Assessing the impact of regulatory changes on the role of risk management in insurance companies

Abstract

In 2008, the world experienced a global financial crisis, highlighting concerns over a lighttouch financial regulatory system such as currently used in South Africa. Even though the South African financial system weathered the storm, nearly a million jobs were lost as a result of the global contagion that originated from the crisis in the First World s banking and financial systems. Consequently, the Financial Services Board, the South African regulator responsible for the non-banking financial services industry, started reforming its regulatory system in the aftermath. The Solvency Assessment and Management framework is currently being developed to establish a risk-based regime for the prudential regulation of long-term insurers and shortterm insurers in South Africa. Solvency Assessment and Management is developed as a risk-based supervision framework replicating the multi-year European project called Solvency II. The Financial Services Board established a Solvency Assessment and Management governance structure to provide it with recommendations from all stakeholders for the risk-based framework underlying the Solvency Assessment and Management regulatory regime. The Solvency Assessment and Management governance structure consists of three main committees overseeing quantitative aspects (Pillar I), risk management and governance (Pillar II) and reporting and disclosure (Pillar III). The study focused on the Pillar II impact of Solvency Assessment and Management on the role of risk management in an insurance company. Furthermore, the study evaluated the current self-assessed readiness of insurers for the future Solvency Assessment and Management risk management requirements. A quantitative data analysis approach was applied to the Solvency Assessment and Management Pillar II Readiness Survey, which the Financial Services Board conducted in 2012 as part of the journey to prepare insurers for Solvency Assessment and Management. The survey was mandatory for all registered South African insurance companies with the primary focus of gaining a better understanding of how insurers prepared themselves for the requirements of Pillar II. The questionnaire consisted of seven parts and in each part, there were specific questions related to the Pillar II requirements followed by a self-assessed readiness question. The purpose of the data analysis was to identify which aspects of the risk management section of the questionnaire were significant predictors of whether insurers rated themselves as ready for the Solvency Assessment and Management Pillar II risk management requirements. The relationship between the responses to each question and the insurer s self-assessed readiness for the Solvency Assessment and Management risk management requirements was tested using Pearson s chi-squared test and Fisher s exact test. Key predictors of readiness identified in the analysis were compared with literature on the attributes required for a robust risk management system. The study provided insight into insurers perception of a relevant risk management framework compliant with the Solvency Assessment and Management requirements. Results from the analysis of individual relationships for life insurers indicated that there was a significant relationship between having in place a risk management system documenting the risk management strategy, an explicit asset-liability management policy, an investment policy and a risk transfer policy and assessing themselves as ready for the Solvency Assessment and Management requirements. Therefore, life insurers who had these components of the risk management framework in place were more likely to assess themselves as ready for the future Solvency Assessment and Management Pillar II risk management requirements. For non-life insurers, the results indicated that there was a significant relationship between having in place a risk management system documenting the risk management strategy, an explicit asset-liability management policy, a risk transfer policy and a remuneration committee and assessing themselves as ready for the Solvency Assessment and Management requirements. Therefore, non-life insurers who had these components of the risk management framework in place were more likely to assess themselves as ready for the future Solvency Assessment and Management Pillar II risk management requirements.