. - Competency requirements vary by product: experience, qualifications, regulatory examinations, continuous professional development. - Table examples: Category I vs Category II & IIA entry/experience/qualification distinctions preserved in source. - Market statistics: - As of March 31, 2014, approximately 10,992 licensed FSPs, down from 12,051 in 2011. Decline attributed to tighter licensing, fit and proper, and educational requirements to improve policyholder protection and conduct. - Distribution channels: - Long-term insurers: individual life policies mainly in-house agents (53 percent); group life policies mainly brokers (51 percent). - Short-term insurers: broker channel dominates personal lines, corporate and commercial distribution. - On-going regulatory requirements and controls: - PPR under Insurance Acts require insurers to deal with FSPs licensed under FAIS (FAIS s7(3); LTIA s62; STIA s55). - Minimum capital requirements set for FSPs to address operational and credit risk (Board Notice 106 of 2008 Part IX; FAIS s8). - Requirements applied per licence category; higher-risk categories face higher requirements. - Regulatory returns, compliance officers and reporting: - FSPs must submit compliance reports, financial statements and audit reports to FSB-SA; notify FSB-SA of changes in key individuals and representatives (FAIS s17-19). - FSPs (except sole proprietors with no representatives) must appoint a Compliance Officer (CO) to oversee compliance; CO must be approved by FSB-SA and submit compliance reports at frequency determined by licence category. - FSPs must inform FSB-SA within 15 days of any change in licence application information for off-site supervision. - Auditor and CO must inform FSB-SA of any irregularity or suspected irregularity; failure to do so is a criminal offence. Auditor must report on segregation of client funds where applicable. - Corporate governance: - Companies Act (CA) sets directors’ duties; King III applies on ‘apply or explain’ basis. Corporate governance implicitly required under Codes of Conduct; assessment embedded in risk-based supervision. - Disclosure and conflict of interest: - Within 30 days, FSP must provide client with specified information: general business info; legal/contractual status and client responsibility; compliance contact details; financial services authorized and restrictions; guarantees/professional indemnity/fidelity insurance cover; FSP’s relationship with insurer. - FSPs must maintain and publish conflict of interest management policy; where conflict cannot be avoided must disclose measures taken, any material ownership/financial interest, nature of third-party relationships giving rise to conflict, and how client can access the conflict policy (General Code s3). - Monetary disclosure requirements: - FSP must disclose all charges, fees, remuneration in specific monetary terms; if amount not reasonably pre-determinable, basis of calculation must be described. - Must disclose monetary obligations assumed by client, consequences of non-compliance and anticipated contractual increases. - Must disclose incentives, remuneration, consideration, commission, fee or brokerage payable to provider and identity of product supplier. - FSP must furnish written statement on existing policies at least annually showing ongoing monetary obligations, main benefits, investment product value and accessible portion, and ongoing incentives/fees/commissions payable to provider (General Code s7(4)). - General Code prohibits offering/receiving financial interest other than those listed. Outsourcing incentives and remuneration addressed (General Code s3A; Directive 159.A.i; Regulations on binder functions). - FSP duties regarding representations: provide clear product supplier/insurer information, conflict disclosure, detailed contract information, conduct needs analysis, and ensure advice is appropriate to client needs and risk profile. Similar provisions for insurers under Policyholder Protection Rules (PPR). - Commissions: - Commissions paid by insurers to FSPs are subject to caps for long-term and short-term products. - On investment products, only 50 percent of total commission may be paid upfront to reduce early termination incentives and switching incentives (LTIA Regulations). - Assessment: - FSB-SA has extensive requirements for FSP conduct, licensing, fit-and-proper, disclosure, conflict management, capital and compliance oversight embedded in supervisory regime. *Italic: Source — content provided in the input.* ### Part 3A). ### Part 3A) ### Oversight, authorisation and conflict-of-interest monitoring - Disclosure and conflict of interest are routinely monitored through the CO and audit reports and from any complaints received. - The FSB has been developing its processes and systems in this regard. - Legislation provides for suspension, withdrawal of an authorisation, withdrawal of the approval of a key individual or debarment of any person on a number of grounds including non-compliance with any provision of the FAIS Act (FAIS s9, s14, s14A). - The FAIS Act regulates the provision of advice by an FSP and the management of conflicts of interest in relation to that advice. - The General Code contains both principles-based requirements regarding avoidance, management and mitigation of conflicts, and rules-based requirements in relation to: - maintaining a conflict of interest management policy; - conflict related disclosure obligations; - prohibitions on specific types of conflicted remuneration and business models (applies to bancassurance models). - Adherence to General Code obligations on conflicts of interest is monitored through on-site visits and specific questions in FAIS off-site compliance monitoring reports. - The Retail Distribution Review (RDR) is expected to minimize inherent conflicts in the commission-based remuneration model; interim measures and information letters have been issued to address specific conflicted remuneration models. ### Client monies, insurance of intermediaries and payment deemed to insurer - FSPs are required to hold professional indemnity insurance (minimum R1 million). - Where FSPs hold client funds, they must hold such funds separately in a ring-fenced account. Exception: FSPs that collect short-term insurance policies are not subject to this requirement as they are required to hold security in respect of these premiums (STIA s45). - Insurance Acts: payment of a premium under the policy to a person on behalf of the insurer shall be deemed payment to the insurer under that policy (LTIA s47; STIA s54). - FAIS Act requires: - client monies be kept separately; - a separate report signed by the auditor be submitted annually to the FSB-SA of FSPs to demonstrate compliance; - a separate bank account, designated for client funds must be maintained and all funds held on behalf of clients must be deposited within one business day of receipt (FAIS s19(3)); General Code s10). ### Supervisory practices, Risk Based Supervision (RiBS) and on-site activity - The FSB-SA uses the Risk Based Supervision (RiBS) framework to facilitate early identification of supervisory concerns and ongoing assessment based on FSP risk profiles; RiBS sets out information sharing and co-operation between departments where different licences are issued to a single institution or group. - Under RiBS: - an initial rating is allocated to an FSP once the license is approved; - ratings vary by factors such as nature of intermediary service (discretionary services viewed as higher risk), products offered, number of representatives, and assets under management; - initial rating is updated as and when an onsite visit is conducted; - information from complaints, profile changes, audit reports, financial statements and compliance reports affect a FSP’s risk-rating; - FSPs are assigned to a risk category: small, small-medium impact, medium impact, medium-high impact and high impact; intensity of supervision differs by impact category. - Compliance with FAIS Act and governance practices assessed via off-site monitoring supplemented with on-site visits. - On-site visits: - can be scheduled or unscheduled in response to information, complaints or allegations; - routine on-site visits supplement statutory report analysis and detect problems not visible off-site; - an inspection is conducted if material non-compliance is suspected; - Financial Institutions (Protection of Funds) Act and the IFIA authorize on-site visits and inspections in respect of persons to whom a FSP has outsourced functions or activities. - On-site activity examples and statistics: - In 2013, there were 10 CoB on-site visits that revealed concerns in respect of assistance business group policies; non-compliance was addressed with relevant insurers and corrective actions taken. - In addition, 10 other on-site visits found challenges insurers experienced aligning binder agreements with binder Regulations and related remuneration matters. - The FSB-SA conducted 412 on-site visits on FSPs rendering financial services in respect of insurance products. - The FSB-SA conducted 35 on-site visits on insurers to determine their compliance with the FAIS Act. - The FSB-SA has taken regulatory actions (suspensions, withdrawals) against FSPs where necessary; lists are published on the FSB-SA website. ### Ongoing regulatory initiatives: Treating Customers Fairly (TCF) and Retail Distribution Review (RDR) - FSB-SA is implementing a CoB regulation and supervision approach informed by the TCF concept to embed fair customer treatment within firm culture using market conduct principles and explicit rules to drive clear and measurable fairness outcomes. - TCF embedding: - TCF has begun to be embedded into regulatory and supervisory framework and subordinate regulations; work underway to further entrench principles in legislation including explicit minimum governance requirements. - TCF outcomes are being used as indicators in assessing adherence to PPRs or General Code. - Material failures to deliver fair outcomes are often actionable under existing regulation; where unfair outcomes are not framed as breaches, the FSB-SA engages on a moral suasion basis. - Retail Distribution Review (RDR): - A cross-sector RDR focuses on a broad review of distribution practices and the regulatory framework governing them across retail financial services. - RDR expected to go beyond disclosure of remuneration and propose structural interventions to reduce potential conflicts of interest. - RDR will inform enhanced future market conduct regulatory framework under the Twin Peaks framework. - A discussion paper was to be published in June 2014 (as referenced in source). - FSB-SA is developing prescribed, standardized templates for “Key Information Documents” (KIDs) required from all retail product suppliers prior to point of sale. ### Conduct of Business (CoB) framework, point-of-sale disclosure and product governance - CoB regulatory framework established under: - LTIA and STIA (regulate conduct of insurers as product providers and contractual/remuneration arrangements between insurers and intermediaries); - FAIS Act (regulates insurers in their capacity as distributors and financial advice and intermediary services provided by insurers and FSPs). - Dealing with customers: - Insurance Acts and Policyholder Protection Rules (PPR) require insurers to act with due skill, care and diligence in advertising, inducements, policy documentation, cancellation, claims handling and outsourcing matters (LTIA s62, STIA s55). - General Code requires FSPs to render financial services honestly, fairly, with due skill, care and diligence, and in clients’ interests and the integrity of the industry (General Code s2). - TCF framework formulated to have policies and procedures on fair treatment; FSB-SA engages regularly with insurers and FSPs on quality of interactions and assesses embedding of TCF during on-site visits. - Interests of different customer types: - FSLGAA amendments give FSB-SA power to issue rules and policyholder protection standards, including norms and standards for micro-insurance products for low-income policyholders. - Review of internal product approval governance and target market identification is a focus for on-site visits; TCF self-assessment tool sets regulatory expectations. - Under SAM framework, governance requirements for insurers (including product approval processes) will be strengthened. - Statutory quarterly Conduct of Business Returns drafted to capture quantitative and qualitative CoB indicators to assess emerging CoB risks by product and customer group. - Promotion and advertising: - Insurance Acts prohibit misleading advertisement, brochure or similar communications and require policy documents to prominently include the name of the insurer underwriting the policy (LTIA s4(3); STIA s4(3)). - General Code prohibits advertising containing fraudulent, untrue or misleading statements (Code s14). - FSB-SA has taken action against insurers for misleading advertising and is issuing an Information Letter on advertisements, brochures or similar communications (consultation on draft Information Letter has taken place; expected to be issued shortly). - Point-of-sale information and cooling-off: - General Code requires timing, delivery and content of information at point of sale, appropriate advice before sale, and records (General Code s3-7; s8-9). - PPRs impose specific disclosure on direct marketer insurers; oral disclosures must be confirmed in writing within 30 days. - Long-term insurers must provide a policy information summary setting out material representations, premiums payable and policy benefits as soon as possible, but not later than 60 days after a policy is concluded or varied. - PPR provide for a 30 day “cooling off” period within which a policyholder may cancel an insurance transaction (LTIA s48). - Review of disclosure practices, advice process and related controls are reviewed during on-site visits; FSPs must furnish FAIS compliance reports on prescribed advice processes. - FSB-SA considers lapse and replacement ratio of products sold by FSPs when investigating conduct (lapse and replacement ratios indicative of suitability of advice). ### Service of policy, ongoing disclosures and claims/complaints handling - Service of policy: - PPRs require disclosure of contractual changes and salient features at inception, during lifetime, and at exit; triggers include policy loans, cessions, claims, assistance group scheme transfers, and unilateral termination of general insurance policies. - General Code requires ongoing disclosures at least annually by written summary, including: - the main benefits provided by the products; - where marketed as an investment or having an investment component, the value of the investment and amount accessible to the client; - any ongoing incentives, consideration, commission, fee or brokerage payable to the intermediary (General Code; s7(4)). - Material or significant changes affecting a client must be disclosed without delay; service must be rendered in accordance with contractual relationship and reasonable client requests. - Claims handling and complaints management: - PPRs place specific requirements on insurers for claims handling, including timelines and handling of claims-related disputes (LTIA Rule 16; STIA Rule 7.4). - Insurance Binder Regulations set requirements where claims handling is outsourced to a binder holder; Outsourcing Directive applies to other service providers involved in claims assessment or settlement. - PPRs require insurers to provide internal complaint resolution system details and particulars of Short-term and Long-term Insurance Ombuds within a reasonable time after contract commencement (Rule 16 for Long-term; Rule 7.4 for Short-term). - General Code requires FSPs to maintain an internal complaint resolution system and procedures covering: - a comprehensive complaints policy; - transparency and visibility of procedures; - accessibility of facilities (offices, postal, fax, telephone, electronic helpdesk); - fairness in resolution (Code paras. 