sa long-term valuation bases

SA long-term valuation basesSA long-term valuation bases

Presented to ASSA members7 October 2003 – Johannesburg

9 October 2003 – Cape Town

Why are we here?Why are we here?

Display the information at the FSB’s disposal.

Orientate members as to the industry trends in statutory returns.

What will we show you?What will we show you?

Give you brief overview of the LT Insurance market in 2002.

Discuss the impact of management action to reduce the CAR of insurers.

Review some valuation assumptions in the LT2000 and compare these with the resulting AOS.

Overview of LT Insurance Overview of LT Insurance market in 2002market in 2002

Overview of LT Insurance Overview of LT Insurance market in 2002market in 2002

FSB classification:

G – General insurers (30 active in 2002)

L – Linked insurers (12 active in 2002)

R – Reinsurers (5 active in 2002)

A – Assistance insurers (6 active in 2002)

N – Niche insurers (7 active in 2002)

C – Cell captive insurers (4 active in 2002)

Overview - some key Overview - some key indicatorsindicators

g l r a n c Total (R'b)

Number of active insurers

30 12 5 6 7 4 64

Net premiums received

63% 34% 1% 0% 1% 1% 177

Net benefits paid 84% 14% 1% 0% 1% 0% 134

Total expenses incurred

91% 3% 3% 0% 2% 0% 19

Investment yield -1.2% 16.4% 8.3% 4.3% -1.3%11.7

% 0.8%

Overview – where are the Overview – where are the assets invested?assets invested?

As % of Rows g l r a n c

Total

(R'b)

Cash and deposits 79% 18% 1% 0% 1% 0% 67

Fixed interest 89% 8% 2% 0% 1% 0% 168

Equities and convertible debentures

88% 11% 0% 0% 1% 0% 334

Property 100% 0% 0% 0% 0% 0% 34

Collective investment schemes

69% 31% 0% 0% 0% 0% 98

Other 53% 46% -1% 0% 0% 2% 42

Total assets 84% 14% 1% 0% 1% 0% 783

Overview – where are the Overview – where are the assets invested?assets invested?

As % of Columns g l r a n c

Cash and deposits 8% 11% 15% 19% 17% 23%

Fixed interest 23% 11% 66% 14% 24% 14%

Equities and convertible debentures

45% 32% 13% 2% 48% 2%

Property 5% 0% 0% 2% 0% 0%

Collective investment schemes

10% 27% 0% 47% 7% 2%

Other 9% 19% 6% 16% 5% 59%

Total assets 660 111 5 0 5 1

Overview - the liabilities and Overview - the liabilities and CAR…CAR…

g l r a n c

Total

(R'b)

Linked liabilities 58% 41% 0% 0% 0% 0% 265

Non-linked liabilities 98% 0% 1% 0% 1% 0% 409

Total liabilities 83% 16% 1% 0% 1% 0% 706

Excess assets 97% 1% 1% 0% 1% 0% 77

CAR before management action

98% 0% 0% 0% 1% 0% 82

CAR after management action

97% 0% 1% 0% 2% 0% 35

Overview – remarks Overview – remarks

Industry funding factor of 1.11 (excluding CAR).

Industry funding factor of 1.06 (including CAR).

Industry CAR cover of 2.18.

Management action in CARManagement action in CAR

Management action in CARManagement action in CAR

For the top 10 insurers, management action was used to reduce the investment resilience risk in the CAR by 65%.

We acknowledge the freedom of PGN104 in setting CAR requirements but we contrast this with the need for a prudent approach when setting statutory reserves.

Management action in CARManagement action in CARTypes of management actions used by the

10 biggest general insurers:

Removal of non-vested bonuses.

Removal of interim bonuses.

Declaration of lower future bonus rates.

Reduction in surrender values.

Revision of mortality and expense charges.

Reduction in second tier margins.

Valuation assumptions in the Valuation assumptions in the LT2000LT2000

Valuation assumptions in the Valuation assumptions in the LT2000LT2000

The results we are about to show represent a mix of greatly different insurers.

The dangers of interpreting industry results should be kept in mind.

We suggest the results to be an orientation exercise and nothing more.

Mortality - AssuranceMortality - Assurance

Most popular table is the SA85/90.

SA72/77, SA56/62 and internal experience are also used.

The types of adjustments vary:

A form of proportional adjustment is most popular.

The addition of constants and age adjustments are also used.

Mortality - AssuranceMortality - Assurance

The following is separate weighted average mortality rates for males and females as disclosed in statement G11.

Used a benchmark of SA85/90 ultimate 100% heavy to place weighted rates in perspective.

