FINANCIAL SERVICES BOARD Issues Paper

Issued for industry comments 1

FINANCIAL SERVICES BOARD

Issues Paper: Financial Condition Reporting – Proposed Solvency Assessment for

Short-term Insurers

INTRODUCTION .........................................................................................................................2

RISK-BASED SUPERVISION .....................................................................................................6

LEGISLATION CHANGES ..........................................................................................................6

THE FINANCIAL CONDITION REPORT.....................................................................................7

PRESCRIBED MODEL..............................................................................................................17

TRANSITION ARRANGEMENTS FOR THE PRESCRIBED METHOD ....................................29

NEW APPLICATIONS ...............................................................................................................30

APPLICATION AND APPROVAL PROCESS FOR ALTERNATIVE MODELS..........................31

CERTIFIED MODELS................................................................................................................34

INTERNAL MODELS.................................................................................................................44

TECHNICAL GUIDANCE ..........................................................................................................58

DEFINITIONS AND ABBREVIATIONS......................................................................................59

APPENDIX 1 .............................................................................................................................63

APPENDIX 2 .............................................................................................................................71

REFERENCES ..........................................................................................................................75


Introduction

Purpose of the paper

1 The purpose of this paper is to inform the short-term insurance industry of the method of statutory

financial reporting that will be required in South Africa in the future. This method is called Financial

Condition Reporting (FCR).

2 This paper describes FCR and the methods of calculating a short-term insurer’s insurance liabilities

and Capital Adequacy Requirement (CAR) that will be required by the Financial Services Board

(FSB).

3 The paper also describes changes that will need to be made to legislation governing short-term

insurance in order to accommodate FCR. It also outlines the arrangements for transition between

the current method of financial reporting to FCR. It sets out deadlines by which all short-term

insurers in South Africa should have made the transition.

4 The paper contains a fair amount of technical information. Insurers are advised to consider

obtaining professional advice to determine the effect that these proposals will have on their specific

circumstances.


Comments

5 This paper is open for public comment until 31 May 2007. Comments will not be treated as

confidential, unless specifically stated as such.

6 Comments must be sent, using the accompanying document template for comments, to:

Mrs Hantie van Heerden

Actuarial Department

Financial Services Board

PO Box 35655

MENLO PARK

0102

Fax number (012) 347 1288

E-mail address: [email protected]

Why Financial Condition Reporting?

7 By introducing FCR, the FSB is following a risk-based regulatory approach that is becoming more

acceptable internationally. Some of the countries that have already adopted a risk-based regulatory

approach are Australia, the UK, the USA, Germany, Canada, Holland and Switzerland.

8 The advantage of the current approach is that it is easy to administer. Effectively, it requires each

short-term insurer to hold risk capital at least equal to 25% of its annual net written premium. Its

disadvantage is that it is not sufficiently prudent for all insurers as the risk capital is independent of

the size of the insurer and the underlying risk. Thus it cannot be fully relied on to alert the FSB

when a certain insurer is in trouble. The current approach is also not useful for an insurer’s risk

management.

9 FCR is favoured because it requires each insurer to calculate risk capital that depends on the

underlying risk of its business. This will allow insurers to make more efficient use of capital when

they manage the underlying risk.


10 FCR will aid insurers in their risk management. This is because the method requires insurers to

implement sound risk management strategies and to use the report and models that accompany the

method in the day-to-day running of their business. This will result in a better understanding of an

insurer’s risks by its management, its board and the FSB.

Costs

11 The benefits of FCR will cost money. A significant portion of the cost will be incurred in complying

with the regulation. This cost will ultimately be borne by the same policyholders that FCR will aim to

protect. However, the FSB is of the opinion that the benefits will outweigh the cost.

Envisaged use of models to determine Capital Adequacy Requirement and liabilities

12 The FSB’s preferred approach to calculating risk capital and liabilities is through using an Internal

Model. This is because, of all the options that insurers have, it is the most accurate in calculating

risk capital. It is envisaged that ultimately, all insurers will be required to use Internal Models to

calculate their risk capital. Since the Internal Model requires specialised expertise and judgement to

develop, the person responsible to develop it should have an appropriate professional certification.

13 The Internal Model has the drawback of the cost and expertise that is required in developing it. To

aid companies that will not be in the position to build their own Internal Model by the time that FCR

becomes a requirement, the Prescribed Model has been developed. It is based on the whole short-

term industry and will be most accurate for companies that are average in most respects. Although

the formulae are complex, the model is easy to use and is already incorporated into the ST2006.

14 Another option that companies have to calculate their risk capital and liabilities is the Certified

Model. Many of the features of this model are the same as those of the Prescribed Model. However,

individual insurers are able to change some elements of the Prescribed Model to meet their specific

circumstances. The person responsible to develop the Certified Model should also have an

appropriate professional certification. In its certified model application, the insurer should outline its

strategy and time frame in progressing to an internal model. In addition, the insurer should outline


the enterprise wide risk management procedures it has in place as part of its risk management

strategy.

15 The diagram below compares the different types of model that insurers can choose from.

16 The diagram below summarises FCR, its requirements and the methods that can be used to

calculate liabilities and risk capital.

Financial Condition Report

Fair

valu

e of

adm

issi

ble

asse

ts

Ris

k M

anag

emen

t

Use

in d

ay-to

-day

runn

ing

of b

usin

ess

Fair

valu

e of

ass

ets

Excess

assets

Liabilities

Best estimate

+ Prescribed

margins

PM, CM or

IM

CAR

Min R10mil

PM, CM or IM

Free Assets

• Industry Structure

• Industry

Parameters

Prescribed Model

• Industry Structure

• Company Parameters

• Annual certification

by actuary

Certified Model

• Company Structure

• Company Parameters

• Peer review at

application

• Annual certification by

actuary

Internal Model


17 If the insurer received approval to issue debentures or preference shares (other than compulsory

convertible preference shares) these instruments will be viewed as suitable capital to back the

CAR. The same terms and conditions, as prescribed by the Registrar in the approval of these

instruments, will apply.

Risk-based supervision

18 The FSB is in the process of implementing risk-based supervision. Under this approach, the riskier

an insurer is, the more stringently it will be regulated.

19 Insurers will be classified into categories of risk and control levels will be established to determine

the level of regulation that each insurer will be subject to.

20 FCR fits in naturally with risk-based supervision as it will provide the FSB with more accurate

information regarding each insurer’s level of risk.

Legislation Changes

21 Legislative changes will be necessary to implement FCR. The changes that we have proposed in

the Insurance Amendment Bill 2007 are discussed below.

22 The main change will be to remove the sections on the valuation of liabilities from Schedule 2 and

replace it in a Board Notice / Regulation format. The reason for this is to simplify the process in

future if changes to the formulae or other technical aspects are required.

23 If it happens that the Insurance Amendment Bill is enacted before FCR can be implemented, we

propose that the current legislation’s principles should be included in the Board Notice / Regulation

until the time that FCR is implemented. A proposal, if this should occur, is attached in Appendix 1 in

a Board Notice format1.

1 The same information can be put into the format of Regulations


24 Once FCR is implemented the Board Notice / Regulation should contain the principles as set out in

this issues paper, in other words the details regarding the Prescribed Model, Certified and Internal

Models as well as the disclosure thereof.

25 Other act changes include the following:

• All references to the contingency reserve must be removed.

• All references to the “additional amount” must be removed and replaced with “capital adequacy

requirement”. (Referring to a “capital adequacy requirement” also makes the short-term

legislation more comparable with the long-term legislation.)

• References to “liabilities” in the Act must be changed to “liabilities and capital adequacy

requirement”.

• Allowance must be made for the appointment of a statutory actuary in certain circumstances,

including the right to the FSB to approve (and remove) such an appointee.

• An additional requirement must be added in section 28 (2) to state that an insurer shall be

deemed to be financially unsound if it has not made provision for the capital adequacy

requirement.

• Part 2 of the Regulations to the Act must be removed.

26 It is not certain when the Insurance Amendment Bill will be tabled in Parliament, but we hope that it

will happen during the latter half of 2007.

The Financial Condition Report

27 A Financial Condition Report provides an outline of the key risks and matters impacting on the

financial condition of the insurer. This includes providing the insurer with implications of issues

identified and, where these implications are adverse, proposing recommendations designed to

address the issues. It augments, but does not replace, statutory returns.

28 The Board of directors of the short-term insurer should assure themselves and demonstrate within

this report that adequate capital support is in place to minimise the risk of possible financial failure

of the insurer.


29 The report should focus on principles. For example, smaller insurers may need to report less than

larger insurers.

30 The principles of disclosure that should be adhered to are described in this section. Therefore no

standard template is given at this stage.

Financial Condition Report submission

31 The report must be submitted by all registered short-term insurers. This includes registered short-

term insurers in run-off.

32 This report must be completed on an individual short-term insurer level and not at a group level2.

33 This report must be submitted to the Registrar of Short-term Insurance on an annual basis

accompanying the annual statutory return (within four months after the financial year end of the

insurer). It should not be viewed as an annexure to the statutory return or the published annual

financial statements. Neither should any cross-reference be made between the report and the

statutory return or the published annual financial statements.

34 The Registrar may at any time require, with valid reasons, a short-term insurer to compile and

submit, within a reasonable period of time, a Financial Condition Report. This request by the

Registrar may be made on an ad hoc basis (over and above the annual submission requirement)

depending on the nature of the short-term insurer’s financial position.

35 This report must be signed off by the chairperson of the Board of Directors and the chief executive

officer of the short-term insurer.

36 In the event the short-term insurer was assisted by an approved person in compiling any part of the

report, the report must state the name and level of assistance provided by the approved person.

2 However, if an insurer is prone to systemic risk, this should be mentioned and addressed.


Insurer's background

37 The report must outline and describe the intrinsic nature of the business and the external

environment within which the short-term insurer operates. Such information includes:

• the corporate structure;

• the ultimate beneficial shareholder of the insurer as well as the financial condition of the holding

company; and

• the business classes registered and registration conditions imposed.

Recent experience

38 The report must identify and comment upon significant features or trends in the insurer’s recent

experience, including any impacts due to external factors. Deviations in actual experience from

expected experience must also be discussed, including reasons for these deviations.

39 The report must comment on any steps taken, or proposed to be taken, by the Board and senior

management of the insurer to address areas of deviation and adverse experience.

Risk management strategy

40 The report must outline the short-term insurer’s risk management strategy. It should be a

demonstration of the systems and procedures in place to identify, assess, mitigate and monitor the

risk with which the insurer is faced.

41 The report must disclose the following matters in respect of the risk management strategy:

• the risk governance relationship between the Board, Board committees and senior management;

• the processes for identifying and assessing risks;

• the process for establishing mitigation and control mechanisms for individual risks;

• the process for monitoring and reporting risk issues (including communication and escalation

mechanisms);

• those persons in the insurer with managerial responsibility for the risk management framework,

their positions, roles and responsibilities;

• the process by which the risk management framework is reviewed;

• the mechanisms in place for monitoring and ensuring continual compliance with the Capital

Adequacy Requirement (CAR); and


• the processes and controls in place for ensuring compliance with all other prudential

requirements.

42 Additional requirements will be necessary if the insurer uses an internal or certified model to

calculate its liabilities and / or CAR. These are described in the sections on certified models and

internal models below.

Liability valuation

43 In determining the value of its insurance liabilities, an insurer must determine a value for both its

outstanding claims liabilities and its premium liabilities for each short-term regulatory return class of

business. Where,

• outstanding claims liabilities relate to all claims incurred prior to the valuation date, whether or

not they have been reported to the insurer; and

• premiums liabilities relate to all future claim payments arising from future events post the

valuation date that are insured under the insurer’s existing policies that have not yet expired.

44 The report must include the method used to calculate the liabilities, whether this is the Prescribed

Model (PM) or a company-specific calculation performed by an Approved Actuary.

45 When the calculation is performed by an Approved Actuary the calculation needs to be done in

accordance with the guidance notes prescribed by the Actuarial Society of South Africa.

46 Irrespective of the methodology used the following information is required by class of business:

• a best-estimate value of the outstanding claims liabilities, split between case reserves for

outstanding claims and incurred but not reported (IBNR) reserves;

• a best-estimate value of the premiums liabilities;

• risk margins for each insurance liability specified above, determined on a basis that is intended

to value the insurance liabilities of the insurer at a 75% level of sufficiency;

• an analysis of the historical adequacy of each liability estimate over the past five years; and

• if the historical provisions have been inadequate, an explanation for these inadequacies and

steps taken by the insurer to prevent the situation from persisting needs to be included.


Asset and liability management

47 The report must comment on the current approach of the insurer to asset and liability management

in relation to the liability profile and liquidity needs of the short term insurer.