16-18). - FSPs must advise clients of further steps available if a complaint is not resolved to the client’s satisfaction. - Ombuds: - Voluntary Insurance Ombudsman schemes deal with complaints against product suppliers who are voluntary members (no jurisdiction over brokers); most insurers are members and publish individual insurer complaints data. - FAIS Ombud (introduced 2004) adjudicates complaints against FSPs (including agents and brokers) and covers institutions not within other ombud jurisdictions; all brokers fall under statutory jurisdiction of the FAIS Ombud. - Fragmentation of statutory and voluntary schemes poses confusion and inconsistency risks for policyholders; TCF implementation is strengthening complaints management requirements and introducing more detailed complaints reporting. - FSB-SA reviews claims handling processes during on-site visits and is conducting a thematic review comprising both on-site visits and off-site questionnaires of insurers’ complaints/claims management processes. - Complaints data and Ombud qualitative inputs are reviewed to identify trends, including claims disputes. - Proposed quarterly Conduct of Business return will require detailed statistics on claims, including claims ratios, claims rejections, and claims processing by product, customer and distribution model. ### Privacy, consumer education and supervisory disclosure supporting TCF - General Code prohibits FSPs from disclosing confidential client information without written consent or unless required in public interest or by law (Code s3(3)). - Protection of Personal Information Act enacted to align with international data protection laws; Act is in waiting commencement and FSPs are preparing for implementation. - FSB-SA issues media releases to warn the public about unregistered operators and contraventions; a dedicated Consumer Education Department runs initiatives including on insurance matters. - TCF implementation requires the following outcomes (TCF approach described as requiring clear and measurable fairness outcomes and embedding fair treatment in firm culture). ### Assessment and policy recommendations - Assessment summary: - All entities providing insurance intermediation services and/or advice must be authorised as FSPs, including insurers and banks acting as distributors or advisers. - FSB-SA has detailed licensing requirements and risk-based ongoing supervision; adequate requirements exist to ensure FSPs act professionally and transparently. - Disclosure requirements are adequate and safeguards for client funds are in place. - FSB-SA has taken action against unlicensed individuals and entities. - Potential for mis-selling and poor policyholder outcomes persists despite improved professional standards. - TCF initiative is expected to benefit consumers and industry; scope exists to improve governance requirements and supervision of their implementation. - RDR expected to propose structural interventions beyond disclosure to reduce conflicts of interest. - Authorities are advised to maintain momentum in embedding TCF and expediting the RDR, and to consider: a) Actively monitor persistence rates of intermediaries; b) Ensure governance requirements for intermediaries are effectively embedded and enforced to better protect policyholders; c) Consider ways to simplify the FSP structure to have greater focus on supervising insurance intermediaries to improve policyholder protection; d) Consider establishing cyber-surveillance to enhance detection and prevention of illegal sale of insurance products via internet, social networking services, and mobile telephony; e) Ensure adequate resources for more robust implementation of recent legislative amendments and effective supervision of intermediaries. *Source: Part 3A) of the provided IMF content unit.* ### 1. Customers can be confident they are dealing with firms where TCF is central to the ### _cr1556 - 1. Customers can be confident they are dealing with firms where TCF is central to the ### Core TCF Principles - 1. Customers can be confident they are dealing with firms where TCF is central to the corporate culture. - 2. Products and services marketed and sold in the retail market must be designed to meet the needs of identified customer groups and targeted accordingly. - 3. Customers must be given clear information and be kept appropriately informed before, during and after the time of contracting. - 4. Where customers receive advice, this must be suitable and must take account of their circumstances. - 5. Products perform as firms have led customers to expect, and service is of an acceptable standard and as they have been led to expect. *Source: IMF content unit _cr1556 - 1.* ### 6. Customers do not face unreasonable barriers imposed by firms to change product, ### 6. Customers do not face unreasonable barriers imposed by firms to change product, switch providers, submit a claim or make a complaint. ### Market Conduct under Twin Peaks - New supervisory tools expected to enhance conduct of business in South Africa: “mystery shopper” techniques, sourcing information from third parties (intermediaries, suppliers, media, ombud schemes and consumer bodies), consumer and industry surveys, supported by enhanced reporting requirements from regulated institutions. - Assessment: Largely Observed - Key findings and status: - The FSB-SA has most necessary requirements to see that customers are treated fairly throughout the product cycle; processes in place to review fairness before contract entry through contract satisfaction. - Implementation of the TCF initiative is underway; progress reported in the FSB-SA annual report. - Authorities have embarked on the RDR aimed at strengthening the CoB regime to address structural issues (e.g., commission and conflict of interest). - FSB-SA drafted a Conduct of Business Return to require insurers to regularly report key indicators of TCF outcomes (including statistics on lapses and surrenders, claims ratios, complaints, etc.). - Proposed Board Notice to enhance governance requirements for insurers to improve management of risks relating to unfair policyholder treatment. - Shortcomings identified: - Lack of requirements for insurers and FSPs to establish and implement policies and procedures on fair treatment of customers. - Need to improve legislation to take into account interests of different types of customers when developing and marketing insurance products. - Need to enhance management of conflicts of interest, claims and ombudsman services, and protection of private customer information. - Authorities are advised to expedite CoB initiatives to address gaps: - a) explicitly require insurers to take into account the interests of different types of customers when developing and marketing insurance products; - b) provide explicit conduct of business requirements on insurance product development and provide the supervisor with the authority to require notification of certain types of new insurance products and prohibit certain products that do not meet prescribed standards; - c) have appropriate governance framework on strengthening conflict of interest; - d) review the adequacy of supervisory resources of FSB-SA to effectively implement the TCF regime, more proactive CoB supervisory approach and fine tuning the regulatory policies in light of actual supervisory experience. ### ICP 20 Public Disclosure - Principle: supervisor requires insurers to disclose relevant, comprehensive and adequate information on a timely basis to give policyholders and market participants clear view of business activities, performance and financial position. - Description and current framework: - The Insurance Acts do not have specific public disclosure requirements. The Companies Act (CA) requires all public companies to comply with IFRS, which partly addresses disclosure standards under this ICP. - Only one mutual insurer is not a public company. - Insurers that are not public companies must submit audited financial statements prepared in accordance with the CA to the FSB-SA. - Annual statutory returns of insurers (excluding commercially sensitive information) may be made available to the public by the FSB-SA, on request, including high level information on governance, assets, technical provision and other liabilities and the solvency ratio. Methods and assumptions used are not made available to the public. - Listed insurers disclose more in accordance with JSE Listings Requirements. - Ongoing initiatives: - Under the SAM framework, public disclosure requirements will be established as part of Pillar III requirements. - The Insurance Bill is expected to introduce public reporting requirements and further enhance statutory reporting obligations. - Assessment: Partly Observed - Comments and recommendation: - There is no obligation, unless listed, to make financial statements available to persons other than beneficiaries. - FSB-SA does not monitor disclosures made by insurers to market participants. - Recommendation: establish explicit public disclosure requirements in line with ICP 20 applicable to all insurers and provide clear legal authority to the FSB-SA to supervise compliance. ### ICP 21 Countering Fraud in Insurance - Principle: supervisor requires insurers and intermediaries to take effective measures to deter, prevent, detect, report and remedy fraud in insurance. - Legal framework and findings: - Insurance Acts do not expressly address insurance fraud. Fraud in general is a criminal offence under common law. - The Criminal Law Amendment Act imposes minimum sentences for fraud, forgery and uttering a forged document where amounts exceed R500 000. - In the case of a first offender, the punishment is 15 