Front Matter Page

IMF Country Report No. 15/56

SOUTH AFRICA

FINANCIAL SECTOR ASSESSMENT PROGRAM

DETAILED ASSESSMENT OF OBSERVANCE ON THE INSURANCE CORE PRINCIPLES

March 2015

This Detailed Assessment of Observance on the Insurance Core Principles on South Africa was prepared by a staff team of the International Monetary Fund. It is based on the information available at the time it was completed in February 2015.

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Front Matter Page

SOUTH AFRICA

FINANCIAL SECTOR ASSESSMENT PROGRAM

INSURANCE CORE PRINCIPLES DETAILED ASSESSMENT OF OBSERVANCE

February 2015

Prepared By

Monetary and Capital Markets Department

Contents

• GLOSSARY

• EXECUTIVE SUMMARY

• ASSESSMENT OF INSURANCE CORE PRINCIPLES

• A. Introduction and Scope

• B. Information and Methodology Used for Assessment

• C. Overview—Institutional and Macroprudential Setting

• D. Preconditions for Effective Insurance Supervision

• E. Recommendations and Authorities’ Response

• DETAILED ASSESSMENT

• TABLES

• 1. Insurance Market–Licensed Insurers

• 2. Main Activities of Insurance Groups

• 3. Composition of Assets—Long-term (Life)

• 4. Trend in Technical Provisions—Long-term

• 5. Solvency: Assets Available Over Required

• 6. Free Assets to Capital Adequacy Requirement

• 7. Performance Indicators for Short-term Insurers

• 8. Summary of Compliance with the ICPs

• 9. Summary of Observance Level

• 10. Recommendations to Improve Observance of the ICPs

• 11. Detailed Assessment of Observance of the ICPs

• APPENDIX

• I. Status of Implementation of 2010 FSAP Recommendations

Glossary

Executive Summary

The insurance sector is an important pillar of the financial system in South Africa. In 2013, assets held by insurers accounted for nearly 23 percent of financial sector assets in South Africa. As at end-2013, there were 78 long-term insurers, 87 short-term insurers, 6 reinsurers and 11 captive insurers (excluding cell captive insurers). The long-term insurance sector is highly concentrated with the top five conglomerates dominating the market with over 73 percent of total industry assets in 2013 while the short-term insurance industry is less concentrated. The insurance sector is adequately served by a wide range of intermediaries, with approximately 10,992 financial services providers (FSPs) as at March 31, 2014.

Insurance regulatory and supervisory regime in South Africa is in transition. Currently, the Financial Services Board (FSB-SA) regulates the non-banking financial services industry, including the insurance sector, in South Africa. With the goal of achieving a safer financial sector to serve South Africa better, the Government has proposed major changes in the financial sector. The four policy objectives are: financial stability, consumer protection and market conduct, financial inclusion and combating financial crime. Market realities in the insurance sector pose significant regulatory challenges, which are well recognized by the authorities. These considerations include the dominance of financial conglomerates, high market concentration, demands of an economically diverse consumer base, high unemployment and slow growth in recent years.

As part of the regulatory reforms, a Twin Peaks supervisory structure will be adopted, with functional separation of prudential and market conduct mandates. The prudential supervisor will be part of the South African Reserve Bank, which will serve as the micro-prudential and macro-prudential supervisor. The FSB-SA will be transformed to a dedicated market conduct supervisor. The Government, through the Minister of Finance, will be responsible for the policy framework for the financial sector.

The authorities have been proactive in updating and/or formalizing the regulatory regime to better reflect current international best practices, which are well progressed. The key regulatory initiatives include the implementation of a formal group supervision framework, a risk-based Solvency Assessment and Management regime (SAM) and Treating Customers Fairly (TCF) approach to conduct of business supervision. The FSB-SA will have formal legal authority to supervise insurance groups including direct powers over a group holding company. SAM will be supported by explicit regulatory requirements on corporate governance and risk management frameworks. The TCF approach seeks to ensure that fair treatment of customers is embedded within the culture of regulated entities, using a combination of principles and rules to deliver fair outcomes for consumers. The proposed enhancements to the regulatory framework to entrench the above in legislation would significantly improve observance with the Insurance Core Principles. While this assessment does not reflect these on-going regulatory initiatives, the key proposals of the reforms are summarized by way of additional comments in this report.

The proposed regulatory enhancements will bring the regulatory regime in line with the international standards promulgated by the IAIS. Nonetheless, there is scope for fine-tuning in the following areas:

• a) A proportionate licensing and supervisory approach for friendly societies and clearer boundaries between medical schemes and insurance products;

• b) Priority of ranking for policyholders in the event of winding-up;

• c) Enhance the proposed group supervision framework by establishing explicit requirements on intra-group transactions and risk exposures e.g., intra-group reinsurance;

• d) Provide explicit conduct of business requirements on product development and provide the supervisor with the authority to require notification of certain types of new insurance products and prohibit certain products that do not meet prescribed standards;

• e) Public disclosure requirements for all insurers and clear legal authority to supervise compliance;

• f) Address the remaining legal deficiencies in the AML-CFT regime;

• g) Appropriate indicators for assessing systemic risk of insurers and reinsurers; and

• h) A crisis management and resolution framework to deal with cross-border crisis effectively.

The FSB-SA has introduced a risk-based supervision framework, which has been evolving to improve supervisory intensity and effectiveness. In this regard, there is scope for more intensive on-site visits with a baseline supervision cycle that are proportionate to the risk profiles of insurers and reinsurers. This would also include a systematic approach to evaluating the nature of supervision of reinsurers and other counterparties used by insurers. Group supervision should cover all insurance groups with holistic off-site monitoring of intra-group transactions and aggregate group exposures, including joint on-site visits of financial conglomerates. It is important that conduct of business risks be addressed in the Risk Assessment Document. To improve supervisory effectiveness, the FSB-SA is advised to strategize an appropriate risk-based supervisory cycle to cover the large number of FSPs. It is also advisable for the FSB-SA to adopt a more structured macro-prudential surveillance framework that also considers cross-sectoral inter-linkages and system-wide market conduct issues.

Pending the implementation of the Twin Peaks, the FSB-SA could be further strengthened in a number of areas by: a) formalizing the objectives for insurance supervision and the legal authority for group-wide supervision in the legislation; b) strengthening operational independence to minimize undue political or industry interference; and c) reviewing the adequacy of supervisory resources and augment skill sets in light of current and impending regulatory initiatives. It is important that the FSB-SA continues its positive engagement with domestic and international counterparts to ensure effective supervisory cooperation.

Going forward, the implementation of the enhanced regulatory regime as well as more effective and holistic supervision under the Twin Peaks hinges on the adequacy and quality of supervisory resources of the FSB-SA.