Financial Services Board INSURANCE LAWS AMENDMENT BILL Jonathan Dixon Deputy Executive Officer: Insurance Financial Services Board Page 1

Financial Services Board Overview Page 2 Background Main elements ○Governance framework ○Insurance groups supervision Timelines Q&A

Financial Services Board Background Page 3 IMF Report on Standards & Codes, 2010 ○South Africa’s regulatory system is fundamentally sound and is substantially compliant with international standards ○Insurance regulation is also sound and while the assessment identified areas for development, these are being addressed ○Main areas for development include insurance group supervision and insurer governance, risk management and internal control requirements

Financial Services Board Background Page 4 IAIS International Core Principles (ICP)Comments Corporate Governance “The supervisor requires insurers to establish and implement a corporate governance framework which provides for sound and prudent management and oversight of the insurer’s business and adequately recognises and protects the interests of policyholders.” No explicit requirements for insurers – limited to requirements of the Companies Act. Risk Management and Internal Controls “The supervisor requires an insurer to have, as part of its overall corporate governance framework, effective systems of risk management and internal controls, including effective functions for risk management, compliance, actuarial matters and internal audit.” Recommendation to develop insurance specific requirements. FSB to provide guidance to companies on its observations of good and bad risk management practices.

Financial Services Board ○Effective insurance group-wide supervision is also key to 3 rd country equivalence under Solvency II – EU Member states may provide that the calculation of the group solvency shall take into account the Solvency Capital Requirement and the own funds eligible to satisfy that requirement, as laid down by the third-country concerned Background Page 5 IAIS International Core Principles (ICP)Comments Group-wide supervision “The supervisor supervises insurers on a legal entity and group-wide basis.” Significant gaps regarding the powers of the FSB and the focus of supervision

Financial Services Board Background Page 6 SAM Quantitative requirements Qualitative requirements Reporting & Disclosure Insurance Groups Pillar 1 Pillar 3 Pillar 2 ILAB introduces interim measures on Pillar 2 and insurance group supervision as a stepping-stone to SAM implementation in 2015

Financial Services Board 29/10/2008 Page 7 Background Process to date ○SAM Structures developed proposals ○FSB reviewed and finalised proposals ○Discussion Documents 1 and 81 reflect the details ○ILAB drafted based on discussion documents ○ILAB and Discussion Documents were issued for industry comment ○Revised draft submitted to NT for consideration

Financial Services Board Overview Page 8 Background Main elements ○Governance framework ○Insurance groups supervision Timelines Q&A

Financial Services Board Governance Framework The ongoing financial soundness and stability of an insurer is highly dependent on the quality of its leadership, governance, and management teams, and on its risk management and internal control systems. It is therefore vital that these interim measures prepare insurance and reinsurance companies for the SAM regime. Ideally the interim measures should increase awareness of risk exposures, as well as improve the scrutiny and management of these matters. Page 9

Financial Services Board Governance Framework Out- sourcing Page 10

Financial Services Board Governance Framework Objective ○Adopt and implement an effective governance framework ○Prudent management and oversight of business ○Adequately protects the interests of policyholders ○Proportionate to nature, scale and complexity of business and risks. Page 11

Financial Services Board Requirements adequately protects the interests of policyholders. Transparent Clear Allocation Segregation Transparent Clear Allocation Segregation Governance Framework Org Structure Fit & Proper Risk Management System Internal Control System Control Functions Outsourcing Fit & Proper Risk Management System Internal Control System Control Functions Outsourcing Compliance Risk Management Investment Reinsurance & Risk Transfer Internal Controls Remuneration Outsourcing Risk Management Investment Reinsurance & Risk Transfer Internal Controls Remuneration Outsourcing Written Policies Page 12

Financial Services Board Board of Directors Objective ○Adopt and implement a governance framework ○Prudent management and oversight of business ○Adequately protects the interests of policyholders. Page 13

Financial Services Board Requirements over and above the Companies Act, given objective of adequate policyholder protection Sufficient number of non-exec directors Composition must support objectivity in decision making Appropriate number and mix to ensure adequate spread and level of knowledge, skills and expertise Independent Chairman Sufficient number of non-exec directors Composition must support objectivity in decision making Appropriate number and mix to ensure adequate spread and level of knowledge, skills and expertise Independent Chairman Board of Directors Composition Assess and determine need for board committees Audit Committee is minimum requirement Risk and remuneration committees recommended Assess and determine need for board committees Audit Committee is minimum requirement Risk and remuneration committees recommended Structure Fit and proper Act in the best interest of the insurer and its policyholders Exercise independent judgement & objectivity Fit and proper Act in the best interest of the insurer and its policyholders Exercise independent judgement & objectivity Duties Page 14

Financial Services Board Senior Management Key requirements ○Carry out day-to-day operations effectively, in line with strategies, policies and procedures ○Promote a culture of sound risk management, compliance, and policyholder protection ○Provide adequate and timely information to the Board, including information necessary for the monitoring and review of company performance, risk exposures, and performance of senior management ○Provide the registrar and other stakeholders with information required to satisfy legal and other obligations Page 15