years or more. - In the case of a second offender, the sentence is 20 years or more. - In the case of any subsequent offender, the sentence is 25 years or more. - At assessment, FSB-SA did not have explicit legislative powers to require insurers and FSPs to take effective measures to address potential fraud risks, although the General Code requires FSPs to have resources, procedures and technological systems to reasonably eliminate client/product supplier financial loss (implicitly including fraud). - FSB-SA expects insurers to allocate resources and implement effective risk prevention procedures and controls (implicitly including anti-fraud measures). - Industry collaboration: - Insurers use external investigators; the South African Insurance Crime Bureau exists to provide a database of insurance fraud and promote exchange of information and training. - Supervisory practices: - FSB-SA lacks legislative authority to make/enforce specific rules on insurance fraud; refers fraud to enforcement authorities. - EO/DEO may disclose information for public warnings and developing/implementing policies to deter/ prevent/detect/report/remedy fraud (FSBA s22). - FSB-SA has understanding of common types of insurance fraud (e.g., fraudulent claims from cash-back hospitalization or assistance/funeral policies, and unauthorised intermediary services). - There have not been thorough assessments of adequacy of insurers’ systems and controls for fraud risk. - On-going initiative: - Proposed Board Notice to require insurers to implement risk management policies that incorporate an explicit insurance fraud risk management policy to: - a) outline appropriate strategies, procedures and controls to deter, prevent, detect, report and remedy insurance fraud; - b) effectively manage fraud risk; - c) provide for the prompt reporting of insurance fraud to the relevant authorities. - Assessment: Partly Observed - Comments: - FSB-SA has minimal direct legislative powers; expects insurers to implement implicit anti-fraud measures. - The proposed Board Notice would require explicit insurance fraud risk management policy including prompt reporting, in line with ICP 21. ### ICP 22 Anti-Money Laundering and Combating the Financing of Terrorism - Principle: supervisor requires insurers and intermediaries to take effective measures to combat ML/FT; supervisor takes effective measures itself. - Background and legal framework: - Last AML-CFT assessment conducted in 2008 noted strong legal framework but effectiveness not established and found serious technical shortcomings in preventive measures. - Since then, South Africa amended FICA to strengthen FSB’s supervisory powers and sanction regime; draft amendments to FICA were undergoing public consultation at assessment time to close legal gaps and introduce risk-based approach. - AML-CFT legislative framework comprises the FICA, the Money Laundering and Terrorist Financing Control Regulations (MLTFC Regulations) and Exemptions in Terms of the FICA. - Accountable institutions under FICA include long-term insurers and FSPs (except short-term insurance intermediary services). Short-term insurers are not accountable institutions (FICA Schedule 1 and Schedule 2). - Institutional roles: - National Treasury coordinates AML/CFT with support from the FIC (FIU). - Counter-Money Laundering Advisory Council established in 2001 under FICA has been inactive and likely to be abolished under pending legislation. - South African Police Service investigates ML/TF and refers to National Prosecution Authority. - FSB-SA is a designated supervisory authority under FICA; empowered to appoint an inspector for AML-CFT inspections, but non-routine inspections require consultation with the FIC (FICA s45, s45B(6)(b), s26(2)). - FICA obligations for accountable institutions (exact provisions referenced): - a) Identify clients before establishing a business relationship or concluding a single transaction (FICA s21); - b) Keep records on business relationship and transactions for at least 5 years after termination of business relationship or conclusion of transactions (FICA s22, s23); - c) Have free and easy access to the records kept by third parties (FICA s24); - (b) Report cash transactions or electronic transfers of money above the prescribed amount (FICA s28, s31); - (c) File suspicious transaction reports (FICA s29); - (d) Formulate and implement internal rules to comply with FICA (FICA s42); - (e) Provide training and appoint a compliance officer (FICA s43). - Supervisory and guidance issues: - FICA, Insurance Acts and FAIS Act authorise FSB-SA to issue directives to long-term insurers and FSPs in consultation with FIC. FIC has issued directives/guidelines; some parts of guidance are not legally enforceable due to pending legal provisions. - FSB-SA has not established supervisory guidance on AML/CFT requirements applicable to insurers and intermediaries. - Coordination and information exchange: - FSB-SA’s legal powers to share information are outlined in ICP 3; FICA allows FIC to obtain information from FSB-SA. - FSB-SA entered into MoU with FIC; attends quarterly FIC Enforcement Forum for information exchange. - Information from FIC may be disclosed only to specified authorities and disclosure to another FIU requires written agreement and reciprocity (FICA, s40 and s41). - Supervisory practices and activity: - South Africa had not completed a national assessment of ML/FT risks at the time. - FSB-SA has good understanding of ML-FT risks in insurance sector; Insurance Compliance Department resources and expertise enhanced. - FSB-SA requires insurers and FSPs to submit AML-CFT information as part of annual statutory returns and compliance reports. - Insurance Division conducted 12 AML-CFT on-site visits on insurers in 2012/13 with no systemic ML-FT risk identified and no regulatory action taken. - FAIS Supervision Department performed 399 AML/CFT on-site visits in 2012/13; 95 reports followed up to remedy minor findings; one report referred to Enforcement Unit. - On-site checks include nominated compliance officer, employee training, policies and procedures, risk-based approach, and submission of suspicious transaction reports to FIC (FICA s45A, s45B). - FSB-SA reviews effectiveness of its own measures annually; FIC may share STRs selectively though none were forwarded to FSB-SA in 2012/13. - On-going regulatory initiative: - FSB-SA will issue a Board Notice requiring long-term insurers to develop and implement an explicit AML-CFT policy that: - outlines appropriate strategies, procedures and controls to deter, prevent, detect, report and remedy ML and FT; - provides for the prompt reporting of AML-CFT matters to relevant regulatory authorities; - provides for the matters as may be prescribed. - Assessment: Partly Observed - Comments and recommendations: - AML-CFT regime covers long-term insurers and FSPs; some FIC guidance not legally enforceable due to legal gaps. - FSB-SA is a designated competent authority with inspection and sanction powers; assessing compliance is embedded in risk-based supervision; FSB-SA has sufficient resources for AML/CFT mandate. - Insurers and FSPs submit STRs to FIC directly; FSB-SA authorised to cooperate and exchange information with relevant authorities and has MoU with FIC; disclosure to foreign FIU subject to written agreement and reciprocity. - Authorities are advised to: - a) Expedite passage of amendments to main AML-CFT legislation to address remaining technical deficiencies; - b) Consider how best to improve supervisory coordination and engagement of the industry to facilitate effective compliance by insurers and FSPs with AML-CFT obligations; - c) Periodically assess potential ML-FT risk in the short-term insurance industry to take account of evolving ML-FT typologies and consider whether to apply the FATF standards to short-term insurance. ### ICP 23 Group-wide Supervision - Principle: supervisor supervises insurers on a legal entity and group-wide basis. - Background and legislative authority: - FSB-SA has been developing group supervision approach; no direct powers in Insurance Acts for group-wide supervision at time of assessment. - Conducted limited-scope group-wide supervision informally with participation of insurance groups; requests group information indirectly through insurers under Insurance Act s4. - Scope and definition: - Informal definition applied: a group is an insurance group if two or more entities include at least one insurer and one has significant influence on the insurer; significance judged by participation, influence, contractual