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

2. 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

3. 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 |

4. 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

5. 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

6. 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.

7. 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

8. 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.

9. 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)…..

10. 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

11. 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)

12. 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.

13. 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

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

15. 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

16. 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!!

17. 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

18. 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

19. 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

20. 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 insurers across 30 European economies.
+ We have only 25 GI Insurers, 10 Life insurers and 10 Re-insurers : Our smallness is our greatest advantage!

21. 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
bluecroftsolutions.com
Bluecroft: piecing together your financial puzzle.