48 The report must outline the process followed to implement an investment strategy, including the

following:

• the investment objective of the insurer;

• how the capital position, the term and currency profile of its expected liabilities, liquidity

requirements and the expected returns, volatilities and asset class correlations are incorporated

in this objective;

• the formulation of the investment strategy, discussing strategic asset allocation, assets allocation

ranges, risk limits target, currency exposures and ranges;

• the management of individual asset classes, whether performed internally or outsourced to

investment managers;

• the responsibilities of individuals and committees deciding and implementing the investment

strategy;

• the selection process of the investment managers as well as the monitoring of these investment

managers in respect of adherence to their mandates;

• the process of ensuring the continuing appropriateness of the investment strategy; and

• the monitoring of compliance with the investment strategy.

49 The report must outline the liquidity plan for different classes of business at different points in time.

50 In respect of derivatives transactions the report must outline the

• objective in using derivatives;

• risk tolerance or allowed exposure of the insurer and a management framework consistent with

the risk tolerance;

• lines of authority and responsibility for transacting derivatives; and

• the consideration of worst-case scenarios and sensitivity analyses.


Business projections

51 The report must include the projected premium income used in the calculation of the CAR, by line of

business.

52 The report must include a comparison of actual premium income achieved against projected

premium income used for previous CAR calculations. The comparison should contain figures for the

previous five financial periods split by line of business with an explanation for any major

discrepancies between actual and expected premium income.

Capital management and capital adequacy

53 The report must outline the insurer’s strategy for setting and monitoring capital resources over time

and the processes and controls in place to monitor and ensure compliance with the CAR as

determined in accordance with professional guidance as prescribed by the Actuarial Society of

South Africa. Comment must be made on the strategy, including targets and trigger ratios included

in the strategy, and any issues arising from the use of the strategy, having regard to the insurer’s

CAR and future capital needs to support the business plan.

54 The report must include the method used to determine the CAR, whether this is the Prescribed

Model Method (PM), Certified Model Method (CM) or Internal Model Method (IM).

55 Where an IM or CM is used, the report must include the date at which the model was last approved

by the Registrar and any subsequent changes to the model since that date.

56 Where a CM is used, the report must indicate which business has been calculated under the CM

and report this business separately.

57 Where a CM is used, the insurer must report on the progress made towards implementing an

Internal Model.


58 The following items of information must be disclosed:

• the capital base of the insurer;

• the CAR of the insurer, stipulating the model used; and

• the capital adequacy multiple of the insurer.

59 The report must comment on whether or not the insurer is complying with the CAR, and has

complied with the CAR continuously over the past year.

60 The report must identify trends in the insurer’s compliance with its capital targets over the last three

years.

61 The report must comment on the extent of, and reasons for, any breaches by the insurer of its

targets during the past year and the subsequent actions that were taken by the insurer to rectify any

breaches. Where such breaches have occurred it is necessary for an Approved Actuary to

comment on the extent of and reasons for any breaches by the insurer of its CAR during the past

year and the subsequent actions that were taken by the insurer to prevent such breaches from

reoccurring.

62 The Approved Actuary must consider and comment on the insurer’s capacity to continue to meet

the CAR and its capital targets over the next three years. This assessment should include

quantitative and qualitative stress and scenario testing.

Premium adequacy

63 The report must outline the insurer’s approach to the premium determination process. This must

include commentary on underwriting practices, expense assumptions and profit margins.

Reinsurance management strategy

64 The report must outline the insurer’s reinsurance management strategy and must comment on any

issues arising from the use of the specified reinsurance strategy and arrangements. This must

include:

• the primary objectives when placing reinsurance;


• the process for selecting reinsurance partners;

• the process of establishing the type and level of reinsurance required; and

• the methodology used to calculate the maximum loss per risk and per event.

65 The report must outline the process for ensuring continuing appropriateness of the reinsurance

strategy and implementation of this strategy and highlight the monitoring and oversight of this

strategy.

66 The report must describe the impact of the reinsurance strategy on the overall capital model.

67 The report must comment on the use of facultative reinsurance by the insurer with reference to how

and why the decision to purchase facultative reinsurance is made.

68 The report must comment on the level of catastrophe cover purchased with commentary on the

decision process for selecting this amount of cover.

69 The report must highlight changes to the reinsurance strategy over the prior reporting period, with

specific reference to:

• the type of reinsurance cover purchased;

• the net retention levels;

• the amount of catastrophe cover purchased; and

• the lead reinsurer on major contracts.

70 The report must indicate in a form of a table the exposure to the insurer’s five largest reinsurance

partners. This table must include:

• the name of the reinsurer and country of incorporation;

• the total proportional treaty premium;

• the total catastrophe non-proportional treaty premium;

• the total non catastrophe non-proportional treaty premium;

• the facultative premium; and

• the percentage of the premium paid to this reinsurer in relation to all reinsurance premiums paid.


71 In respect of the Motor, Property and Engineering business classes the report must include the

following information per cresta zone:

• the number of risks;

• the total sum insured;

• the total estimated maximum loss; and

• the gross and net premium income.

72 The report must outline the maximum protected and unprotected net retention per risk.

73 The report must outline the automatic capacity available per business class, including:

• the maximum amount of non-proportional risk capacity purchased;

• the maximum amount of proportional treaty capacity automatically available;

• the nature of this proportional capacity (surplus, quota share or autofac); and

• for property and engineering classes, the minimum estimated maximum loss percentage without

reference to the lead reinsurer.

Credit risk

74 The report must outline the processes in place to manage and monitor the credit risk exposure of

the short-term insurer.

75 The report must describe how the insurer defines acceptable ranges, quality and diversification of

credit exposures. It is recommended that this be related to different categories such as reinsurers,

brokers, policyholders, investments and other.

76 The report must include the limits set for credit exposures and the maximum exposure at the

reporting date to single counterparties and groups of related counterparties.

77 The report must include a description of the process for approving changes in the credit mandate

and changes in limit structures.

78 The report must include a description of the process for reviewing and, if necessary, reducing or

cancelling exposures to a particular counterparty where it is known to be experiencing problems.


79 The report must include a list of any material third-party defaults over the prior reporting period and

the processes and procedures in place to mitigate such defaults from reoccurring in the future.

Operational risk

80 The report should include a definition of what the insurer perceives as operational risks within its

business context. Such risks may include:

• the risks associated with outsourcing work;

• business continuity risk;

• the risk of inadequate human resources;

• internal and external fraud;

• the risks associated with project management;

• the risks associated with underwriting and claims; and

• the risks around the introduction of new products.

81 The report needs to provide detail on the processes incorporated by the insurers to manage and

monitor the operational risk exposure.

82 The report must include a description of the process that the insurer applied to identify key areas of

risks which has been included under their definition of operational risk. This should also include

commentary regarding the reassessment of the insurer’s activities and internal functions to update

the definition.

83 The report must include detail on the financial losses suffered due to operational losses over the

prior reporting period. This must include:

• a description of the events that caused the loss;

• the control procedures that were not functioning to prevent the loss; and

• mitigating actions taken to prevent these losses in the future.


Prescribed Model

84 The Prescribed Model can be used to calculate the insurance liabilities of an insurer as well as its

Capital Adequacy Requirement (CAR).

85 The Prescribed Model was calibrated using industry data from historical STAR returns. As such it

provides an approximate measure of an insurer’s insurance liabilities and its CAR. Also, whenever

the model refers to business classes, it refers to the eight business classes as used in the statutory

return.

86 Since the Prescribed Model is an industry average model, it has certain limitations and can not be

accurate for all insurers. This is firstly because the STAR returns did not contain all the necessary

data required and secondly because the data that were available were not always reliable.

87 In particular the data did not allow a split and analysis between proportional and non-proportional

reinsurance, since only certain non-proportional reinsurance is seen as approved reinsurance in the

Act. In the STAR return only the earned premium of the non-proportional approved reinsurance is

taken into account, and not the full effect that the reinsurance can have on the liability profile. This

has important implications for an insurer with a significant amount of non-proportional reinsurance.

88 Also, in the STAR return data it is not possible to separate extreme events from attritional losses.

Thus the calibration implicitly modelled these different types of losses together.

89 By its nature the Prescribed Model is approximate and will therefore not ‘fit’ individual companies

with specific circumstances. The lack of fit can be expected to be particularly pronounced for niche

insurers, cell captive insurers and reinsurers.

90 The Prescribed Model estimates insurance liabilities that are 75%3 sufficient. It also calculates the

CAR for different sufficiency levels (98%, 99% and 99.5%). However, the requirement is for

insurers to hold a CAR that is 99.5%4 sufficient.

3 This means that the liabilities will be expected to be insufficient once in every four years. 4 This means that the insurer will be expected to have insufficient capital once in every 200 years.


Insurance liabilities

91 The diagram below slices the liabilities side of an insurer’s balance sheet in different ways to

summarise the Prescribed Model and the elements of liabilities and risk capital it calculates.

92 In the Prescribed Model, insurance liabilities are made up of the claims liabilities, the prescribed

margin on the claims liabilities, premium liabilities and the prescribed margin within the premium

liabilities.

93 The claim liabilities is a reserve with respect to claims that have occurred in the past. The unearned

premium liabilities is a reserve with respect to future claims on business already written. The

Prescribed Model provides a best estimate of both these reserves. The purpose of the prescribed

margins on these reserves is to make the total insurance liabilities 75% sufficient.

94 The calculation of the claim and premium liabilities is described separately below.

Liabilities Best estimate +

Prescribed

margins

75% sufficient

CAR Min R10mil

99.5% sufficient

Best Estimate

of Claim Liabilities (IBNR and OCR)

Best Estimate

of Premium

Liabilities

Prescribed Margin

on Claim Liabilities

Prescribed Margin on Premium

CAR

Best estimate of

Liabilities

TCR


Claims Liabilities

95 The claim liabilities is a sum of

• Incurred But Not Reported reserve (IBNR) and

• Outstanding Claims Reported reserve (OCR).

OCR

96 Insurers provide their own best estimate of the OCR.5

IBNR

97 The Prescribed Model uses a table, based on the chain ladder method, to calculate the best

estimate IBNR reserve. It uses a different six-year run-off pattern for each business class to

calculate the percentage of claims not yet reported at the end of every year.

Percentage of claims not yet reported for the current financial year less x years where x = … Business Class

0 1 2 3 4 5

Accident 9.00% 2.90% 0.94% 0.30% 0.10% 0.03%

Engineering 8.67% 2.57% 2.04% 1.99% 1.98% 1.98%

Guarantee 24.92% 5.46% 1.39% 0.54% 0.36% 0.33%

Liability 17.01% 3.73% 1.32% 0.89% 0.81% 0.80%

Motor 4.33% 0.63% 0.31% 0.28% 0.28% 0.28%

Property 6.14% 0.43% 0.12% 0.10% 0.10% 0.10%

Transport 9.71% 3.40% 1.69% 1.22% 1.10% 1.06%

Miscellaneous 7.30% 1.01% 0.29% 0.20% 0.19% 0.19%

5 Depending on the insurers’ current methodology, this reserve should not change from the current method to the Prescribed Method.


98 The IBNR reserve is obtained by summing the products of earned premium and the appropriate

percentage of claims not yet reported for each combination of business class and relevant year.

99 Example:

Consider an insurer that writes Motor and Property business only. The following information applies:

• Each class of business is completely run off after two years

• The earned premiums for the two classes are as follows:

Earned premium for current financial year less

x years where x = Business Class

0 1

Motor 3 000 000 2 000 000

Property 5 000 000 3 500 000

Using the Prescribed Model, the IBNR calculation for this company would be performed as follows:

Calculation for current financial year less x years where x = Business Class

0 1

Motor 3 000 000*4.33% 2 000 000*0.63%

Property 5 000 000*6.14% 3 500 000*0.43%

This would give the following results for IBNR:


Result for current financial year less x years where x = Business Class

0 1

Total

Motor 129 900 12 600 142 500

Property 307 000 15 050 322 050

Total 436 900 27 650 464 550

The total IBNR for the insurer is therefore R464 550.

100 The methodology described above will be the minimum level of IBNR required. If an insurer wants

to use a lower IBNR percentage, it needs to get approval from the FSB. The Registrar may direct in

a particular case, another percentage to be used.

Prescribed margin on the claim liabilities

101 The prescribed margin on the claim liabilities increases the sufficiency of the total claim liabilities

(IBNR + OCR) to 75%. It is found by using the following formula:

cOCRGrossIBNRGrossbainMescribed )__(arg_Pr +×+=

102 The scale used should be in R’000s.


103 The parameters a, b and c are given below for each business class:

Business Class a b c

Accident -2.22492 2.79709 -0.01411

Engineering -1.31733 1.60758 -0.00220

Guarantee -7.46957 8.22086 -0.00624

Liability -1.29049 1.59921 -0.00358

Motor -1.86457 2.55882 -0.02002

Property -3.64609 4.48216 -0.01284

Transport -15.67146 16.30213 -0.00241

Miscellaneous -4.75294 5.57018 -0.01016

Premium Liabilities

Unearned Premium Provision

104 The Unearned Premium Provision (UPP) must be calculated using the current estimation technique,

namely the 365ths method. If an insurer wants to use a different method, the FSB must approve the

alternative method, whether the alternative method is more conservative or not.

Unexpired Risk Provision

105 Where an insurer has specific knowledge that its premiums are inadequate, appropriate prudence

would need to be borne in mind when setting an Unexpired Risk Provision (URP). This URP would

also form part of the insurance liabilities and would have to be set at a 75% level of sufficiency.