obligations, interconnectedness, risk exposure/concentration/transfer and intra-group transactions. Scope limited to entities under ultimate holding company in South Africa. - IFRS consolidation principles used to determine scope and inclusion; significant influence evidenced by board representation, policy-making participation, material transactions, interchange of managerial personnel, unified management, potential voting rights. - In deciding relevant entities consider: - non-operating holding company (including intermediate holding companies) incorporated in South Africa; - insurers (including subsidiary insurers); - other regulated entities, such as banks and/or securities companies; - non-regulated entities (including parent companies, subsidiaries and companies substantially controlled or managed by entities within the group); - Special purpose entities. - Current group-wide supervision practices: - Approach is informal and relies on regulator’s authority rather than specific legislative provisions; group reporting standards relatively undeveloped. - Scope extends to insurance group holding company level within South Africa only and includes financial conglomerates. - FSB-SA requests larger insurance groups and conglomerates to submit quarterly unaudited returns on a group-wide basis; performs annual solvency calculation on a group-wide basis for these groups (ICP 17). - Risk-based supervisory approach applied to insurance groups, but limited; only a few large groups have had on-site risk assessment. - Participation in external supervisory colleges (UK PRA, Switzerland FINMA); coordinates Sub-Sahara Regional Supervisory Group for African insurance groups; quarterly cross-sector supervisory colleges with SARB for major domestic banking and insurance groups. - Ongoing initiatives: - Proposed Board Notice and Twin Peaks Bill will introduce insurance group supervision including clear definition of insurance group and approach to group financial condition. FSB-SA to act as group-wide supervisor for groups domiciled in South Africa except where SARB is group supervisor (bank head). - Assessment: Partly Observed - Comments and recommendations: - FSB-SA has been developing approach but lacks explicit powers; supervision informal and focused on few large conglomerates relying mainly on financial indicators. - Recommended to establish clear and consistent regulatory regime for group-wide supervision to provide: - a) explicit powers for the FSB-SA to: - enforce group-wide supervision requirements (including reporting requirements) for unregulated companies, including holding companies; - refuse or revoke authorization where a firm’s ownership links may prevent effective group supervision; - approve intra-group transactions and cross-shareholdings to prevent concentration risk, risk of contagion, and double gearing of capital; - b) regulatory reporting at both solo and consolidated levels for all insurance groups; - c) a more formal risk assessment program for heads of group; - d) group-wide market conduct requirements. - Importance of ensuring effective implementation supported by adequate supervisory resources and enhanced/formalised cross-sectoral coordination, particularly for groups dominated by securities entities. ### ICP 24 Macroprudential Surveillance and Insurance Supervision - Principle: supervisor identifies, monitors and analyses market and financial developments and environmental factors that may impact insurers and uses this information in supervision; utilize information from other national authorities where appropriate. - Sources of information used by FSB-SA: - a) Supervisory information and unaudited quarterly statutory returns used for quarterly reports on long-term and short-term insurance markets. - b) Quarterly unaudited returns from insurance groups considered systemically important, analyzed to a limited extent for macroprudential impact. - c) SARB quarterly Financial Stability Review reports; presentations and write-ups provided to supervisory staff quarterly to inform risk ratings and assessments. - d) Other sources: rating agency reports, media releases, etc. - Analytical process: - Industry analyst prepares/updates section notes on operating environment (global economic environment, key economic indicators in South Africa, operating environment and outlook) as inputs to risk-based assessments; presented quarterly to supervisors. - Comparisons of insurer returns are made to peer groups and market as a whole. - FSB-SA’s annual reports provide insurer-specific and aggregate information. - Macroprudential integration and stress testing: - Macro-analysis informs assessment of how macroeconomic vulnerabilities and market risks impinge on insurers’ financial condition and sector stability. - Examples: joint information request with SARB on exposures to EU states during European sovereign debt crisis; stress testing requirements introduced post-2008/2009 crisis (ICP 16). - Limitations and ongoing initiatives: - No formal process to assess potential systemic importance of insurers; dedicated Insurance Group Supervisory Department established in 2011 to supervise major/potentially systemic groups more intensively. - Financial Sector Regulation Bill will establish Twin Peaks architecture with SARB as macroprudential regulator via financial stability oversight committee. - Assessment: Largely Observed - Comments and recommendations: - FSB-SA uses supervisory analysis and external sources to identify macro risks; supervises major/potentially systemic groups more closely. - Authorities advised to formulate macro-prudential surveillance framework under Twin Peaks including: - d) Developing more robust indicators for assessing systemic risk of insurers and reinsurers; - e) Taking account of cross-sectoral linkages (cross-shareholdings, bancassurance, linked policies); - f) Inclusion of risks arising from system-wide market conduct issues, including reputational risks. ### ICP 25 Supervisory Cooperation and Coordination - Principle: supervisor cooperates and coordinates with other relevant supervisors and authorities subject to confidentiality requirements. - Legal authority and mechanisms: - FSB-SA’s powers to exchange information and cooperate are outlined in ICP 3. - FSB-SA empowered to enter into MoUs to coordinate/harmonize reporting, exchange information on adverse assessments, coordinate supervisory activities including on-site visits, and assist regulatory authorities with similar legislation (FSBA s22(3)). - Domestic coordination: - Bilateral MoU between FSB-SA and SARB governs dialogue on major financial services groups, joint enforcement, systemic issues; FSB-SA and SARB determine financial conglomerates and lead supervisor. - Since 2010, frequent supervisory meetings for five largest banking and insurance groups; more formalized supervisory coordination for group structures, group solvency assessments, intra-group transactions, risk concentration and governance. - Cooperation with NCR unchanged since 2010 except for specific projects; plan to include NCR in current bilateral MoU. - Regional and international cooperation: - FSB-SA participates in supervisory colleges and has signed coordination agreements for information flows and periodic meetings. - Hosted first supervisory college with SARB and regional supervisors for one major insurance group in 2013; agreed FSB-SA would assume role of group-wide supervisor for that group. - Plans to host regional supervisory colleges for at least four other systemic groups; formulating key functions of colleges and entering coordination agreements with involved supervisors. - On-going initiatives and proposed roles under new framework: - Enhancement of supervisory coordination is key objective of regulatory reforms A safer financial sector to serve South Africa better. - Bilateral MoU between FSB-SA and SARB needs updating for Twin Peaks division of responsibilities and mechanisms to resolve differences. - Proposed explicit legal framework for supervisory cooperation and coordination in respect of insurance groups, including: - determining need for group-wide supervisor and roles/responsibilities; - participation in formal/informal structures (supervisory colleges); - entering cooperation agreements with procedures for ongoing and emergency information exchange, communications with holding company, convening meetings, and comprehensive assessments. - Under proposed framework, FSB-SA as group supervisor required to: - initiate suitable coordination arrangements proportionate to nature/scale/complexity of risks; - act as key coordinator, convener