PRESENTATION BY THE FINANCIAL SERVICES BOARD TO THE PORTFOLIO COMMITTEE ON TRANSPORT RE: VIEW ON THE ROAD ACCIDENT FUND’S (“RAF”) CURRENT SITUATION AND THE RAF’S RESCUE PLAN ROB BARROW – EXECUTIVE OFFICER SUZETTE VOGELSANG – HEAD: INSURANCE PRUDENTIAL

INTRODUCTION Last report by FSB on RAF for the financial year ended 31 March 2006 In the process of finalising the report for the financial year ended 31 March 2007 FSB’s report highlighted the shortfall in net assets of the RAF FSB regulates insurance industry on a prudential basis FSB’s review of RAF’s “Rescue Plan” The question is “Should the RAF be funded on the same basis as a registered short-term insurance company?”

FINANCIAL POSITION OF THE RAF Annually a report to Honourable Minister of Finance 31 March 2007 R’ million 31 March 2006 31 March 2005 31 March 2004 31 March 2003 Total assets 4 208 4 357 1 708 768 1 250 Total liabilities 24 385 22 728 21 559 19 325 16 680 Surplus/(deficit) (20 177) (18 370) (19 852) (18 557) (15 430)

FINANCIAL POSTION OF THE RAF Increase in deficit Fund is in a technically insolvent position RAF does not have sufficient cash or near cash assets to cover its short-term liabilities The liquidity ratio 0.42:1 (0.61:1, 2006)

FSB’S VIEW ON THE FINANCIAL SUPERVISION OF THE RAF Fundamental Insurance principles are not embodied Funding received is disconnected from the benefits payable by the Fund No direct relationship between the Fund and the insured person Standard fixed rate is not in line with general insurance underwriting principle i.e. poor risk should pay a higher premium

FSB’S VIEW ON THE FINANCIAL SUPERVISION OF THE RAF Financial Supervision of the RAF Act silent on the objectives of the supervisory functions. Short-term Insurance Act, 1998 specific requirements: Solvency Liabilities to be provided for Types of assets to be invested in Liquidity requirements Fit and properness of directors Limitation of certain actions by insurers Registration conditions Actions by the Registrar

FINANCIAL POSITION OF RAF vs. ST INSURANCE INDUSTRY TYPICAL Key ratios RAF ST Insurers - Typical (Unaudited) % PI or Fuel Levy income 31/03/07% 31/03/06 % 31/03/05 % 31/12/07 % 31/12/06 % 31/12/05 % Claims Ratio 123¹ 111 119 66 65 63 Expense Ratio 7² 9 10 27³ 25 26 Underwriting profit (loss) (30) (20) (29) 6 8 Underwriting and investment income (27) (19) (28) 14 15 16 1 – RAF claims includes claims related expenses 2 – RAF Expenses only in respect of staff and admin cost 3 – ST Insurer expenses includes commission payable i.e. Motor business 12.5% and other business 20%

FINANCIAL POSITION OF RAF UNDER ST INSURANCE ACT, 1998   Liabilities Outstanding Claims Undiscounted provision (R13 161 million higher) IBNR 7% of Net Fuel Income (R409 million) Contingency Reserve 10% of Net Fuel Income (R701 million) URP Provided if an underwriting loss Additional requirement 15% of Net Fuel Income (R1 050 million)

FSB’S VIEW OF RESCUE PLAN Not in a position to comment on the Rescue Plan as such The Rescue Plan appears to adequately address the key issues Noted the following since the implementation of Rescue Plan: Increase in staff productivity i.e. number of claims finalised per staff member First time claims finalised greater than claims lodged during 2007 Noted an improvement in administration and staff expenses HOWEVER: An increase in the number of months delay in claim settlement No improvement in costs to service providers Fruitless expenditure of R10million for interest and sheriff cost

FSB’S VIEW OF RESCUE PLAN (Cont.) Supervising the insurance industry the following: Very expensive to implement and maintain a new system Normally teething problems with a new system that can cause unplanned delays Difficulty in attracting and retaining knowledgeable and experienced staff Internal control, segregation of duties and clear processes and procedures