Benefits of risk-based regulation for Zimbabwean Insurers Duration: 45 mins Presented by: Thomas Sithole Date:

What we are going to cover A brief history lesson What is Solvency II The three pillars Impact studies before/during implementation Blends of solvency II in other countries Zimbabwe Regulation vs Solvency II Challenges of Solvency II Benefits of solvency II - style regulation in Zimbabwe

A brief history lesson 1973: First Non-Life Directive 1979: First Life Directive 2002: Life & Non-Life Directive 2009: Solvency II -Solvency II has a heritage stemming from the 1970s |------------------------Solvency I -----------------------------|

What is Solvency II the risk framework for insurance companies operating in the EU Aims – to basically correct the failings of Solvency 1 Cover all the risk to which insurers are exposed Reduce insurance failures (to no more than 1 in every 200 cases) Promote disclosure of risk information to the capital markets Increase flexibility towards the calculation of solvency capital Cater more for multinationals Market consistent valuation of Assets and Liabilities

The three pillars SII follows a 3 pillar framework similar to Basel 2 & 3 But SII is less prescriptive than the Basel rules - SII is a good thing for organisations conducting both insurance and banking functions Pillar 1: Quantitative Requirements Pillar 2: Qualitative Requirements Pillar 3: Disclosure

Pillar 1: Quantitative Requirements There are two key capital measures: Solvency Capital Requirement (SCR) – Below this level, regulatory action is taken upon the insurer SCR: capital such that the probability of ruin within one year = 0.5% (i.e., 99.5% VaR) In other words, holding 100% of calculated SCR would result in becoming insolvent once in every 200 years Minimum Capital Requirement (MCR) – Below this level, a firm looses its authorisation Models are used to calculate a firm’s SCR & MCR Firms can use a standard model developed by the Regulator Or develop their own internal models which have to be approved by the Regulator.

Solvency II Balance Sheet Total Assets Free Surplus Solvency Capital Requirement (SCR) (MCR is a subset of the SCR) MCR RM Technical Provisions = Best-Estimate + Risk Margin (RM) Best-Estimate Liability

Balance sheet components Best Estimate value of Liabilities Liabilities can never be known with certainty Best Estimate Value has an equal chance of under/over estimating the value of liabilities Risk Margin – Since liabilities are uncertain, the RM is an additional buffer increasing the value of the liabilities. Free Surplus – (Assets minus the liabilities) these allow the insurer to continue writing new business.

Pillar 2: Qualitative Requirements Deals with the relationship between firms and their national Regulators Regulators should: Analyse strategies of firms Ensure that business models are under scrutiny Ensure that firms have adequate internal processes Be satisfied with the governance systems A key component of Pillar 2 is the Own Risk and Solvency Assessment (ORSA)…..

ORSA – at the heart of Solvency 2 •Underwriting •Business Run-off •Technical provisions •Claims Aggregation   ORSA Insurance Risks Other Risks Counterparty Risks Market Risks •Interest rate volatility •Index linked liabilities •Equity Markets (ZSE) •Currency risks •Liquidity risks •Operational risks •Reputation risk •Fraud •Credit risks •Risk-concentration •Reinsurer default  

Pillar 3: Disclosure Capital adequacy alone are not enough! Firms need to be encouraged to manage ALL their risks The information on these risks needs to be disclosed to: The Capital Markets The Public The Regulator (through ORSA)

Impact studies before/during implementation Quantitative Impact Studies (QIS) A kind of back and forth between industry and regulator to ensure everything goes smoothly. A total of 5 QISs were conducted to gather industry comments and reservations/ contributions to the SII project. Very important to ensure proper buy in from all industry stakeholders.

Input needed from the key players Governance & Reporting Financial resources Internal models Board and senior mgmt XXXXX X Risk Management XX XXXX Finances XXX Actuarial Internal Audit Key XXXXX Very Active XXXX Key Responsibility XXX Active Involvement XX Contribute X Be aware

Blends of solvency II in other countries Solvency Assessment Management framework - SAM China – Risk Oriented Solvency System C-ROSS Ghana – Risk Based Capital assessment

South Africa SAM is also a 3 Pillar framework similar to Solvency II Key aim: institute a principles-based supervisory regime for the prudential regulation of both long-term and short- term insurers in South Africa proportionality ensures that the risk governance system is tailored to each company and is not overly burdensome The final SAM implementation date has been pegged for January 2016

China C-ROSS Technical Standards are still being finalised Full implementation is expected in 2016 C-ROSS has three pillars just like Solvency II quantitative capital requirements qualitative regulatory requirements and market discipline The world is slowly moving towards Risk Based Capital adequacy regimes!!

A Brief Look at Ghana National Insurance Commission introduced a new Risk Based Capital Framework (taking effect from 1 January 2015) scope of the new solvency framework: capital adequacy requirements solvency control levels Investments technical provisions & valuation of assets risk management control function which would include internal audit, risk management, actuarial and compliance function

Zimbabwe Regulation vs Solvency II Current Zimbabwean Regulation is mainly in the form of Restrictive Capital Requirements. This aims to enforce a high minimum capital requirement on insurance players so that if anything goes wrong, there will be enough capital to cover the risk. But how much capital is optimal? Current system does not incentivise insurers to manage their risk exposure. It also directly limits the number of players in the insurance marketplace

Challenges of Solvency II Companies adopting a box ticking approach IT challenges Not enough buy in from management Uncertainty over certain areas leading to ….. Deadline extensions Lack of sufficient data. e.g. data on operational risks ----------------------------------------------------------- “Solvency II is not only about capital – It is a change of behaviour!!” Thomas Steffen, Chairman of CEIOPS

Benefits of Solvency II to Zimbabwe Good governance Proportionality & Fairness Prospective risk management focus Confidence in industry Intervene before its too late “Ladder of interventions” – upper threshold (plan for corrective action) to lower threshold (regulator takes over) Set the stage for our insurers to command a greater regional presence Increased FDI and international cooperation + Solvency II will impact more than 3 800 insurers across 30 European economies. + We have only 25 GI Insurers, 10 Life insurers and 10 Re-insurers : Our smallness is our greatest advantage!

Questions “I would not position it as having to be ready for Solvency II. Instead, we have to be ready for proper enterprise risk management and Solvency II is part of that.” Jeroen Potjes, Chief Insurance Risk Officer, ING Email : thomas.sithole@bluecroftsolutions.com bluecroftsolutions.com Bluecroft: piecing together your financial puzzle.