and chairperson of meetings and supervisory colleges and take lead in insurance group supervision; - take into account assessments by relevant regulatory authorities for any person part of an insurance group; - coordinate crisis management preparations; - proactively share information on insurance groups. - Assessment: Observed - Comments: - Despite lack of formal framework, FSB-SA coordinates effectively in practice and has hosted supervisory college; legislative provisions pending to enhance cooperation and coordination. ### ICP 26 Cross-border Cooperation and Coordination on Crisis Management - Principle: supervisor cooperates and coordinates with relevant supervisors and authorities to manage cross-border crises involving a specific insurer effectively. - Current practices and findings: - FSB-SA has not formally developed plans/tools for insurers in crisis but has demonstrated willingness/ability to share information without compromising resolution, subject to confidentiality safeguards. - Example: FSB-SA worked closely with home supervisor in a case where crisis evolved from head of group due to solvency and liquidity challenges and South African operations were significant; helped develop plan to reorganise capital resources. - No crisis where FSB-SA was group-wide supervisor required coordinated solution that was not possible. - Official interactions in non-crisis periods typically conducted at supervisory colleges. - FSB-SA has not coordinated crisis management preparations formally with other supervisors. - Supervisory colleges have identified potential impediments (exchange control regulations, investment requirements, localisation of reinsurance) but limited focus on inter-linkages or impediments to coordinated solutions. - Information and contingency planning gaps: - Current legislative framework lacks explicit requirements for insurers to provide timely information in crisis; nevertheless, FSB-SA has required insurers to furnish additional information in response to market developments (e.g., exposures to EU during sovereign debt crisis). - No explicit requirements on insurers to maintain contingency plans and procedures for going- and gone-concern situations; some insurers were asked to draw up contingency plans where high interconnectedness exists. - On-going regulatory initiatives: - Financial Sector Regulation Bill proposes crisis management and resolution framework; identifies SARB as resolution authority for systemic institutions. Where taxpayers’ money is at risk, crisis management decisions to be taken by Minister of Finance. - Proposed Board Notice on risk management framework will require insurers to include processes for contingency planning, business continuity and crisis management. - Assessment: Largely Observed - Comments and recommendations: - FSB-SA has ability and willingness to participate in crisis resolution but pre-crisis preparation, coordination and cooperation should be enhanced. - Proposed Board Notice and crisis management/resolution framework are positive initiatives. - Important for FSB-SA to engage supervisory colleges on preparations and common tools for managing cross-border crises and to identify and resolve barriers to coordinated resolutions. - Resolution Policy Working Group should inform framework; framework should explicitly address plans/tools for dealing with insurers in crisis, requirements for timely information provision, maintenance and testing/review of contingency plans and procedures. *Source: IMF Financial Sector Assessment content unit _cr1556 (South Africa), extracted from the provided PDF.* ### Appendix I. Status of Implementation of 2010 FSAP ### Appendix I. Status of Implementation of 2010 FSAP Recommendations ### ICP Recommendation 2 — Objectives of regulation in line with the Insurance Core Principles - An Insurance Laws Amendment Bill (“ILAB”) was tabled in Parliament on June 21, 2013. - The ILAB proposes amendments to the Long-term Insurance Act No. 52 of 1998 and the Short-term Insurance Act No. 53 of 1998 (“Insurance Acts”) to explicitly state the object of the Insurance Act as the promotion of “the maintenance of a fair, safe and stable long-term insurance market for the benefit and protection of policyholders.” - Due to other legislative priorities, the ILAB was withdrawn in April 2014 and the provisions contained in the ILAB will be given effect through a Board Notice and other means. - The Financial Sector Regulation Bill and the Insurance Bill will provide for the objective of supervision. ### ICP Recommendation 3 — Strengthening the regulatory framework and conduct rules - Recommendation elements: - i) enable the FSB-SA to set all major requirements on insurers via board notices without reference to government; - ii) set out causes for which board and executive members may be removed from office and to require publication of the reasons in each case; and - iii) remove provisions in the insurance legislation for the FSB-SA’s exercise of certain powers to be subject to Minister of Finance approval. - In addition, it is recommended that the staff code of conduct is expanded to require employees to notify their manager when they are negotiating employment with a regulated entity. - Implementation and status: - i) The recently enacted Financial Services Laws General Amendment Act No. 45 of 2013 (enacted on January 16, 2014, effective from February 28, 2014) amended the Insurance Acts to allow the Registrar to make Policyholder Protection Rules without reference to the Minister of Finance. However, the Minister may under sections 72 and 70 of the Insurance Acts, respectively, make regulations in respect of certain matters. - Under the Financial Sector Regulation Bill (that will give effect to the “Twin Peaks” regulatory architecture) the powers of the regulator will also be enhanced. The Bill, however, could be further clarified to ensure that there is no overlap between the regulator and NT in respect of imposing detailed requirements on insurers and other financial institutions. - It has been proposed by the FSB-SA that requirements, in the form of Rules, may be prescribed by the FSB-SA to give effect to provisions in legislation. - ii) The Financial Services Board Act No. 97 of 1990 does not include explicit procedures for the appointment and dismissal of the Executive Officer or the members of the FSB-SA Board or place an obligation on the Minister to publicly disclose the reasons for dismissal. However, as the decision to dismiss a member of the FSB-SA Board constitutes an administrative decision, a person so dismissed has the protection afforded under the Promotion of Administrative Justice Act; i.e., the member may insist on reasons for the decision and may take the decision on review. - Further, as the Executive Officer (and other members of the Executive of the FSB-SA) is a staff member of the FSB-SA, the Labour Relations Act No. 66 of 1995 applies. The latter Act affords specific protection and remedies to staff against arbitrary decisions. - The Financial Sector Regulation Bill places explicit requirements on the Minister regarding the appointment and dismissal of the head of the supervisor and members of its governing body (the Executive Committee). *Source: Appendix I. Status of Implementation of 2010 FSAP Recommendations — _cr1556 (excerpt)._ * ### section 4 of the Bill. ### _cr1556 - section 4 of the Bill. ### Governance, licensing, and legislative changes - Finding: The Financial Services Laws General Amendment Act No. 45 of 2013 amended the Insurance Acts to remove the requirement that the Registrar must seek the approval of the Minister prior to prohibiting an insurer from entering into new business (placing the insurer in run-off) or applying to Court for winding-up; the FSB-SA’s exercises of certain powers are no longer subject to Minister of Finance approval. - Finding: The FSB-SA’s Employees’ Human Resources Policies and Procedures promulgated in terms of section 19 of the Financial Services Board Act does not require employees to notify their manager when negotiating employment with a regulated entity. - Recommendation (ICP 6): - extend license requirements in the legislation to refer also to the need for adequate governance, internal controls and risk management; - amend legislation to bring larger friendly societies within the scope of the insurance legislation; - expedite introduction of a micro-insurance regime to help bring basic protections to all buyers of insurance. - Implementation/status: - In practice, governance requirements inform licensing decisions via section 9 of the Insurance