Transcript Current Issues with Financial Condition Reporting

Financial
Services
Board
INSURANCE LAWS
AMENDMENT BILL
Jonathan Dixon
Deputy Executive Officer: Insurance
Financial Services Board
Page 1
Overview
• Background
Financial
Services
Board
• Main elements
○ Governance framework
○ Insurance groups supervision
• Timelines
• Q&A
Page 2
Background
• IMF Report on Standards & Codes, 2010
Financial
Services
Board
○ 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
Page 3
Background
Financial
Services
Board
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.
Background
Financial
Services
Board
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
○ Effective insurance group-wide supervision is also key to 3rd
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
Page 5
Background
Pillar 2
Pillar 3
Reporting &
Disclosure
Financial
Services
Board
Quantitative
requirements
Pillar 1
Qualitative
requirements
SAM
Insurance Groups
ILAB introduces interim measures on Pillar 2 and
insurance group supervision as a stepping-stone to
SAM implementation in 2015
Page 6
Background
• Process to date
○ SAM Structures developed proposals
Financial
Services
Board
○ 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
29/10/2008
Page 7
Overview
• Background
Financial
Services
Board
• Main elements
○ Governance framework
○ Insurance groups supervision
• Timelines
• Q&A
Page 8
Governance Framework
Financial
Services
Board
Page 9
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.
Governance Framework
Financial
Services
Board
Outsourcing
Page 10
Governance Framework
• Objective
Financial
Services
Board
○ 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
Governance Framework
• Requirements
Financial
Services
Board
Page 12
Org Structure
• Transparent
•Clear Allocation
• Segregation
Compliance
Written Policies
• Fit & Proper
• Risk Management
System
•Internal Control
System
•Control Functions
•Outsourcing
•Risk Management
•Investment
•Reinsurance &
Risk Transfer
•Internal Controls
•Remuneration
•Outsourcing
• adequately protects the interests of policyholders.
Board of Directors
• Objective
Financial
Services
Board
○ Adopt and implement a governance framework
○ Prudent management and oversight of business
○ Adequately protects the interests of policyholders.
Page 13
Board of Directors
• Requirements over and above the Companies Act,
given objective of adequate policyholder protection
Financial
Services
Board
Composition
• 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
Page 14
Structure
• Assess and
determine need for
board committees
• Audit Committee is
minimum
requirement
• Risk and
remuneration
committees
recommended
Duties
• Fit and proper
• Act in the best
interest of the
insurer and its
policyholders
• Exercise
independent
judgement &
objectivity
Senior Management
• Key requirements
Financial
Services
Board
Page 15
○ 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
Risk Management System
• Objective
Financial
Services
Board
○ 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
Risk Management System
• Requirements
Material Risks
Financial
Services
Board
Elements
• Resources
• Strategies
• Policies
• Processes
Page 17
processes for contingency planning,
business continuity & crisis management
Strategy
Regular review for modification &
Improvement - documented
• Objectives
• Principles
• Assumptions
Board & Management reports - material
risks, and risk management effectiveness
• Responsibility
• Adequate for nature, scale and complexity, adapted
• Strategy should be across all activities, consistent with business strategy
Internal Control System
• Objective
Financial
Services
Board
○ 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
Control Functions
• General Requirements
Financial
Services
Board
1
2
3
4
○ necessary authority, independence, resources,
expertise and access to all relevant employees and
information
Page 19
Control Function Heads
Conditions
Financial
Services
Board
• Must have a head of each
area
• Regularly report to BoD or
committee
• Can head up more than 1
area (not Internal Audit)
• Regularly meet with
Chairperson of BoD or
Committee, in the absence
of senior management
• 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
Page 20
Requirements
•Report non-compliance to
BoD, and to Registrar if no
appropriate action is taken
by the BoD within 30 days of
receiving the report
Outsourcing
• Requirements
Financial
Services
Board
○ An insurer that outsources any function or activity
must have an outsourcing policy that includes the
matters as may be prescribed.
Page 21
Outsourcing - Limitations
• Cannot outsource aspects which may:
Financial
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Board
Page 22
○ 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
Outsourcing – Requirements
Financial
Services
Board
Page 23
○ 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
Overview
• Background
Financial
Services
Board
• Main elements
○ Governance framework
○ Insurance groups supervision
• Timelines
• Q&A
Page 24
Insurance Groups
• Significance
Financial
Services
Board
Page 25
○ Lessons from financial crisis – focus on systemwide 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
Insurance Groups - Definition
Financial
Services
Board
• “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
Page 26
○ risk transfer and / or intra-group transactions
Insurance Groups - Definition
Category 1 : 1 insurer + 1 or more non-financial entities
Category 2 : 2 or more insurers
Financial
Services
Board
Category 3 : Financial conglomerate
An insurance group is a financial conglomerate if it
conducts insurance activities plus financial activities
either:
Page 27
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.
Group-wide Supervision
• Regulatory requirements
Financial
Services
Board
Page 28
○ 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
Overview
• Background
Financial
Services
Board
• Main elements
○ Governance framework
○ Insurance groups supervision
• Timelines
• Q&A
Page 29
Timelines
• Way forward
○ Aim to table in Parliament before end-2012
Financial
Services
Board
○ 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
29/10/2008
Page 30
Financial
Services
Board
Questions
Page 31