Since the calculation of the URP would depend on the context and the specific circumstances of the

insurer, a formula is not prescribed for it.


Prescribed margin within UPP

106 The prescribed margin within UPP needs to be calculated in order to quantify its contribution to

Total Capital Required. It is calculated by using the following formula:

UPPemiumEarnedGrossbainMescribed c ××−−= ])Pr__(1,0[maxarg_Pr

107 The parameters a, b and c are given below for every business class:

Business Class a b c

Accident 0.909828 0.000000 0.000000

Engineering 0.884053 0.000000 0.000000

Guarantee 0.950792 0.000000 0.000000

Liability 0.861766 0.000000 0.000000

Motor 0.866146 4.325236 -0.312100

Property -90.139828 91.659539 -0.000482

Transport -7.738425 9.022793 -0.004004

Miscellaneous -25.797955 27.875147 -0.002596

Risk capital required

The Total Capital Required (TCR) as calculated by the Prescribed Model is the result of the formula

explained below.

Total Capital Required

108 The formula that calculates TCR uses the following charges for risk as inputs:

• Charge for investment risk, called the Asset Capital Charge (ACC)


• Charge for insurance risk, called the Insurance Capital Charge (ICC)

Asset Capital Charge

109 The Prescribed Model specifies a capital adjustment factor for each investment class. The capital

factors were estimated using the Smith Model, calibrated to the South African market. The aim of

the capital adjustment factor is to provide the specified level of protection against loss in market

value of the assets backing the liabilities and other capital elements.

110 The ACC is calculated by first allocating assets to liabilities (both current liabilities and insurance

liabilities) and Capital Adequacy Requirement elements to decide which assets the capital

adjustment factors need to be applied to. The ACC is the sum of the products of the capital

adjustment factor and the amount of assets held in each investment class for all investment

classes.

111 The capital adjustment factors for different investment classes are given in the following table for a

99.5% level of sufficiency:

Investment Class Capital Adjustment Factor

Cash 0.0%

Equity 38.0%

Property 32.5%

Fixed Interest (Outstanding Term = 1 year) 6.7%

Fixed Interest (Outstanding Term = 2 years) 11.27%





Insurance Capital Charge

112 The diagram below shows how the insurance capital of a short-term insurer is built-up from various

components. This diagram is best understood from the bottom-up, since each component of risk

feeds upwards into the component above it.

113 Gross Stand-alone Risk Capital is capital that covers the risk within each of the business classes. It

is ‘stand-alone’ because it does not yet take into account the correlation and diversification that


exists between the business classes. It is gross of reinsurance. Gross Stand-alone Risk Capital is

estimated by using tables. The tables are results of a dynamic financial analysis model calibrated to

STAR returns data. Their inputs are class of business, Gross Written Premium and Gross

Unearned Premium Provision. The tables can be found in Appendix 2.

114 Net Stand-alone Risk Capital is calculated by firstly multiplying the Gross Stand-Alone Risk Capital

by the retention factor for the appropriate business class. The retention factor is based on

proportional reinsurance. It is at this point where the Prescribed Model can be significantly

inaccurate for companies with a significant amount of non-proportional reinsurance. This is because

detailed data available was not available in STAR returns for a more in-depth calibration taking into

account the type of reinsurance taken out by an insurer.

115 In the event of a worst-case insurance loss (as envisaged by the net stand-alone risk capital

calculated at this point) the company will also incur expenses in the normal course of business.

These expenses thus need to be allowed for in the Capital Adequacy Requirements of each class

of business by adding them to the net stand-alone risk capital. Insurers can use their current level of

expenses as an indication of the likely level of expenses in the coming year. Further, should

insurers feel that their expenses would rise significantly in times of high insurance losses, they

should estimate their expenses on this basis.

116 To calculate the ICC, Net Stand-alone Capital is calculated for each of the eight STAR return

business classes. From the Net Stand-alone Capital for each business class the overall insurance

charge for all business classes can be calculated. This is achieved by summing of the Net Stand-

alone Capital for each business class and multiplying the sum by a diversification and correlation

factor. The factor is determined as follows:

)()()(

pTSCpDCCpfactor =

Where

DCC(p) = Diversified and Correlated Capital at the pth

percentile

TSC(p) = Total Stand-Alone Capital at the pth

percentile


DCC is the appropriate percentile of a log-normal distribution with the following mean, E[DCC], and

variance, V[DCC], appropriately parameterised for underwriting risk:

∑=

×=N

iii ULREEPEDCCE )]([][

Where:

N = The number of classes of business

i = The specific class of business under consideration

EPi = The earned premium in class of business i

E[ULRi] = The expected ultimate loss ratio for class of business i

∑ ∑∑=

<×+×=

N

ijijji iii ULRULRCovEPEPULRVEPDCCV

1

2 ],[)()(2][)(][

Where:

V[ULRi] = The variance of the ultimate loss ratio for class of business i

Cov[ULRi ; ULRj] = The covariance of the ultimate loss ratios of class i & j

TSC is the sum of the appropriate percentiles of a series of lognormal distributions where only

underwriting risk is allowed for. The following mean and variance are used in estimating the

parameters of each lognormal distribution:

)(][ iii ULREEPSCE ×=

)()(][ 2iii ULRVEPSCV ×=

The ratio of DCC to TSC is an approximate measure of the appropriate factor to be applied to the

net total capital required to allow for diversification and correlation effects.

117 Finally, the ICC is calculated by subtracting the investment return on assets backing insurance

liabilities from the overall insurance charge. It is yet to be decided whether the rate of investment


return on assets backing insurance liabilities will be prescribed of if guidance will be provided. A

rate of return of 8% has been used in the model embedded in the 2006 statutory return for

illustrative purposes.

Calculating Total Capital Required

118 The TCR is calculated by using the ACC and the ICC as inputs.

22

⎟⎠⎞⎜

⎝⎛+⎟

⎠⎞⎜

⎝⎛=

iccacc gICC

gACCTCR

119 The gacc is the grossing up factor on the ACC and the gicc is the grossing up factor on the ICC. The

grossing-up factors are calculated via an intermediate calculation described below. This step

involves the performance of an asset allocation (after the allocation of assets to current liabilities

and reserves) to adjusted values for the asset capital charge and the insurance capital charge.

These adjustments are given below and are performed so as not to penalise companies for the

composition of elements of their shareholders’ funds not being used to back their Capital Adequacy

Requirements:

TCRadj = Intermediate total capital required (before grossing-up)

ACCadj = Adjusted Asset Capital Charge

ICCadj = Adjusted Insurance Capital Charge

22 ICCACCTCRadj +=

⎟⎠⎞

⎜⎝⎛

+×=

ICCACCACCTCRACC adjadj

⎟⎠⎞

⎜⎝⎛

+×=

ICCACCICCTCRICC adjadj

120 An asset charge (calculated on the same basis as ACC) is calculated for the allocation of assets to

ACCadj and ICCadj. These two charges are the weighted average fall in assets that could result for

an appropriate level of sufficiency.


accc = asset charge on ACCadj where 10 << accc

iccc = asset charge on ICCadj where 10 << iccc

121 The resulting grossing-up factors are calculated as follows:

accacc cg −=1 where 10 << accg

iccicc cg ×−= 5.01 where 10 << iccg

122 The rationale for the above is that for the ACC, full grossing-up should be allowed for as a grossed-

up asset charge is needed in precisely the situation that you need the asset charge itself. The

grossing-up of the ICC only takes half of the appropriate asset charge into account since a worst

case insurance event will not always happen at the same time as a worst case asset event. The

use of a factor of a half can be seen to be allowing for a 50% correlation between insurance

catastrophes and investment market crashes. This is in line with the intended practice in European

markets.

Minimum Capital Required

123 The TCR implicitly contains prescribed margins referred to in previous sections. Thus the CAR can

be found by applying the formula below to the TCR:

CAR = TCR – Prescribed Margin on Claim liabilities – Prescribed Margin within Unearned Premium

Provision

124 The Capital Adequacy Requirement is subject to a minimum of R10 million.

Transition arrangements for the prescribed method

125 Should the FSB manage to make the necessary amendments to the Short-term Insurance Act

during 2007, then the implementation date for compliance with FCR is for all short-term insurers

with a financial year-end after 1 January 2009.


126 From the date of implementation, insurers will have five financial years to accumulate capital to the

99.5% sufficiency level. To ensure steady progress towards the 99.5% sufficiency level within five

years, insurers will be considered financially unsound if they do not comply with the transition

capital levels.

127 Transition capital levels are calculated by defining

• x as the capital at the 99.5% sufficiency level

• y as 25% of Net Written Premium (the current solvency requirement)

• and deriving transition capital levels using variable proportions of x and y over the following five

year-ends as described in the table below:

First year-end

Second year-end

Third year-end

Fourth year-end

Fifth year-end

Proportion of x 20% 40% 60% 80% 100%

Proportion of y 80% 60% 40% 20% 0%

128 The FSB will be open to requests where insurers cannot comply with the transition capital levels.

These insurers should make the necessary application for dispensation with a clear motivation why

a special dispensation should apply to them. After consideration of the application, the FSB could

propose alternative transitional arrangements for such insurers.

129 The transition arrangements described above are applicable to the prescribed method only. If an

insurer chooses an internal or certified model, a 99.5% level of sufficiency must be maintained from

the date of approval of that method.

New applications

130 Entities that apply for a new short-term insurance license before FCR is implemented, will be

informed about the new proposals to ensure that no unrealistic capital expectations are set.

131 Applications for a new short-term insurance license after FCR has been implemented, will be

required to base their business plans on the same transitional arrangements as described above.


Application and approval process for alternative models

132 Insurers that choose to use an Internal Model or a Certified Model to demonstrate solvency must

lodge an application to the FSB for their models to be approved.

133 For the rest of this section, the word ‘model’ refers to both an Internal Model and a Certified Model,

unless where the context makes it clear otherwise.

Model Approval Process

134 An insurer must obtain the FSB's prior approval before it will be able to use its model to determine

its CAR. Short-term insurers should make a written application to the FSB. The model approval

process can be lengthy therefore insurers should apply well in advance (i.e. at least six months in

advance) of the proposed effective date for using their models.

135 The insurer’s Board of Directors should sign the model application.

136 Any approval will be conditional on continued compliance with the requirements of these guidelines,

as modified from time to time.

137 The FSB process will not be an audit / check on the calculations of the model. The FSB will also

consider wider supervisory knowledge on the insurer and knowledge of wider market developments

and practices. Assessment of models will also form part of future on-site visits.

138 An external provider’s model(s) will not be approved explicitly. Although a provider’s model may be

acceptable in principle, an insurer will still have to apply individually.

139 Approval will be subject to the outcome of a comprehensive model review process including:

• completion of a detailed application form about the model and accompanying risk control

environment;

• one or more on-site visits to discuss the detail of the model, risk management systems, and

surrounding organisational structure and controls;


• for an internal model, certification (by way of an independent review of the model) by an

independent actuary that the model’s methodology and assumptions are appropriate; and

• the model must have been in use for at least one year (in other words, producing results for at

least one year-end) as part of the risk management system used by the insurer.

140 If an insurer is applying for the use of a Certified Model, it should complete a single Certified Model

application containing all the elements that needs to be certified. Such an application could certify

alternative reserving methods, liabilities with prescribed margins and/or CAR. Despite submitting a

single application, results for each business class must be available and reported separately.

141 The application should incorporate a level of detail that provides sufficient justification for material

assumptions. The onus rests on the insurer to satisfy the FSB that its particular approach is

appropriate to its individual circumstances.

142 Once the FSB is satisfied with the extent to which the insurer has met the criteria outlined in these

guidelines, the FSB will approve the model. Any conditions on which the approval is granted will

also be specified.

143 The FSB will require, as a minimum condition of its model approval, that the insurer undertake to

advise the FSB in advance of any material changes to its model or surrounding controls, and that

the FSB be provided with any information necessary to satisfy itself that the insurer continues to

meet the criteria outlined in this proposal.

144 Examples of material changes include, but are not limited to:

• A change in model or significant modification to an existing model;

• changes in assumptions that, when used in the model, result in significant differences in Capital

Adequacy Requirements versus prior assumptions;

• a change in organizational structure that affects the model usage and capital calculation; and

• new products with features or options that significantly differ from the currently modeled portfolio.

145 Any material modifications to the model will require FSB review and concurrence. Depending on

the nature of the changes, a new approval may be required.


146 If an insurer is applying for the use of a Certified Model, it should outline its strategy and time frame

in progressing to an Internal Model. The application should demonstrate to the satisfaction of the

Regulator that the insurer is not engaging in a cherry picking exercise that can potentially leave the

insurer under-capitalised.

147 Once an insurer has commenced using the model for the measurement of its CAR, the insurer will

be required to continue using this method of capital measurement unless:

• The FSB revokes model approval and directs the insurer to use the Prescribed Model for

calculating its CAR; or

• The insurer seeks and receives approval from the FSB to regress from an Internal Model to the

Prescribed Model or a Certified Model or to regress from a Certified Model to the Prescribed

Model.