Acts and business-plan requirements on system of governance. - The Financial Services Laws General Amendment Act authorizes the Registrar to prescribe a governance and risk management framework for insurers; a Board Notice will be issued in 2014 providing specific governance framework requirements for solo insurers that will form a formal, legislated part of licensing considerations. ### Microinsurance and friendly societies - Finding: The National Treasury published “The South African Microinsurance Regulatory Framework” in July 2011 setting policy objectives: - Extending access to a variety of good-value formal insurance products appropriate to the needs of the low-income households; - Enabling current informal insurers to provide formal insurance, in the process establishing new, well-capitalised insurers and promoting small business development; - Lowering the barriers to entry to encourage broader participation in the market and promote competition among providers; - Ensuring protection of consumers of microinsurance; - Facilitating effective supervision and enforcement. - Status: Drafting of regulatory and legislative reforms to give effect to the microinsurance framework is in progress. - Implementation: Larger friendly societies will be brought within the scope of the insurance legislation through legislation that will entrench microinsurance. ### Statutory actuary, conflicts, and control functions - Recommendation (ICP 7): Consider making formal requirements regarding statutory actuaries holding other positions in the insurance company. - Finding: Directive 53.A.i (LT) prohibits the statutory actuary of a long-term insurer from simultaneously being managing director or chairperson, but the statutory actuary may be a director. No formal requirements currently exist for statutory actuaries in short-term insurers. - Finding: Sections 22 and 21 of the Insurance Acts authorise the Registrar to require termination of appointment of a director, managing executive, public officer, auditor or statutory actuary if not fit and proper. - Practice: The application form for approval of a statutory actuary requests information on potential conflicts of interest; provided information is considered in approval decisions. - Board Notice (ICPs 6/controls): Will require an insurer to establish and maintain an actuarial function; control function requirements (reporting structures, independence, resources, expertise, responsibilities, functions) will be prescribed. ### Shareholder controllers, control thresholds, and fit-and-proper regime - Finding: At present the Registrar must apply to Court to have the shareholding of a significant owner reduced. - Insurance Bill will empower the Registrar to: - direct a significant owner to reduce, within a specified period, the proportion of voting rights or beneficial interest to a specified percentage; - direct a significant owner to dispose of, within a specified period, the full beneficial interest held; - limit, with immediate effect, the voting rights that may be exercised by a significant owner. - Fit and proper requirements: - The Financial Services Laws General Amendment Act introduced a definition of “fit and proper requirements” into the Insurance Acts, including qualities of competence, integrity and financial standing as may be prescribed by the Registrar by notice in the Gazette. - These requirements have not yet been prescribed; the amendment became effective on February 28, 2014. - Current inputs informing fit-and-proper assessments include: - application form for registration as an insurer (section 9); - notification form for appointment/termination of director, managing executive or public officer (section 18); - application form for appointment of auditor or statutory actuary (sections 19, 19A and 20); - application form for change in shareholding requiring information relating to financial soundness and integrity. ### Notifications of changes of control and predetermined control levels - Recommendation (ICP 8): - place a requirement on insurers to notify FSB-SA when they become aware of proposed changes of control; and - establish predetermined control levels in law at which further approval of controllers is always required. - Status: - Sections 26(2A) and 25(2A) of the Insurance Acts require an insurer to inform the Registrar if a person acquires shares or any other financial interest as referred to in sections 26 and 25. - Sections 26 and 25 allow the Registrar to grant applications subject to aggregate nominal value/number of shares not exceeding such percentage as may be determined by the Registrar without further approval; approval of significant increases above predetermined control levels is not automatically required unless initial approval imposed that condition. The Insurance Bill will address the anomaly that this condition cannot presently be imposed when granting an initial approval to control an insurer. ### Control functions, internal audit, outsourcing, and investment controls - Recommendation (ICP 10): FSB-SA should add to existing internal control requirements, particularly on the role of internal audit and controls over outsourcing. - Finding: The Insurance Acts do not specifically require effective control functions, but sections 9 and 12 effectively require insurers to maintain an effective governance framework; FSB-SA uses these to require boards to address governance gaps including establishing or enhancing control functions based on nature, scale and complexity of risks. - Supervisory practice: - Internal audit effectiveness is assessed via off-site monitoring and structured, risk-based on-site visits; reports from internal audit are requested for on-site visits; most concerns are resolved timely. - Board Notice will require insurers to establish and maintain: - a risk management function; - a compliance function; - an actuarial control function; - an internal audit function. - Outsourcing: - Registrar issued Directive 159.A.i (LT & ST) under sections 4(4) read with 9(3) and 12(1) setting principles and key requirements for outsourcing, including: - requiring an outsourcing policy (limits on types/level of outsourced functions); - requiring internal review and approvals; - requiring written contracts and contract requirements; - requiring on-going management and regular review; - notification to the Registrar of outsourcing of control, management or material functions and material developments. - Binder-function regulations issued under the Insurance Laws regulate to whom binder functions may be outsourced, matters to be addressed in agreements, remuneration, and reporting. - Investment controls and safekeeping (ICP 21): - Board Notice will require an explicit investment policy addressing investment of all insurer assets, risk management for complex/less transparent asset classes, and matters as may be prescribed. - The Insurance Bill will require valuation of assets and other liabilities to be based on an economic valuation of the whole balance sheet; assets and other liabilities must be valued at fair value and according to IFRS (with adjustments where appropriate). - The Bill will adopt the prudent person investment principle and require assets covering technical provisions, minimum capital requirement and solvency capital requirement to be invested to reasonably ensure security, quality, liquidity and profitability and to ensure availability of assets. - Section 34(1)(b) prohibits an insurer allowing its assets to be held by another without Registrar approval; standing approvals were granted subject to Directive 126.A.i minimum conditions. The Requirements document (Board Notice 63 of 2007, Government Gazette of May 27, 2007) governs nominee companies; a register of approved nominee companies will be maintained and published on FSB-SA website. - Directive 159 Ai on Outsourcing was issued on April 12, 2012. ### Market surveillance, stress testing, and macroprudential considerations - Recommendation (ICP 11): FSB-SA should complement existing work with broader analysis of market indicators and more frequent exercises to assess market-wide events (e.g., pandemic, major emergency); recruit specialist expertise in risk and risk management; develop macroprudential surveillance including bank–insurer links and potential regulatory arbitrage; accelerate availability of annual aggregate data without charge. - Practice and status: - Insurer annual/quarterly returns are compared to peer groups and market; statutory submissions combined with rating agency reports, media releases, Financial Stability Review Report of