Draft Insurance Laws Bill promise prudency

The draft Insurance Laws Bill was published last week with a promise to tighten prudency while pushing democratisation of the sector.

The Bill was published by the National Treasury and the Financial Services Board (FSB) for comment last week after being approved by the cabinet. A cabinet statement said “The Bill is aligned to the National Development Plan and ensures a sound and well-regulated insurance sector, promotes financial stability that will support sustainable economic growth by giving effect to higher prudential standards that have been developed in light of the 2008 financial crisis.”

The cabinet statement added that “The bill gives effect to a new prudential framework for the insurance sector.” This new framework comes partly via the Solvency Assessment and Management (SAM) regime which seeks to introduce a new, forward-looking risk-based approach. Primarily the framework seeks to align the capital requirements with the underlying risks of an insurer.

SAM can be described as the Basel III of the insurance sector.

Discussing background to the bill Treasury said “The 2008 Global Financial Crisis highlighted the importance of having higher prudential and market conduct standards on both banks and insurance companies, to enhance their financial soundness and ultimately support consumer protection and financial stability.”

The statement added that the initial global financial regulatory reforms driven by the G20, International Monetary Fund and the Financial Stability Board after the crisis provided for such higher prudential standards for banks through Basel III, while for insurance these prudential standards were largely facilitated through Solvency II in Europe.

“In South Africa, Basel III for banks was effected through legislation in 2013, while the FSB developed an equivalent prudential framework for the insurance sector called the Solvency Assessment and Management (SAM) framework.
“The current Bill focuses on prudential standards, and similar to the Basel Core principles for banks. It also gives effect to the International Association of Insurance Supervisors Insurance Core Principles by establishing principles for group-wide supervision, governance, licensing, risk management and internal controls.

By committing to international standards, financial institutions are able to operate in other countries with greater ease as regulators are also able to apply equivalent regulatory standards and cooperate better with each other.”

The statement added that the enhanced prudential framework for insurers form part of the Twin Peaks reforms, which seek to significantly enhance South Africa’s financial regulatory and supervisory framework, by also enabling an intensive, intrusive and effective system of regulating the financial sector.

Key purpose and objectives of the Bill were listed as follows

 enhances financial soundness and oversight through higher prudential standards, group supervision and stronger reinsurance arrangements;

 increases access to insurance through a dedicated micro-insurance framework;

 strengthens the regulatory requirements in respect of governance, risk management and internal controls for insurers; and

 aligns with international standards and in accordance with South Africa’s G20 commitments.

The statement added that a recently conducted

SAM Economic Impact Study found that “SAM is likely to lead to better risk management which in turn is expected to lead to a safer insurance industry and ultimately a more stable financial system given the highly inter-connectedness nature of the South African financial sector.

“The implementation of SAM will result in direct costs to insurers that are small when seen in context of the size of the South African insurance industry. The study also indicates that SAM will facilitate positive social outcomes by enabling affordable insurance to low income households.”

The statement added that the Bill gives effect to the Micro-insurance Policy Document released in July 2011. “It supports the development of an inclusive insurance sector through providing affordable insurance, while also having proportionate and appropriate regulation and supervision of micro-insurance.”

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