148 The application for approval of a model will be subject to a fee as published in the Government

Gazette.

Approved Actuary

149 Where an Internal Model or a Certified Model has been used, it is necessary that an actuary be

approved as an approved person to assist the short-term insurer in quantifying the insurer’s

technical liabilities and Capital Adequacy Requirements. However, the final responsibility remains

with the Board of the insurer.

150 The Actuarial Society of South Africa (ASSA) must approve the actuary to perform valuations for

short-term insurers and the Registrar of Short-term Insurance must approve the ASSA certified

actuary to perform valuations for the specific short-term insurer.

151 In the case of a short-term insurer using the Prescribed Model to calculate its Capital Adequacy

Requirement, automatic exemption is granted from appointing an approved actuary.

152 The FSB reserves the right to reject and/or to remove an ASSA certified actuary to perform

valuations for a specific short-term insurer. Such removal and/or rejection would be substantiated

by valid reasons.


153 A change in the approved actuary for a specific insurer must be approved by the FSB.

Certified Models

154 A Certified Model is a medium term temporary solution to assist South African insurers in making

the transition from prescribed-formulae-based solvency demonstrations to Internal Model based

solvency demonstrations.

155 However, a Certified Model is not:

• any model used simply to minimise solvency requirements; nor

• a proxy for an internal model; nor

• a cherry-picking exercise where insurers select prescribed Capital Adequacy Requirements and

Certified Model elements to minimise overall Capital Adequacy Requirements.

Relationship with Prescribed Model

156 A Certified Model is an adjustment to the Prescribed Model. It is a tolerable solvency demonstration

that is appropriate where the prescribed formulae do not fairly quantify an insurer’s risk.

157 It allows consideration of an insurer’s individual risk characteristics by applying the insurer’s specific

risk parameters to the Prescribed Model’s structure.

158 The diagram below summarises the certified model framework in the context of the proposed

prescribed model’s framework:


Prioritising and selecting business to certify

159 Insurers should prioritise their Certified Model designs according to the sizes (by gross written

premium and / or unearned premium provision) of their business classes. Larger classes of

business should be certified first. An insurer can model smaller classes first only if the data required

for the modeling of larger classes is not available and no reasonable modelling can be done without

it. In such cases, the insurer must satisfy the FSB in its application:

• that the data constraint exists and that it prevents modelling of the larger business class first and

• that reasonable steps have been taken to possibly model excluded business in the future.

160 To ensure overall sufficiency, developers should make the assumption that, while certifying sections

of the business, prescribed requirements for the other sections remain sufficient.


161 An insurer may model homogeneous groups of business separately. It may consider correlations

and diversifications between these classes of business. It should justify its approach to the FSB and

demonstrate its reasonability.

Authorised adjustments to the Prescribed Model

Liabilities and Prescribed Margins

162 Insurers may model Claims Liabilities, Premium Liabilities and Prescribed Margins for all business

classes using a Certified Model.

163 Since, in the Prescribed Model, Prescribed Margins are included within the Total Capital Adequacy

Requirement (TCR), the calculation of the TCR should be adjusted in a Certified Model. This should

be done according to the following formula, subject to a minimum of zero:

escribedCertifiedAdjustmentBeforePMCertifieddDiversifieCorrelated

adjustmentAfrerPMCertifieddDiversifieCorrelated PMPMTCRTCR Pr

)_(&

)_(& −+=

164 Example:

Item Prescribed Model Monetary higher reserves + PM

Monetary lower reserves + PM

Claims liabilities 10 20 5

Premium liabilities 20 40 10

Prescribed margins 10 20 5

Total Capital Adequacy Requirement

30 30+20-10 = 40 30+5-10=25

Admissible assets 100 100 100

75% sufficient reserves 40 80 20

Excess assets 60 20 80

Capital Adequacy Requirement

20 20 20

CAR coverage 3 times 1 time 4 times


Insurance Capital Charge

165 Once Liabilities and Prescribed margins for a specific business class have been certified, then the

Insurance Capital Charge (ICC) for that business class can be modelled. Asset Capital Charges

provided by the Prescribed Model may not be adjusted.

166 Insurers have two options in modelling ICC:

• Stand-alone insurance capital per business class; and

• Diversified insurance capital across business classes.

Option 1 - Standalone insurance capital per business class

167 Once the Certified Model developer has certified both reserves and prescribed margins for the

insurer’s business that could be modelled (to the extent allowed by appropriate data), then

consideration may be given to model the required insurance charge for such business.

168 Option 1 modelling works within the eight business classes as defined in the Short-term Insurance

Act 53 of 1998 and for which insurers are separately licensed. Within each of these classes, the

Certified Model developer should derive the distribution of profits/losses expected on the class of

business over a one-year time horizon6. This distribution of profits/losses is derived by subtracting

claims incurred from premiums earned in respect of both existing - and new business written in the

next year, while considering expenses, commission and reserve development. This modelling might

be done for homogeneous risk groups within each business class, in which case the Certified Model

developer should appropriately combine these groups (i.e. consider their correlations and

diversification effects).

169 Option 1 insurance charge modelling is done within a business class, as illustrated by the following

diagram:

6 An insurer may measure these profits/losses over a different combination of probability of default and time horizon, provided that the insurer can demonstrate to the FSB that the alternative parameters are appropriate for its business mix and produces a result which is consistent with the benchmark set above.


* As defined in the Short-term Insurance Act 53 of 1998

170 The above diagram illustrates how these resulting stand-alone insurance charges (SCR) for each

business class would then be combined to take account of diversification and correlation between

business classes. It is compulsory to use the Prescribed Model to combine SCRs derived through

option 1 insurance charge modelling into an Insurance Capital Charge (ICC).

Option 2 - Diversified insurance capital across business classes

171 Option 2 modelling differs from option 1 modelling in allowing the Certified Model to produce

insurance charges that take account of correlation and diversification within the Certified Model

itself. This is particularly useful where the insurer offers coverage across various business classes

SCR

Propert

Combine using Prescribed Model

Property* Motor* Liability* Transport

Com

bine

ris

k Homogen

Homogen

Homogen

SCR

Motor

SCR

Liability

SCR

Transp

Insurance

Capital


to a particular homogeneous risk group. Similar to option 1 modelling, the Certified Model developer

should derive the distribution of profits/losses expected on the risk group over a one-year time

horizon. This distribution of profits/losses is derived by subtracting claims incurred from premiums

earned in respect of both existing and new business written in the next year, while considering

expenses, commission and reserve development. Once again, a diagram should illustrate the

intention:

* As defined in the Short-term Insurance Act 53 of 1998

172 Once again, the Certified Model developer should appropriately combine these groups (i.e. consider

their correlations and diversifications).

Restricted areas of adjustment in a Certified Model

173 The following sections of the Prescribed Model framework may not be changed in a Certified Model

framework:

Property* Motor* Liability* Transport

Com

bine

ris

k Insurance

Capital


• best-estimate claim liabilities for a single class of business7 (unless data limitations exist);

• best-estimate premiums reserves for a single class of business7 (unless data limitations exist);

• prescribed margins on claim liabilities for a single class of business7 (unless data limitations

exist);

• prescribed margins on premium liabilities for a single class of business7 (unless data limitations

exist);

• asset capital charge requirements; and

• the method for grossing-up the insurance capital charge and the asset capital charge.

Required buffer

174 A Certified Model of solvency capital represents a move away from the default solvency Capital

Adequacy Requirements. This removes some implicit industry-wide margins contained in default

solvency Capital Adequacy Requirements. In addition, individual-company data rarely include

sufficient catastrophe experiences to adequately model the “tail” of catastrophe losses. Coupled

with this, company data (for small insurers) are unlikely to be of such volume to have sufficient

credibility for capital modelling purposes.

175 Therefore, with any application of a Certified Model, a buffer should be added. This buffer should be

added to the final Capital Adequacy Requirement (after adjusting for modified prescribed margins)

where the buffer is set on a tiered approach in the following manner:

7 This means that the calculation needs to be done for all classes of business.


Tier Buffer Description

Compulsory tier – held

by all insurers applying a

Certified Model to

solvency capital.

5% of rolling 12 month

total net written premium

Held by all insurers applying for a

Certified Model (option 1 or option 2

modelling) to solvency capital.

PLUS

Additional tier – held in

addition to compulsory

tier by insurers with

insufficient risk control

structures.

5% of rolling 12 month

total net written premium

Not required for insurers that

demonstrate, to the Regulator’s

satisfaction, on an ongoing basis a

Board approved, comprehensive, pro-

active and preventative enterprise-wide

risk management that effectively limits

operational - and other risks.

PLUS

Assessed tier – added

by the Regulator on an

individual basis.

Variable on case-by-case

basis

Assessed by the Regulator at the

application stage and could be revised

annually thereafter.

The total buffer required is multiplied by the following ratio, to account for the extent to which a Certified

Model is used:

( )( )∑∑

+

+

essBuAll

essBuCertified

GWPGUPR

GWPGUPR

sin_

sin_

)(

)(

176 Insurers with no enterprise-wide risk management would hold a buffer equal to the sum of all three

tiers. The total buffer can be a maximum of 15% of Net Written Premium.

Additional risks that must be considered

177 The professional developing the Certified Model should apply his/her mind to any significant

additional risks that arise when proposing the use of a Certified Model to substitute sections of the


Prescribed Model. Where appropriate, the professional should make allowance for such risks,

ensuring appropriate sufficiency for only the certified business.

178 The Certified Model developer must ensure compliance with prescribed ASSA guidance notes.

Cell insurers

179 The risk profile of cell insurers is vastly different from that of non-cell insurers. Also, between cell

insurers and within cells, there is great difference in the underlying risk. Internal Models are, thus,

the only method of accurately reflecting the inherent risk for a cell insurer. The following are interim

measures to assist cell insurers in making the inevitable transition to Internal Models.

1st party cells

180 There is an international trend to make the ring fencing in cell insurers more absolute through

Protected Cell Company) and Incorporated Cell Company legislation. If South Africa follows this

international trend, a case could be made to grant express certification of all 1st party cells. Here,

an express certification is meant to imply simple application and prompt approval, but not automatic

approval.

181 The express certification should apply only to 1st party cells with policy limits, where the policy limits

are less than the sum of the net asset value of the cell and the expected premium. If reinsurance is

used for the cell, one of the following must be adhered to:

• approved reinsurance (as defined in the Act) is used,

• foreign reinsurance with a pay-as-paid clause is used; or

• foreign reinsurance with no pay-as-paid clause is used, but with security in place equal to the

cover bought.

182 1st party cells which do not meet the above reinsurance requirements and do not qualify for

express certification can still be certified through the standard certification process (i.e. not express

certification).

183 Every 1st party cell meeting these requirements need to set money aside equal to the premium plus

the net asset value less the claims incurred in respect of the cell. By the nature of the cell, this

amount should not be less than zero. Although no other solvency capital is proposed in respect of


such 1st party cells, the Certified Model developer must consider and provide for any asset risk (by

applying the asset risk Capital Adequacy Requirements to the cell’s assets) that could exist for such

cells. Cell insurers may use the re-capitalisation clause in providing for these risks, but where used,

the insurer should clearly disclose and justify this approach in its Certified Model application.

184 Insurers must apply in a single application for the express certification of the abovementioned 1st

party cells. Such applications may group 1st party cells by class of business and cover more than

one class of business. Insurers must report on express certified 1st party cells separately from non-

certified 1st party cells in their annual statutory returns and financial condition report.

185 While developing Certified Models, developers must be satisfied that requirements for express

certification are met.

186 For the certification of other 1st party cells, cell insurers should apply for approval in a similar

fashion to that proposed for non-cell insurers above. A single application may group 1st party cells,

provided similar capital calculations would be applied to these grouped 1st party cells.

3rd party cells

187 The FSB will apply stricter criteria in evaluating any applications to replace prescribed requirements

for 3rd party cells. Once again, a single application may group 3rd party cells, provided similar

capital calculations would be applied to these grouped 3rd party cells. Requirements for such

applications are similar to that proposed for non-cell insurers above.

Combined 1st and 3rd party cells

188 Combined cells should be split into 1st and 3rd party components. These components should be

treated as recommended in this framework. If splitting of such cells is impractical, the FSB will

approve such cases on their individual merits, while erring more on the side of prudence as the

relative size of the 3rd party component increases.


Internal models

189 The term “internal model” is increasingly being used to identify those models built by insurers for

their own economic capital and regulatory Capital Adequacy Requirement purposes. The adjective

“internal” was added to the more general word “model” through common insurance industry usage

to identify models built by the insurer.

190 Internal models are based upon computer models of all the business or a specific line or segment of

a company’s activity. They are usually stochastic in nature and directed to determining the amount

of capital that will be sufficient to guarantee the success of that business to a high degree of

probability. These models depend upon scenario generators that can produce a wide variety of

scenarios that can affect the future course of the company’s business.