SARB, etc. - All insurers are subject to stress tests as part of prescribed annual statutory returns; major groups submit market risk stress tests bi-annual; all insurers submit annual stress testing results on market and insurance risks. - Risk experts have been added to FSB-SA Insurance Division (SAM Unit). - Registrar prepares and publishes analysis of aggregated unaudited quarterly statutory returns by type and market. - SARB’s Financial Stability Unit produces a quarterly Financial Stability Review Report. - FSB-SA considers global risks and has issued joint information requests with BSD in response to EU sovereign debt issues. - Cooperation with Bank Supervision Department (BSD) for group supervision; differentiation between systemically important and non-systemically important groups; more formalised arrangements for systemically important groups. - Annual report of FSB-SA under Public Finance Management Act provides aggregate industry information publicly and at no cost; annual aggregate information now made available on FSB-SA website ahead of full reports. ### Accountability, enforcement powers, and policyholder protection - Recommendation (ICP 15): - give FSB-SA powers to bar individuals from acting in responsible capacities in the future; and - extend its powers to impose penalties on directors, managers and employees. - Finding: - Sections 22 and 21 authorise the Registrar to require termination of appointment if not fit and proper. - A record is kept of supervisory concerns/contraventions relating to individuals and checked prior to approving appointments. - Insurance Acts do not generally allow holding directors/managers/employees accountable for insurer contraventions except where specific requirements are imposed. - Recommendation (ICP 16): FSB-SA should seek reforms so that in winding-up, policyholders have preference—or seek a policyholder protection scheme. - Status: - Policyholders do not currently have preferred creditor status in winding-up. - FSB-SA engages with Department of Justice and Constitutional Development on insolvency law reform and motivates for policyholder preference ranking below secured creditors as defined in existing Insolvency Act. - FSB-SA participates in a Resolution Policy Working Group (supported by the World Bank) considering enhancements including establishment of a policyholder protection scheme. ### Group supervision, reporting scope, and lead regulator approach - Recommendation (ICP 17): - grant FSB-SA additional powers to enforce requirements for unregulated companies, including holding companies; - extend reporting required of the largest insurance groups to all groups and ensure companies undertaking investment business are included in consolidated supervision; - further develop lead regulator approach for conglomerates in cooperation with SARB. - Status and practice: - An insurance group supervisory framework will be introduced with the next version of the draft Financial Sector Regulation Bill, expected to be published for comment mid-2014 and with effect from January 1, 2015. - Group-wide supervision is currently informal and relies on general authority of the regulator rather than specific legislative provisions. - Registrar requests quarterly unaudited group-wide returns for potentially systemically important groups; non-systemically important groups may be requested to submit returns where concerns exist. Standardised group reporting returns are being finalised. - Scope of group supervision extends to ultimate insurance group holding company level within South Africa and includes financial conglomerates. - FSB-SA has applied a risk-based supervisory approach to groups; only a few groups have undergone full on-site risk assessment to date. - FSB-SA cooperates with BSD for group supervision; for systemically important groups more formalised arrangements exist; bi-annual discussions held for other groups. - FSB-SA participates in international supervisory colleges and hosted its first international supervisory college in 2013 (Old Mutual Emerging Markets group). ### Guidance, supervisory feedback, and derivatives - Recommendation (ICP 18): FSB-SA should provide more feedback and guidance to companies on observed good and bad risk management practices. - Practice: - After analysis of returns, a query letter is issued if clarification or action is required; after on-site visits a management letter communicates findings and required preventative/corrective action by reference to best practice. - Under the Insurance Bill, FSB-SA will issue “Level 3” guidance on good and bad governance, risk management and internal control practices. - Derivatives (ICP 19): - Investment in derivatives is allowed only for efficient portfolio management or reducing investment risk (see sections 34(2) and 33(2)). - Short-term insurers must have matching assets at settlement date. - Annual statutory returns amended to include more derivative transaction information. - Actuarial Society Professional Guidance Note SAP110 recommends market-consistent stochastic models for reserving embedded investment derivatives. - Insurance Bill will require that derivative investments reduce risk or facilitate efficient portfolio management; assets must be properly diversified to avoid excessive concentration; insurers must limit investment in assets not admitted to trading on a regulated financial market to prudent levels. ### Public disclosure, reporting, and transparency - Recommendation (ICP 26): FSB-SA should review full range of disclosures useful to stakeholders and consider making non-confidential parts of returns more readily available. - Current regime: - Registrar requires annual audited statutory returns and unaudited quarterly returns (sections 36 and 35). - Annual audited statutory returns require quantitative and qualitative information; annual statutory returns (excluding commercially sensitive information) are available to the public on request, including governance, assets, technical provisions, liabilities and solvency ratio; methods and assumptions used are not publicly available. - Annual report of FSB-SA provides aggregate industry information and is publicly available; Registrar’s annual reports reflect insurer-specific and aggregate information and key financial indicators but with a time lag. - Insurance Bill will introduce public reporting requirements and enhance statutory reporting; will require insurers to annually publicly disclose prescribed quantitative and qualitative information on profile, governance and controls, financial position, technical performance and risks, in form and manner prescribed. Registrar must ensure information is: - accessible to market participants; - timely, comprehensive and meaningful; - reliable as a basis for decisions; - comparable between insurers in same market; - consistent over time. ### Fraud, AML/CFT, and supervisory resourcing - Recommendation (ICP 27): Review adequacy of FSB-SA powers to make/enforce fraud requirements and introduce requirements for insurance companies. - Finding and status: - Insurance Acts do not expressly address insurance fraud; Registrar refers fraud to appropriate enforcement authorities and is authorised under section 22 of the Financial Services Board Act to share information with domestic/international regulatory authorities. - Registrar requires insurers to allocate resources and implement risk prevention procedures and monitors via risk-based supervision; South African Insurance Crime Bureau (SAICB) established by industry to provide fraud database and promote information exchange and training. - Board Notice will require insurers to develop and regularly review risk management policies that include explicit insurance fraud risk management policy covering deterrence, detection, reporting, remediation, and prompt reporting to relevant regulatory authorities. - Recommendation (ICP 28): FSB should consider recruiting specialist expertise in AML/CFT and address insurers’ high-level approach and resourcing of compliance through on-site and thematic visits. - Status: - Insurance Compliance Department resources and expertise for AML/CFT supervision have been enhanced. - Compliance with FICA by long-term insurers and FSPs is embedded in FSB-SA’s risk-based supervisory approach; compliance regularly assessed via off-site monitoring and on-site visits. FSB-SA and Financial Intelligence Centre (FIC) regularly share ML/FT risk information; FSB-SA attends FATF meetings to learn ML/FT typologies. *Source: _cr1556 - section 4 of the Bill.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr1556.pdf_