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Send  Share  RSS  Twitter  16 Jul 2013

FINANCE: Is South Africa Ready for SAM‘

 





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The Solvency Assessment and Management (SAM) framework is gradually becoming more concrete and the related timelines are firming up with the implementation date for interim requirements having been set for 1 January 2014. “At this date companies need to have interim requirements implemented, and be able to perform a light parallel run starting mid-2014,” says Rodney Manzanga, Business Unit Head of Risk Management at Aon Hewitt.

An alarming fact came to light during a recent readiness survey conducted by the Financial Services Board (FSB), finding that some companies have adopted a ‘wait and see’ approach even though, in all likelihood, SAM will be implemented and critical details are not in flux. The FSB has expressed its concern with this approach and is sure to closely monitor companies suspected of using this approach, which is indicative of a poor risk culture.

The final SAM implementation date has been pegged for January 2016, which leaves very little time to waste. “The purpose of the SAM framework is to institute a principles-based supervisory regime for the prudential regulation of both long-term and short-term insurers in South Africa. In embarking on this project, the FSB wanted to enhance the protection of policyholders’ interest,” explains Manzanga.

During the recent SAM implementation readiness survey, 80% of companies reported that they have risk management programs at various levels of maturity, while 55% said that there is need for improvement, although this is considered to be a conservative number.

“What we have seen is that a lot of companies oversell the risk governance systems they have put in place. What you find is that sizeable cracks start to appear the moment you start to dig deep, particularly if you are not talking to the CRO or the company’s SAM team. If a company is just ticking boxes, it is relatively easy to appear compliant, but very difficult to demonstrate to a knowledgeable party – which the FSB is or at least should be presumed to be – that you have an effective system of governance,” says Manzanga.

This is in line with the outcome of the follow up interviews conducted by the FSB where they found that some companies could not sufficiently support their survey responses. Some, for example, had merely adopted their group policies without sufficient deliberation – companies are expected to take ownership of their governance systems.

The survey also found that confusion regarding the application of the proportionality principle still prevails. “The principle of proportionality ensures that the risk governance system is tailored to each company and is not overly burdensome. It does so, not by reducing the number of requirements, but by allowing simplifications when implementing requirements where such simplifications still result in a prudent risk governance system. Circumstances can differ drastically from one insurer to the next, which means that the SAM implementation should be purposeful and deliberate, taking into consideration all the critical factors that are relevant to each company,” explains Manzanga.

The survey confirms Manzanga’s own concerns that not enough is being done regarding the ‘Own Risk and Solvency Assessment’ (ORSA). The SAM readiness survey found that a small minority is ready to produce an ORSA while 68% of companies do not produce an ORSA at all.

According to the FSB the ORSA is not a report, but rather an ‘own’ assessment of risk and capital. It is defined as the entirety of the processes and procedures that are needed to identify, assess, monitor, manage and report the long and short term risks that an insurer might face; in addition to determining the funds that are necessary to ensure that the overall solvency needs are met at all times and are sufficient to meet the business strategy. The ORSA essentially encourages insurers to question themselves on the framework of an internal system dedicated to control risk management. It must in all cases be concise, easy to understand, and reflect the principles of materiality and proportionality.

“What we are seeing is that ORSA is being approached from a populate-the-template angle. For some companies – not all - the focus seems to be on simply getting an ORSA report, rather than on developing and implementing an effective management tool that can be relied on when making key decisions,” explains Manzanga.

When it comes to ORSA, the emphasis must be on “own” and the process and reports must be designed to cater for own needs. Focusing on speculated regulatory requirements may very well lead to a flawed management tool.

“The focus should not be on the reports, but rather about implementing an effective enterprise risk management program incorporating an economic capital model. While a template makes the notion of an ORSA more concrete and easier to understand, our approach is to only design the template after examining internal reporting requirements and benchmarking to best practices. The biggest downfall of an ‘adopted’ template approach without due consideration of own needs is the temptation to simply populate the template rather than being sufficiently critical of whether it meets unique needs and reporting requirements. Based on our own experience, many templates are inadequate for a leading or mid-tier governance framework,” says Manzanga.

In conclusion, the SAM readiness survey results show that while some companies are making good progress with their implementation of SAM, others have a very long way to go. “It is crucial that all insurers and re-insurers assess where they are as far as implementing SAM requirements and to determine the most optimal course given the time and resource constraints,” says Manzanga.

The skills and resources required to implement SAM successfully are generally not readily available and insurers may need to up-skill, recruit, and/or work with consultants. “Aon Hewitt has the necessary skills and resources required to help insurers and re-insurers at all SAM implementation stages and to go beyond SAM compliancy by developing robust risk management frameworks. Robust Enterprise Risk Management (ERM) frameworks add value, so the longer companies take to develop and implement such frameworks, the more they lose out,” concludes Manzanga.


 
 
 
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