191 The Internal Model Method (IMM) is intended to allow an insurer to calculate both the value of the

liabilities and the value of its Capital Adequacy Requirement (CAR) based on the output of its in-

house capital allocation model. The objectives of an internal model are to:

• give insurers incentives to develop their risk measurement and risk management;

• put the onus on the management of insurers to develop their own view of their capital needs; and

• determine capital that is appropriate to the risk in the individual insurer’s business.

192 Hence, each insurer will have the flexibility to develop a methodology that is best suited to its

business, provided that the model chosen is comprehensive, rigorous and broadly consistent with

comparable segments of the industry.

193 The benefits of an IMM could extend to improving the management’s ability to make decisions on,

for instance, strategy formulation, capital planning, product development, governance and other

decision making processes within the insurer.

194 Use of the IMM will be strictly conditional on the FSB's approval. The internal model method will be

used to substitute the results generated on the prescribed basis.


195 It is the FSB’s preference that insurers should, in future, calculate their Capital Adequacy

Requirement based on an internal model method. However, making use of the IMM will not be

compulsory at this stage.

196 This document focuses on IMMs for individual short-term insurers. It is not the current intention to

extend the IMM for insurance groups.

197 To ensure that the CARs calculated by insurers using the IMM are sufficiently prudent, comparable

and consistent across the industry, model approval will require that the insurer's risk management

system and the methodology underlying the capital calculation meet certain criteria. The FSB will, in

consultation with industry, refine these criteria over time to ensure that they are consistent with the

evolution of industry modelling capabilities. In broad terms, however, the insurer should satisfy the

quantitative and qualitative requirements outlined in these guidelines. In order to recognise

expected advances in insurance risk management and modelling, these guidelines will likely be

revised from time to time.

198 Each insurer will have discretion to determine the precise nature of its modelling approach.

However, an insurer must be able to demonstrate that its internal model:

• operates within a risk management environment that is conceptually sound and supported by

adequate resources;

• is based on a set of quantitative parameters specified in this proposal, including a required

probability of default and a modelling time horizon over which that probability is to be measured.

These parameters will be set at a level that ensures insurers achieve and maintain a minimum

level of financial soundness;

• addresses all material risks to which the insurer could be reasonably expected to be exposed

and is commensurate with the relative importance of those risks, based on the company's

business mix;

• is closely integrated into the day-to-day risk management process of the insurer; and

• is supported by appropriate audit and compliance procedures.

199 In addition to the quantitative and qualitative requirements of this proposal, insurers seeking

approval to use the IMM must have in place adequate processes for validating the accuracy of the


capital measurement model, and for monitoring and assessing its on-going performance. A proven

track record of reasonable accuracy in measuring risk will also be required.

Qualitative factors

200 It is important that insurers using the IMM have risk management systems and capital

measurement models that are conceptually sound and implemented with integrity. Accordingly,

there are a number of qualitative criteria that the FSB will have regard to in deciding whether to

approve an internal model for capital adequacy purposes.

201 The qualitative criteria are:

(a) The insurer should have an independent risk management unit that is responsible for the

design and implementation of the insurer's capital measurement model. This unit could form

part of the insurer's actuarial function, its financial control division, or other appropriate group

within the insurer's organisational structure that is separate from the insurer's general business

units. It is not the FSB's intention to mandate a particular organisational structure for insurers,

provided the designated unit has adequate independence, appropriate skills and resources,

and direct reporting access to the senior management of the insurer.

Amongst other things, this unit should produce and analyse the periodic results of the capital

measurement model and conduct regular validation of the model against the actual experience

observed by the insurer. The insurer's Board and senior management should be actively

involved in the risk control process and must regard risk control as an essential aspect of the

business to which significant resources need to be devoted. The periodic reports and validation

results produced by the independent risk management unit must be reviewed by a level of

management with sufficient seniority, independence, and authority to enforce restrictions on

the insurer's overall risk exposure.

Reports should be produced that satisfy the needs of each level of risk monitoring, and should

be available to and understood by both the business function and the independent risk

management function. Reports, at a minimum, should address risk exposures and action

plans, compliance with applicable policies, and audits.


The organizational structure of the insurer and its relevant committees should indicate a direct

flow of risk management responsibilities from the Board to the senior management and risk

management functions.

The level of skill and experience of key risk unit staff should be commensurate with the

complexity of the risks they monitor. Skills should include systems, finance, business and

actuarial. The Statutory Actuary should be an integral element of the risk management

process. Individuals involved in the risk management process should not have conflicting

responsibilities or priorities.

On an annual basis the Board (or its Audit sub-committee) should minute its satisfaction or

concerns related to management’s actions in relation to the risk management process. A copy

of this minute should be attached to the Financial Condition Report. If there were concerns

raised then a follow-up minute noting resolution of those concerns (or otherwise) should also

be attached.

(b) The capital measurement model must be closely integrated into the day-to-day risk

management process of the insurer. Accordingly, the output of the models should be an

integral part of the process of planning, monitoring and controlling the insurer's risk profile.

(c) An independent review of the capital measurement model should be carried out periodically.

The model must be independently reviewed at least every three years, whilst an annual review

will be viewed as best practice.

(d) A review of the overall risk management process should take place at regular intervals (ideally

not less than once a year) and should specifically address, at a minimum:

• the scope of the risks captured by the capital measurement model;

• the integrity of the management information system;

• the verification of the consistency, timeliness and reliability of data sources used to run

internal models, including the independence of such data sources;

• the accuracy and appropriateness of volatility, correlation and distributional assumptions;

• the verification of the model's accuracy through periodic back testing or other validation

process;

• the validation of any significant change in the capital measurement model;


• the adequacy of the documentation of the capital measurement model and

accompanying risk management systems and processes;

• the organisation of the risk management unit; and

• the integration of the capital measurement model into the broader risk management

framework of the insurer.

(e) An audit trail of all changes affecting the model is required. It must be possible to re-evaluate

an historic model at a future date and subsequently make all known changes to obtain the

results of the existing model.

(f) For the first year that an internal model is used an analysis of change will not be expected.

However, from the second year onwards an insurer will need to provide details of the work

carried out over the interim period – whether updating the methodology and/or parameters.

(g) The insurer needs to give a view on the quality of the policy data used for modeling purposes.

(h) If any external data are used (e.g. industry data) this should be disclosed and motivated.

(i) Where a software package is used, it is important that the employees of the insurer

understands the technical operation of the software, its results and how changes to the

methodology or the assumptions will affect the results.

Quantitative standards

202 The insurer's capital measurement model should calculate an amount of capital sufficient to reduce

the insurer's probability of default over a one year time horizon to 0.05% or below. The probability of

default applies to the insurer’s business classes as a whole.

203 The insurer’s liability reserves should be best estimates. Margins should be added to take the level

of the total reserves of the insurer up to a 75% level of sufficiency. The addition of the Capital

Adequacy Requirement will therefore result in a total level of sufficiency of 99.5%.

204 An insurer may measure its Capital Adequacy Requirement over a different combination of

probability of default and time horizon (e.g. using a lower level of sufficiency over a longer time


period), provided the insurer can demonstrate to the FSB that the alternative parameters are

appropriate for its business mix and produce a result which is consistent with the benchmark set

above.

205 The Capital Adequacy Requirement will be subject to a minimum monetary value of R10m.

206 The FSB reserves the right to change the value of the Capital Adequacy Requirement, as

calculated by an internal model, if it deems the result to be inappropriate.

207 The methodology used to produce an internal model will not be prescribed. The insurer needs to

explain what methods were used and why they are deemed to be appropriate. In addition, a

minimum number of simulations will not be specified but again, the insurer needs to explain why the

chosen number of simulations is appropriate.

208 There must be sufficiently credible experience on which to base the model parameters.

209 The mean and variance of the model output must be similar to the actual empirical data mean and

variance.

210 The method must include the results of any experience investigations undertaken to set the model

assumptions.

211 The method may take into account the margins that are included in the liabilities.

212 Management actions may be allowed in calculating the insurer’s Capital Adequacy Requirement,

provided that:

• the board has agreed (by board resolution) that these management actions will be implemented,

if necessary;

• the implications of the likely delay in recognising emerging weaknesses and implementing

alternative mitigating strategies have been considered;

• all the management actions assumed have been disclosed to the FSB; and

• an estimate of the benefit of the management actions assumed is provided.


213 There should be an ongoing analysis of changes in modeled results from one period to the next.

214 Any differences in the assumptions used for determining the CAR versus determining actuarial

liabilities should be explained by the Statutory Actuary.

Specification of risk factors

215 An important part of an insurer's internal capital measurement model is the specification of an

appropriate set of risk factors, i.e. the risks that impact on the value of the insurer's assets and

liabilities. The risk factors contained in the capital measurement model must be sufficient to capture

the risks inherent in the insurer's portfolio. Although insurers will have some discretion in specifying

the risk factors for their internal models, the criteria specified below should generally be taken into

account.

216 The risks specified below are intended to provide guidance to insurers on the sorts of risk factors

that should be incorporated into capital measurement models. However, the list is not intended to

be exhaustive: there may be additional factors specific to an individual insurer's activities that will

need to be built into any internal model before it can be used to calculate the insurer's CAR.

Similarly, there may be factors included below which are irrelevant or immaterial to a particular

insurer's business or modelling technique. In these cases, the insurer will not be required to devote

significant modelling resources where this is clearly unwarranted.

217 The insurer should highlight and rank its most important risks (e.g. the top ten risks) and explain

how these were addressed in their model.

Investment Risks

218 An insurer's capital measurement model must consider the risk that the amount and / or timing of

the cash flows connected with the insurer's assets will differ from expectations or assumptions as of

the valuation date. Factors that should be considered include:

• default / counterparty failure;

• the future market value of assets;

• the liquidity of assets (the potential that the insurer may be unable to meet its obligations as they

fall due because of having a timing mismatch); and


• the impact of changes in interest rates on the value of asset cash flows (this includes cash flows

from bonds, mortgages, real estate and dividends).

Insurance Risks

219 An insurer's capital measurement model must consider the risk that the amount and / or timing of

cash flows connected with the insurer's obligations will differ from expectations or assumptions as

at the valuation date. Factors that should be considered include:

(a) The projection of exposure over the next year and in particular the variability inherent in

this.

(b) Outstanding claims risk - the risk that the actual cost of claims for obligations incurred

before the calculation date will differ from expectations or assumptions due to factors such

as:

• unexpected inflation in claim costs;

• changes in interest rates;

• changes in the legal environment in which claims will be resolved, including the

environment in which claims are pursued by policyholders or third parties;

• changes to the basic premises underlying the provisions for a particular coverage

(such as has occurred with environmental impairment liability);

• patterns of pricing adequacy which affect the payment of claims or the adequacy of

case reserves;

• currency fluctuations which affect the costs of losses when expressed in local

currency;

• the possibility of latent claims;

• the randomness of the claims process itself; and

• incompleteness of databases.

(c) Process and systems risk.

(d) Premiums risk - the risk that premiums relating to post calculation date exposures,

including premiums written after the calculation date, could be insufficient to fund the

liabilities arising from that business due to changes in factors including:


• changes in interest rates;

• competitive pressures that do not allow the insurer to achieve assumed levels of

exposure and/or rate adequacy;

• regulatory intervention that restrains premium increases or decreases or requires

business to be underwritten that would not be underwritten in the absence of such

intervention;

• retrospective premiums or dividends that differ from assumptions; and

• amounts collectible from agents that differ from assumptions.

(e) Loss projection risk - the uncertainty regarding assumptions about future claims costs. Loss

projection risk is a function of the factors that affect reserve risk and also of the uncertainty

regarding factors such as:

• unanticipated changes in loss costs and exposures from the historical experience

period;

• loss costs for the mix of new policies being underwritten, including the effect of

adverse selection; and

• loss adjustment practices in the future that may differ from those in the past.

(f) Concentration risk - the uncertainty regarding the cost of catastrophic events. This relates

to the quantification of low-frequency high-severity risks which the insurer may be exposed

to. The most common of these risks relates to natural catastrophe such as floods and

windstorms. Concentration risk can be considered a component of loss projection risk, and

is a function of factors such as:

• the coverages being written;

• the concentration of insured values in specific geographic areas or legal jurisdictions;

and across classes of business

• uncertainty regarding the frequency, severity and nature of catastrophic events.

If a catastrophe model is used to determine the Capital Adequacy Requirement for

concentration risk, the details of the model (provider, assumptions etc) should be provided.


If a different model is used to derive the Capital Adequacy Requirement compared to the

model used to purchase reinsurance cover, the reasons for this should be explained.

One of the methods to measure (and mitigate) concentration risk is to put in place sound

systems for the setting, monitoring and altering of its Maximum Event Retention (MER). At

a minimum, these systems must consist of policies and procedures that detail:

• the insurer's willingness to take on catastrophic risks;

• how the insurer's financial resources cover its calculated MER;

• the regular process by which the policies are reviewed by senior management, and (if

relevant) by the Actuary, in the light of the insurer's results by class of business and

geographical region, as well as current market conditions e.g. availability of adequate

catastrophe reinsurance cover;

• the regular process by which the policies are approved by the directors; and

• the regular process by which the insurer's compliance with its policies is

independently reviewed.