Financial Services Board Risk Management System Objective ○The risk management system must be capable of supporting the Board of Directors in its responsibilities with respect to the furtherance of the safe and sound operation of the insurer and the protection of policyholders. Page 16

Financial Services Board Requirements Adequate for nature, scale and complexity, adapted Strategy should be across all activities, consistent with business strategy Risk Management System Resources Strategies Policies Processes Resources Strategies Policies Processes Elements Objectives Principles Assumptions Responsibility Objectives Principles Assumptions Responsibility Strategy Board & Management reports - material risks, and risk management effectiveness Material Risks Regular review for modification & Improvement - documented processes for contingency planning, business continuity & crisis management Page 17

Financial Services Board Internal Control System Objective ○The Internal Control System should provide the Board of Directors with reasonable assurance from a control perspective that the business is being operated consistently with the (a) strategy set by the Board of Directors, (b) agreed business objectives, (c) agreed policies and processes, and (d) laws and regulations. Page 18

Financial Services Board Control Functions General Requirements ○necessary authority, independence, resources, expertise and access to all relevant employees and information Page 19

Financial Services Board Must have a head of each area Can head up more than 1 area (not Internal Audit) Statutory Actuary can be head of Actuarial Control, if individual doesn’t conduct work which compromises the independence and oversight nature of the role Registrar intervention if structure detracts from adequacy of control Must have a head of each area Can head up more than 1 area (not Internal Audit) Statutory Actuary can be head of Actuarial Control, if individual doesn’t conduct work which compromises the independence and oversight nature of the role Registrar intervention if structure detracts from adequacy of control Control Function Heads Conditions Regularly report to BoD or committee Regularly meet with Chairperson of BoD or Committee, in the absence of senior management Report non-compliance to BoD, and to Registrar if no appropriate action is taken by the BoD within 30 days of receiving the report Regularly report to BoD or committee Regularly meet with Chairperson of BoD or Committee, in the absence of senior management Report non-compliance to BoD, and to Registrar if no appropriate action is taken by the BoD within 30 days of receiving the report Requirements Page 20

Financial Services Board Outsourcing Requirements ○An insurer that outsources any function or activity must have an outsourcing policy that includes the matters as may be prescribed. Page 21

Financial Services Board Outsourcing - Limitations Cannot outsource aspects which may: ○Materially impair the quality of governance ○Materially increase risk or affect ability to manage risks and meet legal & regulatory requirements ○Impair the registrar’s ability to monitor compliance with regulatory obligations ○Undermine continuous, fair & satisfactory service to policyholders Page 22

Financial Services Board Outsourcing – Requirements ○Remuneration must be reasonable and commensurate with the activity outsourced ○The Board must be satisfied that outsourcing of a control function does not undermine its independence, objectivity, and effectiveness ○Prior to outsourcing a management, control or material function, must notify Registrar ○ILAB will replace current Directive 159 Page 23

Financial Services Board Overview Page 24 Background Main elements ○Governance framework ○Insurance groups supervision Timelines Q&A

Financial Services Board Insurance Groups Significance ○Lessons from financial crisis – focus on system- wide supervision and systemically significant financial conglomerates ○Risks to policyholders can arise from elsewhere in the group ○Insurance groups are exposed to and a source of specific risks, including liquidity risk, contagion risk, complexity risk, agency risk ○Financial conglomerates are a prominent feature of the SA financial landscape Page 25

Financial Services Board Insurance Groups - Definition “Two or more entities of which at least one is an insurer and one has significant influence on the insurer.” The significance of influence is determined based on: ○participation ○influence and / or other contractual obligations ○interconnectedness ○risk exposure ○risk concentration ○risk transfer and / or intra-group transactions Page 26

Financial Services Board Category 1 : 1 insurer + 1 or more non-financial entities Category 2 : 2 or more insurers Category 3 : Financial conglomerate An insurance group is a financial conglomerate if it conducts insurance activities plus financial activities either: o In at least one other regulated financial sector; o In at least one non-regulated financial sector to the extent that the financial activities in that sector are not subject to group-wide/consolidated supervision by sectoral frameworks. Page 27 Insurance Groups - Definition

Financial Services Board Group-wide Supervision Regulatory requirements ○Establish a non-operating holding company (NOHC): can be applied at insurance group or insurance sub-group level ○Transparent group structure ○Registrar’s approval for material acquisitions ○Group solvency assessment ○Possible capital add-on, limits on intra-group transactions and risk concentrations ○Group-wide governance and reporting requirements Page 28

Financial Services Board Overview Page 29 Background Main elements ○Governance framework ○Insurance groups supervision Timelines Q&A

Financial Services Board 29/10/2008 Page 30 Timelines Way forward ○Aim to table in Parliament before end-2012 ○Implementation mid-2013 – stepping stone to SAM final measures ○Drafting of subordinate legislation ○SAM Pillar II Readiness Review ○Information request to all insurance groups on legal and organisational structure ○Finalise group returns

Financial Services Board Questions Page 31