In determining the level of MER for a given portfolio, the insurer should consider:

• the classes of business in which the insurer is engaged;

• the types of catastrophic risk which need to be addressed;

• the geographical zones in which the insurer transacts business if natural catastrophes

are considered; and

• how the geographical zones will be grouped for calculation purposes.

The insurer should base the calculation of its MER on:

• the relevant area of concentration (e.g. geographic region);

• which peril produces the greatest MER;

• the return period of the relevant catastrophe and the sensitivity of the MER to

changes in the return period; and

• results produced by modelling the insurer's own past experience.


The MER must be calculated in a manner consistent with the processes for setting,

monitoring and altering the MER outlined in the insurer's Reinsurance Strategy Document.

Regardless of the methodology used, the Board should at least annually seek the advice of

its Auditor, Actuary, or other relevant expert, to review the calculation of the MER, and

ensure that it is established at an appropriate level.

An insurer must inform the FSB of any changes to its MER arising as a result of changes in

its risk enterprise management system, risk profile, classes of business underwritten or

reinsurance program.

(g) Reinsurance risk - uncertainty regarding the price and availability of desired reinsurance,

and of the uncertainty regarding the collectability of reinsurance recoverables arising from

the financial condition of the reinsurer or ambiguity about coverages provided. Reinsurance

risk recognises how reinsurance responds under stress, such as a large catastrophe or

other strain on collectability, aggregates, reinstatements and other reinsurance parameters.

Correlations between reinsurers should be allowed for. Intra-group reinsurance should be

disclosed.

Both “approved” and “non-approved” reinsurance will be allowed in the internal model

approach to determine Capital Adequacy Requirements. However, allowance for credit risk

for reinsurance recoveries should be done in accordance with the table below:


Standard & Poor’s

Moody’s AM Best Fitch Global Credit Ratings

Probability of default

AAA to AA- Aaa to Aa3 A++, A+ AAA to AA- AAA to AA- 2%

A+ to A- A1 to A3 A, A- A+ to A- A+ to A- 4%

BBB+ to

BBB-

Baa1 to

Baa3

B++ BBB+ to

BBB-

BBB+ to

BBB-

6%

BB+ or

below

Ba1 or

below

B+ or below BB+ or

below

BB+ or

below

8%

Unrated 100%

As stated in the table above, no allowance can be made for reinsurance recoveries from

unrated reinsurers, unless a parental guarantee or deposit (as described in the Act) is in

place. Local ratings should be used. Where the insurer uses reinsurers with multiple ratings

from two or more of the rating agencies in the table above, the insurer should use the more

conservative rating.

The FSB's approval must be sought if an insurer wishes to use the rating determined by a

rating agency not included in the table above.

(h) Expense risk - the risk that expenses will differ from projections due to factors such as:

• contingent commissions to intermediaries;

• marginal expenses of adding new business; and

• overhead costs, including the risk that overhead costs will be changed by regulatory

intervention, and the risk that there may be periods of changing premium during

which overhead costs will not change in proportion to premium.

220 Not all these risks can be quantified using statistical means and it will be necessary to test the

results by means of stress testing. The risk manager will then need to take a view of the likelihood

of the occurrence evaluated under stress testing. A balance is therefore required between a

stochastic and a stress management solution.


Parameter and Model Risk

221 Parameter uncertainty is the uncertainty in the parameters insurers select to estimate the capital

required. The uncertainty has many potential sources, but the most common is lack of credible

relevant data on which to base the main assumptions.

222 It is important to back-test the key assumptions for reasonableness. This would enable a broad

high-level reasonableness assessment of the parameters and indicate potential areas of significant

under or over estimation.

223 To compensate for known modelling shortcomings, an insurer could adopt more prudent

assumptions in one or more areas of its submission. In assessing a submission it is helpful if the

insurer makes clear which areas of weakness the prudent assumptions are intended to offset and

the extent of any offsetting.

Credit Risk

224 Credit risk refers to any risk in an insurer’s ability to recover money owned by third parties. This

should include all counter-parties, not just reinsurers. In particular, balances held with

intermediaries and banks should be considered.

Operational Risk

225 As well as accurately measuring financial risks, an insurer's model for measuring capital adequacy

must take into account the various operational risks that it also faces, i.e. the risk of financial loss

occurring through error, fraud or failure to perform activities in a timely manner as a result of

breakdown of people or systems, internal controls, corporate governance and external events.

These risks, although difficult to quantify, have the potential to impose significant costs upon, and

possibly seriously jeopardise, the financial soundness and on-going business of the insurer. An

insurer's capital measurement model will therefore need to include a measure of operational risk

within its capital calculation.

226 Particular care should be taken where core responsibilities are outsourced as the outsourcing party

will most likely not have the same incentive as the company in managing the risk. The risks that can

arise from such an arrangement should be critically examined and in particular whether or not such

outsourcing approaches are appropriate at all.


227 We recognise that operational risk poses one of the most difficult challenges in assessing capital.

The insurer should use methodologies and models that are “fit for purpose”. Management should be

involved in making informed judgements on the assumptions to be used. Insurers should explain

how they decided on these judgements.

New business

228 If the average combined ratio over the last 3 years is greater than 100%, the insurer needs to make

explicit allowance for additional capital for new business.

Correlation Between Risk Classes

229 An insurer's capital measurement model must estimate the effects of the risks specified above

individually on the financial position of the insurer, and evaluate the interrelationships between

these risks and other risks.

230 A correlation matrix approach can be used to aggregate the results from individual stress tests

which have been independently applied8 to the business. A significant drawback of this

methodology is that it does not directly explore the impact of more than one risk occurring at the

same time within the business model. This could result in a material understatement of the capital

required. This effect can be described by several different names, but we refer to it as “non-

linearity”. Insurers must allow for this effect in a suitable manner. Depending on the availability of

sufficient data, there may be different methods to model correlation between risk classes that make

appropriate provision for non-linearity.

Sign off and review

231 The board of directors takes ultimate responsibility for the internal model. The board will sign off

that

• the internal model is based on reliable information;

• it is a fair reflection of the risks faced by the insurer; and

• it is consistent with the overall regulatory framework for solvency.

8 “Independently applied” means the following: Say a specific stress test is applied to the model (e.g. a drop in equity values) to determine the capital required for this stress test. All the other inputs will be “base case” assumptions for normal conditions. After the capital amount has been determined, the stress test’s inputs are returned to “base case” assumptions (i.e. equity values are returned to normal) and then the next stress test is applied to calculate the capital for that stress test (e.g. stressed fixed interest assumptions) and so on.


232 In signing this off, the board will rely on its executive management team and its professional

advisors which include its statutory actuary and the external auditor.

233 A statutory actuary should be appointed to sign off the internal model’s calculations annually.

However, the statutory actuary should not be responsible for signing off the risk management

process. The statutory actuary may be independent or may be employed by the insurer.

234 The FSB will have the right at any time to ask for an independent opinion (should the statutory

actuary be employed by the insurer) or for a second independent opinion (should the statutory

actuary not be employed by the insurer).

235 The statutory actuary should follow the professional guidance issued by the Actuarial Society of

South Africa.

Technical guidance

236 This proposal did not address and propose sufficient technical guidance pertaining to:

• Reserving,

• Certified models; and

• Internal models.

237 Instead, the FSB requests the Actuarial Society of South Africa to develop and implement the

necessary professional guidance notes for actuaries that operate within these areas.

238 The Actuarial Society’s short-term insurance committee formed a “Data and Catastrophe” sub-

committee that will investigate the possibility of an industry catastrophe model as well as guidelines

in determining Capital Adequacy Requirements for catastrophe risks.


Definitions and abbreviations

ACC - Asset Capital Charge

Act – Means the Short-term Insurance Act, 1998 (Act No. 53 of 1998)

Admissible assets - The difference between fair value of assets and assets which have been

disregarded for solvency purposes (inadmissible assets). Amounts to be disregarded are defined in Part

I of Schedule 2 of the Short-term Insurance act 53 of 1998.

ASSA -: Actuarial Society of South Africa

Capital adequacy multiple - The result obtained from dividing excess assets by the capital adequacy

requirement.

Capital Adequacy Requirement - The statutory minimum level by which an insurance company’s

assets should exceed its liabilities.

CAR -Capital Adequacy Requirement

Chain ladder method - A statistical method of estimating outstanding claims, whereby the weighted

average of past claim development is projected into the future. The projection is based on the ratios of

cumulative past claims, usually paid or incurred, for successive years of development. It requires the

earliest year of origin to be fully run-off or at least that the final outcome for that year can be estimated

with confidence. If appropriate, the method can be applied to past claims data that have been explicitly

adjusted for past inflation.

CM - Certified Model

Cresta zone - The Global CRESTA (Catastrophe Risk Evaluating and Standardising Target

Accumulations) zone data set helps brokers and reinsurers assess and present risk, based on the

zoning system established by the world's leading reinsurers. Based primarily on the observed or

expected seismic activity within a country, Global CRESTA zones consider the distribution of insured


values within a country as well as administrative or political boundaries for easier assessment of risks.

Global CRESTA was originally developed as a joint project of Swiss Reinsurance Company (Zurich),

Gerling-Konzern Globale Reinsurance Company (Cologne) and the Munich Reinsurance Company

(Munich).

Earned premium - The total premium attributable to the exposure to risk in an accounting period

Estimated maximum loss - The largest loss that is reasonably expected to arise from a single event in

respect of an insured property. This may well be less than either the market value or the replacement

value of the insured property and is used as an exposure measure in rating certain classes of business.

Excess assets - The excess of the value of an insurer’s assets over its liabilities.

Facultative reinsurance - A reinsurance arrangement covering a single risk as opposed to a treaty

arrangement; commonly used for very large risks or portions of risk written by a single insurer.

Fair value of assets - means the fair value of an asset determined by reference to South African

Statements of Generally Accepted Accounting Practice

First-party cell – A cell where the shares issued to cell participants provide the cell owners with the

ability to underwrite their own risk and that of their subsidiaries. The cell participant is responsible for the

funding of the cell and the cell should be maintained at such levels as may be required to ensure the

required solvency is maintained at all times. Claims are limited to funds available in the cell after

providing for solvency.

FSB - Financial Services Board

ICC - Insurance Capital Charge

IM - Internal Model

IMM - Internal Model Method


Incurred but not reported (IBNR) reserve - A reserve to provide for claims in respect of claim events

that have occurred before the accounting date but had still to be reported to the insurer by that date.

Latent claims - Claims resulting from causes that the insurer is unaware of at the time of writing a

policy, and for which the potential for claims to be made many years later has not been appreciated.

Maximum Event Retention (MER) - means the largest loss to which an insurer will be exposed (taking

into account the probability of that loss) due to a concentration of policies, after netting out any

reinsurance recoveries. The MER must include an allowance for the cost of one reinstatement premium

for the insurer's catastrophe reinsurance. The MER is calculated as the net exposure of the company

assuming a 250-year return period and is less than the company’s probable maximum loss.

Maximum Event Retention (MER) - The largest loss to which an insurer will be exposed (taking into

account the probability of that loss) due to a concentration of policies, after netting out any reinsurance

recoveries. The MER must include an allowance for the cost of one reinstatement premium for the

insurer's catastrophe reinsurance. The MER is calculated as the net exposure of the company assuming

a 250-year return period and is less than the company’s probable maximum loss.

Non-proportional reinsurance - Reinsurance arrangements, where the claims are not shared

proportionately between the cedant and reinsurer.

Outstanding claims reported (OCR) reserve - The reserve set up in respect of the liability for all

outstanding claims reported

Pay-as-paid clause – Refer to section 51(c) of the Act

PM - Prescribed Method

Probable Maximum Loss (PML) - means the largest loss to which an insurer will be exposed (within

the realms of possibility) due to a concentration of policies, without any allowance for reinsurance

recoveries.

Proportional reinsurance - A reinsurance arrangement where the reinsurer and cedant share the

claims proportionally.


Return Period - means the expected average period within which a particular catastrophic event will re-

occur. For the purposes of these guidelines, insurers will be required to assume a return period of 1 in

250 years, or greater.

Risk Capacity - The amount of premium income that an insurer is permitted to write or the maximum

exposure that could be accepted, as per its reinsurance agreement.

TCR - Total Capital Adequacy Requirement

Third-party cell – A cell where the shares issued to cell participants (owners) provide the cell owners

with the ability to underwrite the risks of third parties. The source of the business underwritten is usually

from a captured client base. The difference between a third party and a first party cell is that claims

instituted by third parties are not limited to the funds provided by the cell participant, after providing for

solvency. The funds provided by the promoters of the cell insurance facility will also be utilised to settle

claims should the cell participant fail to provide additional funds to settle any claims.

Treaty reinsurance - Reinsurance that a reinsurer is obliged to accept, subject to conditions set out in a

treaty.

Unearned premium provision (UPP) - The reserve set up in respect of the portion of premium written

in an accounting period that is deemed to relate to cover in one or more subsequent accounting periods.

Unexpired risk provision (URP) - The reserve required to cover the excess of the amount required to

cover the claims and expenses that are expected to emerge from an unexpired period of cover over the

UPP.


Appendix 1

DRAFT BOARD NOTICE *** OF 2008

FINANCIAL SERVICES BOARD REGISTRAR OF SHORT-TERM INSURANCE

SHORT-TERM INSURANCE ACT, 1998

(ACT NO. 53 OF 1998)

Prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy

requirement of short-term insurers

I, Robert James Gourlay Barrow, Registrar of Short-term Insurance, hereby prescribe, under paragraph 2 of Schedule 2 of the Short-term Insurance Act, 1998 (Act No. 53 of 1998), the requirements for the calculation of the value of the assets, liabilities and capital adequacy requirement of short-term insurers, as set out in the Schedule hereto.

……………………………………….

RJG BARROW,

Registrar of Short-term Insurance


SCHEDULE

Prescribed requirements for the calculation of the value of the assets, liabilities and capital adequacy requirement of short-term insurers

(Paragraph 2 of Schedule 2 of the Short-term Insurance Act, 1998)

1. Definitions

In these Requirements, unless the context indicates otherwise: ”Act“ means the Short-term Insurance Act, 1998 (Act No. 53 of 1998), and a word or expression to which a meaning has been given in the Act, has that meaning;

”annual return“ means the statutory return an insurer must submit to the Registrar annually;

”capital requirement”, in relation to a regulated financial institution, means the capital or solvency margin, and will include any additional asset requirements, as the case may be, required for that institution by the regulatory authority concerned;

”fair value“, means the value of an asset determined by reference to GAAP;

”GAAP“ means South African Statements of Generally Accepted Accounting Practice;

”group undertaking“, in relation to an insurer, means a juristic person in which the insurer alone, or with its subsidiaries or holding company, directly holds 20% or more of the shares, if the juristic person is a company, or 20% or more of any other ownership interest, if the juristic person is not a company;

”insurer“ means a short-term insurer;

”listed“ means listed on a stock exchange or similar trading facility, which is recognised generally by the international community of institutional investors;

”net asset value“, in relation to a group undertaking, means its net asset value calculated in accordance with paragraph 2.1.2.8;

”policy“ means a long-term policy;


”regulated financial institution“ means: (a) a financial institution as defined in paragraph (a) of the definition of ‘financial institution’ in

section 1 of the Financial Services Board Act, 1990 (Act No. 97 of 1990); (b) a bank as defined in section 1(1) of the Banks Act, 1990 (Act No. 94 of 1990), or a mutual

bank as defined in section 1(1) of the Mutual Banks Act, 1993 (Act No. 124 of 1993); (c) an entity that carries on business similar to the business of an entity referred to in paragraphs

(a) or (b), which is not regulated by a law that regulates an entity referred to in paragraph (a) or (b), but which is subject to substantially similar regulation outside South Africa;

”Schedule 1“ means Schedule 1 of the Act;

”Schedule 2“ means Schedule 2 of the Act.

2. Valuation of assets 2.1 Calculation of values

The value of the assets in paragraph 2.1.1, in which a reference to an item by number means a reference to the item of the Table to Schedule 1, shall be as specified in that paragraph.

2.1.1 The value of-

(a) a Krugerrand coin referred to in item 1, shall be the price which the South African Reserve Bank is prepared to pay for it on the date as at which its value is calculated;

(b) a credit balance, deposit or margin deposit referred to in items 2, 3, 10, 16(5)(b) and (d) and 18, shall be the amount thereof;

(c) an asset referred to in item 4, 5, 6, 7, 8, 9, 10, 11, 12, 13 or 16(1), (2), (3), (4) or (5)(a) or (c) which is listed on a stock exchange and for which a closing price was quoted on that stock exchange on the date as at which the value is determined, shall be the closing price or the closing price last so quoted;

(d) an asset referred to in items 16(5)(c) and 17, shall be the price at which the participatory interest would have been repurchased by the collective investment scheme management company on the date as at which the value is calculated, and in the case of a property collective investment scheme, the market value, and if it is listed on a stock exchange and for which a closing price was quoted on that stock exchange on the date as at which the value is determined, the closing price, or the closing price last so quoted;

(e) a futures contract referred to in items 16(5)(d) and 18, shall be determined by the mark-to-market as defined in the rules of the South African Futures Exchange referred to in section 18 of the Security Services Act, 2004 (Act No. 36 of 2004);

(f) an option contract referred to in items 16(5)(d) and 18 for which a price was quoted on a stock exchange on the date on which the value is calculated, shall be that quoted price;

(g) an asset referred to in item 21, shall be the amount of premiums less- (i) the amount or estimated amount of any commission which the short-term insurer owes

or for which it is likely to become liable in connection with the premiums; (ii) a provision of 7,5 percent of that amount, to cover the risk of loss arising from non-

receipt by the insurer of any premiums;


(h) an asset referred to in item 14, 15, 19 or 20(b) or (c), or an asset not otherwise specified in this paragraph, shall be an amount not exceeding that which could have been obtained on the sale of the asset between a willing seller and a willing buyer, acting at arm’s length and in good faith, as estimated by the insurer;

(i) an asset referred to in item 20(a), shall be the amount which would be payable to the policyholder upon the full surrender of the policy on the day on which the value is calculated;

(j) a derivative not mentioned in subparagraph (e) or (f) shall be calculated as determined by the Registrar from time to time.

(k) an asset in respect of which no basis of valuation is prescribed in subparagraphs (a) to (i) shall be valued in accordance with GAAP.

2.1.2 Value of a group undertaking 2.1.2.1 The value of a group undertaking must be limited to the percentage of the shareholding or

other ownership interest of the insurer in the group undertaking, multiplied by the net asset value of the group undertaking.

2.1.2.2 If the group undertaking is listed, the value in paragraph 2.1.2.1 may be increased by-

A multiplied by B, Where- A equals the difference between the fair value and the net asset value of the group

undertaking, provided that A must be taken as nil if the net asset value is larger than the fair value;

B is the lower of 20% and the percentage of the holding by the insurer in the group undertaking.

2.1.2.3 If a group undertaking is not a regulated financial institution, and its fair value is less than

0,25% of the value of the liabilities of the insurer, it may be valued at fair value, notwithstanding paragraph 2.1.2.1.

2.1.2.4 If there is more than one group undertaking as contemplated in paragraph 2.1.2.1, each

may be valued at fair value, provided that their combined fair value is not more than 2,5% of the value of the liabilities of the insurer. If their combined fair value is more than 2,5% of the value of the liabilities of the insurer, only so many of them, selected by the insurer, as will have a combined fair value of not more than 2,5% of the value of the liabilities of the insurer, may be valued at fair value. The others must then be valued as required by paragraph 2.1.2.1.

2.1.2.5 If an insurer holds shares in its holding company, the value of those shares must for

purposes of valuation be limited to the following:

(a) If the holding company is listed - 2.5% of the value of the liabilities of the insurer. (b) If the holding company is not listed - nil.

2.1.2.6 Paragraph 2.1.2.5 applies also where the insurer, directly, or indirectly through a subsidiary

or trust, holds shares in its holding company under a share incentive scheme linked to shares in its holding company.


2.1.2.7 Paragraph 2.1.2.5 does not apply where the insurer holds shares in its holding company under a collective investment scheme.

2.1.2.8 Net asset value of a group undertaking 2.1.2.8.1 If the group undertaking is a regulated financial institution

(a) The net asset value of the group undertaking is the value of its assets, less the sum of the value of its liabilities and its capital requirement as required by the regulatory authority concerned.

(b) If the group undertaking is a company, and its main business is insurance business, the insurer must, in calculating these values, exclude so much of its capital and reserves as shareholders, other than the insurer, may withdraw in cash when they cease to be shareholders, in terms of the articles of association of, or a contract with, the group undertaking.

2.1.2.8.2 In other cases

(a) The net asset value of the group undertaking is the value of its assets, less the value of its liabilities.

(b) If the group undertaking carries on most of its business in South Africa, these values must be calculated in accordance with GAAP.

(c) If the group undertaking carries on most of its business in another country, these values must be calculated in accordance with accounting standards generally accepted in that country.

(d) In calculating these values, the following items must be excluded, to the extent that, according to the insurer, they can be ascertained with reasonable effort and are material:

(i) an amount, excluding a premium in respect of a short-term reinsurance policy, which remains unpaid after the expiry of a period of 12 months from the date on which it became due and payable;

(ii) an amount representing administrative, organisational or business extension expenses incurred directly or indirectly;

(iii) an amount representing goodwill or an item of a similar nature;

(iv) an amount representing a prepaid expense or a deferred expense.

3. Valuation of liabilities 3.1 Method of calculating the incurred but not reported reserve (IBNR) 3.1.1 The minimum amount referred to in section 32(1)(a)(ii) of the Act, shall be an amount equal to 7

per cent or such other percentage as the Registrar may direct in a particular case, of the total amount of all of the premiums payable to the short-term insurer under short-term policies entered into by it in the period of 12 months preceding the date on which the amount is calculated, reduced by the total amount payable by the short-term insurer as premiums under approved reinsurance policies in respect of the short-term policies concerned.

http://www.acts.co.za/short-term_ins/32__liabilities.htm


3.2 Method of calculating the unearned premium provision (UPP) 3.2.1 In respect of short-term policies, other than short-term reinsurance policies, the minimum amount

of the unearned premium provision referred to in section 32(1)(b) of the Act shall, subject to paragraph 3 of Schedule 2, be the amount calculated by means of the formula-

(A - B) x (1 - C/D)

in which formula-

A represents the amount remaining after deducting from the total amount of all

of the premiums payable to the short-term insurer under all of the short-term policies concerned for the whole of the period for which each of those short-term policies is operative, of-

(a) the total amount of so much of those premiums as has been refunded as a result of the cancellation or variation of the policy;

(b) the total amount payable by the short-term insurer as premiums under approved reinsurance policies in respect of the short-term policies concerned;

B represents the total amount of the consideration, payable by the short-term insurer in terms of section 48 of the Act to independent intermediaries in respect of the short-term policies concerned, reduced by the total amount of any consideration payable to the short-term insurer in respect of approved reinsurance policies under which its liabilities in respect of the short-term policies concerned are reinsured: Provided that such reduction shall not exceed an amount equal to the maximum consideration which would have been payable to an independent intermediary in terms of section 48 of the Act had those contracts been short-term policies other than short-term reinsurance policies;

C represents the number of days in the period from the date of the commencement of the short-term policy until the day on which the calculation is made in accordance with this paragraph;

D represents the total number of days during the whole period for which the short-term policy is operative.

3.2.2 In respect of short-term reinsurance policies, the minimum amount of the unearned premium

provision referred to in section 32(1)(b) of the Act shall, subject to paragraph 3 of Schedule 2, be the amount calculated by means of the formula-

(A - B) / 2

in which formula- A represents the amount remaining after deducting from the total amount of all of the

premiums payable to the short-term insurer under all of the short-term policies concerned for the whole of the period for which each of those short-term policies is operative, of-


http://www.acts.co.za/short-term_ins/48__intermediaries_remuneration_and_binder_agreements.htm

http://www.acts.co.za/short-term_ins/48__intermediaries_remuneration_and_binder_agreements.htm



(a) the total amount of so much of those premiums as has been refunded as a result of a cancellation or variation of the policy;

(b) the total amount payable by the short-term insurer as premiums under approved reinsurance policies in respect of the short-term policies concerned;

B represents the total amount of consideration payable by the short-term insurer in respect of those reinsurance policies, subject to a maximum of 30 per cent of the said premiums, reduced by the total amount of any consideration payable to the short-term insurer in respect of approved reinsurance policies under which its liabilities in respect of the short-term policies concerned are reinsured: Provided that such reduction shall not exceed the total amount of consideration paid by the short-term insurer in respect of those policies.

3.3 A short-term insurer shall, if the Registrar so approves or by notice requires, arrive at the minimum

amount of its unearned premium provision by means of a calculation which is different from that set out in paragraph 3.2.1 or 3.2.2 and which the Registrar is satisfied places a more appropriate value on the liabilities concerned.

4. Calculation of the capital adequacy requirement 4.1 The capital adequacy requirement referred to in section 29 of the Act shall be an amount equal to

the sum of the amounts described in paragraphs 4.2 and 4.3: 4.2 The additional asset requirement, which shall be calculated as the greater of A or B below:

A is R3 000 000 or such smaller amount as the Registrar may, in a particular case and for a determined period, approve; B is 15 per cent of the greater of the amount of the premium income of the short-term insurer in respect of the short-term insurance business carried on by it in the Republic after deduction of all premiums payable by it in terms of any short-term reinsurance policies entered into by it in respect of any short-term policies-

(i) during the period of 12 months immediately preceding the day on which the previous financial year ended; or

(ii) during the period of 12 months immediately preceding the day on which the calculation is made; and

4.3 A contingency reserve, which shall be calculated as the greater of A or B below:

A is an amount equal to 10 per cent of the total amount of all of the premiums payable to the short-term insurer under short-term policies entered into by it in the period of 12 months preceding the date on which the amount is calculated, reduced by the total amount payable by the short-term insurer as premiums under any approved short-term reinsurance policies in respect of the short-term policies concerned;


B, at any time during a period, not exceeding three years, as the Registrar may approve, is such lesser amount as the Registrar may approve, subject to the conditions the Registrar determines, if the Registrar is satisfied that the short-term insurer concerned-

(i) has incurred claims under short-term policies of such extent and as a result of such extraordinary events that it is reasonable to meet all, or such part as the Registrar may approve, thereof from the contingency reserve; and

(ii) will be able to restore the reserve to the amount required in terms of subparagraph (i) within that approved period.

5. Process for the relaxation of a provision

An insurer may approach the Registrar for relaxation of the provisions of this Board Notice. Each application will be evaluated based on the relevant information provided.

Relaxation will only be considered in order to ensure that the insurer maintains a financially sound condition, either in the short or medium term. Relaxation will not be considered only to improve the financially sound condition of an insurer.

6. Short title

This Notice is called the Notice on the Prescribed Requirements for the Calculation of the Value of Assets, Liabilities and Capital Adequacy Requirement of Short-term Insurers, 2008.


Appendix 2

Gross Standalone Capital at 99.5% level of sufficiency

UPR Level (R'mil) Accident 0 0.3 1 2 4 11 29 75 193 500

0 0.00 0.41 1.15 3.24 8.85 21.22 53.18 123.95 289.17 685.46

1 1.47 2.06 2.94 5.18 10.89 23.12 55.02 125.61 290.67 686.83

2 2.79 3.42 4.24 6.11 11.71 25.39 55.66 126.27 299.24 692.21

4 5.29 5.97 6.70 8.75 13.65 26.68 56.58 127.79 298.09 689.34

8 10.02 10.68 11.17 13.06 18.76 30.18 60.84 132.32 296.87 709.62

16 18.91 19.39 19.85 22.02 27.06 39.26 68.49 137.70 293.23 694.20

32 35.61 36.75 37.64 39.64 43.74 53.09 86.06 147.23 314.06 703.18

63 66.84 68.59 68.84 69.70 71.23 85.28 113.19 185.28 343.07 750.23

126 125.06 123.14 126.28 124.17 128.46 139.13 171.19 233.83 405.56 763.03

251 233.20 222.14 233.19 232.09 236.59 249.78 273.46 333.81 488.81 858.66

501 433.27 440.87 435.24 419.42 424.68 448.63 481.89 517.53 679.56 1048.83

GW

P Le

vel (

Rm

il)

1000 801.79 786.05 809.99 801.37 785.72 817.22 834.79 916.70 1051.89 1359.66

UPR Level (R'mil) Engineering

0 0.3 1 2 4 11 29 75 193 500

0 0.00 0.21 0.67 2.22 6.54 17.72 44.24 103.43 248.91 582.26

1 0.75 1.06 1.71 3.54 8.05 19.30 45.77 104.82 250.20 583.42

2 1.44 1.70 2.21 3.80 8.33 19.32 45.48 106.32 247.55 576.45

4 2.74 3.01 3.34 4.69 8.77 19.23 44.80 105.20 241.10 575.57

8 5.16 5.38 5.58 6.71 10.07 20.16 44.53 105.80 248.05 584.89

16 9.61 9.93 10.03 10.65 13.40 21.96 46.38 108.09 247.69 572.24

32 17.67 17.68 17.43 18.25 20.90 27.18 48.21 106.22 254.14 567.03

63 32.01 31.47 33.08 32.24 35.16 39.60 57.40 109.46 248.92 563.28

126 56.88 57.99 56.61 57.15 57.84 62.42 77.72 120.83 246.81 564.85

251 98.61 97.65 98.41 97.58 100.88 100.60 110.99 141.29 250.39 553.40

501 165.53 160.28 164.03 167.91 163.67 171.81 172.91 198.64 273.09 530.61

GW

P Le

vel (

Rm

il)

1000 265.76 257.16 266.62 267.27 264.46 260.32 274.30 292.64 346.62 526.48


UPR Level (R'mil) Guarantee 0 0.3 1 2 7 19 57 170 506 1500

0 0.00 1.05 3.14 9.11 23.16 57.55 125.85 275.67 553.39 1108.26

1 4.10 5.24 7.37 13.26 26.71 60.52 128.04 277.29 554.48 1109.00

2 7.58 8.62 10.37 15.80 28.68 59.31 131.77 271.24 559.48 1145.20

5 13.84 14.39 16.07 20.58 32.75 62.79 132.87 269.96 579.44 1113.19

10 24.97 25.71 26.67 29.88 41.53 69.50 134.63 278.91 580.29 1142.13

21 44.50 45.97 44.65 50.34 58.18 84.23 147.34 282.15 580.49 1164.66

45 78.41 75.22 78.52 81.60 90.29 111.28 168.13 305.55 600.52 1142.83

96 136.67 137.41 138.16 141.38 147.47 167.12 210.82 345.47 632.89 1156.26

205 235.62 231.08 233.10 228.47 255.71 261.31 298.47 410.51 656.52 1240.85

437 401.58 404.22 411.05 405.82 397.21 426.42 450.82 555.57 779.99 1257.84

935 675.62 687.17 674.44 655.91 695.05 661.49 729.07 776.72 950.85 1449.66

GW

P Le

vel (

Rm

il)

2000 1118.76 1108.28 1132.29 1121.56 1155.08 1116.25 1113.18 1202.07 1364.79 1689.82

UPR Level (R'mil) Liability 0 0.3 1 2 6 16 45 126 355 1000

0 0.00 0.79 2.23 6.39 17.55 42.21 104.52 235.90 563.23 1320.31

1 2.97 3.93 5.39 9.61 20.68 44.88 106.86 237.77 564.82 1321.63

2 5.66 6.56 7.90 11.97 21.52 46.57 104.08 241.17 568.25 1293.20

5 10.69 11.33 12.97 16.66 25.81 49.72 108.13 245.16 560.11 1320.00

10 20.09 20.12 22.09 24.48 34.47 56.41 112.48 248.76 559.97 1295.68

21 37.50 37.93 39.75 43.35 50.40 70.74 124.04 262.24 559.97 1321.76

45 69.59 69.91 71.84 72.86 81.13 96.86 148.14 273.93 587.71 1318.96

96 128.38 129.57 131.07 130.27 137.35 153.90 201.25 314.83 612.43 1371.85

205 235.49 234.57 242.08 238.68 248.02 250.36 297.27 404.10 699.29 1416.55

437 429.40 425.26 428.46 440.45 439.36 452.44 488.35 569.19 849.19 1510.24

935 778.09 792.11 786.89 782.23 778.95 784.01 821.34 905.26 1133.84 1689.85

GW

P Le

vel (

Rm

il)

2000 1400.32 1407.00 1380.50 1425.05 1412.17 1375.43 1455.65 1502.31 1686.36 2250.78


UPR Level (R'mil) Motor 0 0.3 1 2 5 14 37 101 276 750

0 0.00 1.52 3.97 10.09 22.86 48.95 95.69 187.14 360.91 633.90

1 6.26 7.61 9.82 15.55 27.40 52.53 98.26 188.99 362.21 634.75

2 11.64 12.68 15.22 19.26 30.14 54.40 103.12 194.28 363.99 648.31

5 21.45 21.99 24.35 27.93 38.19 59.32 104.20 197.88 356.42 640.52

13 39.04 39.23 40.70 45.00 52.20 72.88 114.36 203.17 377.98 678.38

30 70.04 70.29 76.00 73.47 80.07 94.45 131.90 216.27 373.41 637.86

71 123.68 122.28 120.41 123.52 128.08 144.50 176.72 251.52 397.89 694.58

166 214.58 213.32 216.50 212.29 219.87 231.99 255.50 308.81 450.92 694.46

388 364.82 367.81 376.26 366.06 369.69 371.99 389.95 432.83 535.55 783.69

910 604.63 604.28 607.12 610.56 604.29 606.75 634.35 648.23 730.42 924.19

2133 966.68 976.12 962.56 966.32 986.68 975.16 966.98 997.87 1067.71 1201.17

GW

P Le

vel (

Rm

il)

5000 1458.45 1469.39 1432.66 1451.41 1435.38 1451.28 1513.22 1512.74 1485.42 1598.72

UPR Level (R'mil) Property 0 0.3 1 2 6 16 45 126 355 1000

0 0.00 1.99 5.72 15.42 36.35 76.72 156.53 301.16 543.77 958.43

1 7.74 9.94 13.84 23.17 42.83 81.57 160.04 303.56 545.31 959.39

2 14.48 16.37 19.08 28.12 45.93 83.04 158.30 302.76 545.10 947.08

5 26.55 27.61 31.13 36.22 53.48 92.16 159.17 298.71 543.43 969.36

12 47.67 50.10 51.88 55.71 67.96 102.08 167.52 309.32 561.07 944.19

28 83.88 84.19 87.38 87.69 101.78 128.19 195.59 317.06 561.98 990.52

63 144.72 145.12 147.42 151.21 156.79 180.44 234.52 350.05 580.82 941.87

145 244.73 242.76 244.27 248.57 252.18 271.94 317.18 414.01 619.73 970.40

332 404.56 420.46 407.24 408.06 412.76 426.87 454.48 532.16 710.77 1039.47

761 649.06 660.50 632.53 661.17 633.61 665.47 685.99 731.75 867.33 1127.36

1745 994.53 1000.74 1006.78 997.90 1021.65 1009.73 1018.27 1068.17 1122.17 1377.90

GW

P Le

vel (

Rm

il)

4000 1402.88 1413.74 1461.64 1434.28 1426.67 1383.76 1425.76 1436.96 1486.92 1597.29


UPR Level (R'mil) Transport 0 0.3 1 2 4 11 29 75 193 500

0 0.00 0.73 1.98 5.43 12.66 27.60 55.10 105.50 203.39 371.15

1 2.71 3.63 5.04 8.68 15.59 30.07 57.00 106.91 204.45 371.89

2 4.65 5.59 6.59 9.58 16.62 29.33 56.08 109.92 207.75 377.02

4 7.96 8.46 9.75 12.29 18.39 32.00 56.98 107.44 203.75 361.33

8 13.55 14.01 14.74 17.08 22.70 34.56 60.24 111.30 207.30 377.87

16 22.89 23.51 23.06 25.46 30.19 41.68 67.24 112.30 207.44 367.01

32 38.38 38.58 39.36 39.85 44.53 54.31 75.51 122.69 219.08 377.40

63 63.77 64.52 62.44 63.51 66.79 75.01 97.71 139.26 227.79 388.36

126 104.76 102.80 103.03 104.88 109.36 112.62 132.59 171.96 243.88 403.48

251 169.58 164.66 167.32 170.92 172.14 170.18 189.35 220.08 294.40 446.42

501 269.13 263.14 259.87 274.91 267.68 278.34 281.29 309.77 357.06 482.17

GW

P Le

vel (

Rm

il)

1000 415.30 418.25 415.90 412.54 416.21 426.57 429.22 442.30 481.84 590.19

UPR Level (R'mil) Miscellaneous 0 0.3 1 2 6 16 45 126 355 1000

0 0.00 3.24 9.39 23.72 55.45 122.08 243.11 479.98 896.94 1610.35

1 11.78 16.21 22.70 35.65 65.34 129.80 248.57 483.80 899.47 1611.96

2 20.66 23.53 30.16 43.74 71.81 132.77 246.60 487.94 891.18 1588.80

5 35.72 36.80 42.24 53.39 80.28 138.02 258.53 476.72 920.10 1568.23

10 60.86 64.09 67.66 77.49 97.94 159.77 270.70 493.85 902.37 1579.79

21 102.35 107.85 107.98 112.14 133.15 178.44 283.43 518.05 925.77 1572.75

45 169.98 171.68 181.03 179.98 190.86 241.25 322.15 541.96 934.19 1631.47

96 278.91 283.80 283.96 287.26 296.37 335.26 407.01 586.73 961.42 1672.46

205 451.79 462.91 460.27 460.99 449.03 493.99 565.20 728.83 1065.61 1752.43

437 720.43 729.08 735.85 715.28 729.22 769.65 792.79 911.84 1211.08 1813.50

935 1124.26 1104.06 1129.07 1122.37 1142.20 1187.34 1188.55 1289.40 1493.27 1931.35

GW

P Le

vel (

Rm

il)

2000 1697.75 1732.50 1734.20 1690.78 1680.87 1750.83 1800.22 1798.04 1914.23 2355.56


References

Certified Models subcommittee of Financial Condition Reporting working group of the FSB

Financial Condition Reporting—Certified Model framework, 2006

Deloitte and Insight ABC.

Financial Condition Reporting for South African Short-term Insurers Calibration Project, 2005

Disclosure and risk management of Financial Condition Reporting working group of the FSB

Disclosure and Risk Management, 2006

Internal Models subcommittee of Financial Condition Reporting working group of the FSB

Financial Condition Reporting Guidelines: Internal Models, 2006

Documents

FINANCIAL SERVICES BOARD Issues Paper