Mortality – Assurance malesMortality – Assurance males (Linear scale)(Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality – Assurance femalesMortality – Assurance females (Linear scale)(Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

0.1400

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality – Assurance malesMortality – Assurance males (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality – Assurance femalesMortality – Assurance females (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n c a SA85/90

Mortality - AnnuitiesMortality - Annuities

Most popular table is a(55).

SA56/62, PA(90) and own experience are also used.

The types of adjustments vary: A form of proportional adjustment is most popular.

Improvement in mortality rates in the future and age adjustments are also used.

Used a benchmark of a(55) to put weighted average rates in perspective.

Mortality – Annuities malesMortality – Annuities males (Linear scale)(Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

20 30 40 50 60 70 80

g l r n c a(55)

Mortality – Annuities femalesMortality – Annuities females (Linear scale)(Linear scale)

0.0000

0.0100

0.0200

0.0300

0.0400

0.0500

0.0600

0.0700

0.0800

0.0900

20 30 40 50 60 70 80

g l r n c a(55)

Mortality – Annuities malesMortality – Annuities males (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n c a(55)

Mortality – Annuities femalesMortality – Annuities females (Log scale)(Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g l r n c a(55)

Mortality – AOS resultsMortality – AOS results

g l r a n c Total (R‘m)

Min of profit/loss -36 0 -16 0 0 2 -36

Max of profit/loss 200 0 14 5 37 5 200

Total of profit/loss

1,068 0 -6 11 45 7 1,125

Profit/total insurance profit

7% 0% -3% 103% 8%17% 7%

Average profit/loss

40 0 -1 2 9 3 24

Weighted average of profit/loss

138 0 8 4 29 4 133

Morbidity – Income disabilityMorbidity – Income disability

Most popular table is GLTD.

SA85/90 and own experience are also used.

A proportional adjustment is often used.

Data for lump sum disability was fragmented.

We decided to omit results for lump sum disability.

Morbidity – Income disability Morbidity – Income disability malesmales (Linear scale) (Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

0.1400

0.1600

0.1800

0.2000

20 30 40 50 60 70 80

g r n c

Morbidity – Income disability Morbidity – Income disability femalesfemales (Linear scale) (Linear scale)

0.0000

0.0200

0.0400

0.0600

0.0800

0.1000

0.1200

0.1400

0.1600

0.1800

0.2000

20 30 40 50 60 70 80

g r n c

Morbidity – Income disability Morbidity – Income disability malesmales (Log scale) (Log scale)

0.0000

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g r n c

Morbidity – Income disability Morbidity – Income disability femalesfemales (Log scale) (Log scale)

0.0001

0.0010

0.0100

0.1000

1.0000

20 30 40 50 60 70 80

g r n c

Morbidity – AOS resultsMorbidity – AOS results

g r n c Other

Total (R‘m)

Min of profit/loss -19 -22 0 0 0 -22

Max of profit/loss 214 85 3 0 0 214

Total of profit/loss 581 56 5 0 0 642

Profit/total insurance profit 4% 32% 1% 0% 0% 4%

Average profit/loss 45 14 2 0 0 31

Weighted average of profit/loss

58 54 3 0 0 58

Discount ratesDiscount rates

Observed rates from 6% to 18% between the classes of business.

Observed inflation assumption between 2% and 11%.

Weighted average inflation assumption of 9.6%.

Discount ratesDiscount rates

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%% pa

Annuities

Retirement Fund Business Untaxed

Business

Taxed Business

Discount rates – AOS resultsDiscount rates – AOS results

Total (R‘m)

Min of profit/loss -2,235

Max of profit/loss 517

Total of profit/loss -1,681

Profit/total insurance profit -10%

Average profit/loss -28

Weighted average of profit/loss

-380

Expenses – Variable costsExpenses – Variable costs

Min MaxWeighte

d average

Recurring premium: % of premium

2.75% 7.00% 2.90%

Recurring premium: % of fund

0.40% 1.90% 1.07%

Single premium: % of fund 0.40% 1.90% 1.07%

Expenses – Fixed costsExpenses – Fixed costs

0

50

100

150

200

250

300

350

400

450

Single premium

Disability income in payment

Annuities in payment

Paid-up policies

Regular premium

Expenses – AOS resultsExpenses – AOS results

Total (R‘m)

Min of profit/loss -137

Max of profit/loss 264

Total of profit/loss 71

Profit/total insurance profit 0.4%

Average profit/loss 1

Weighted average of profit/loss

48

Lapse and surrender rates – Lapse and surrender rates – Recurring premiumRecurring premium

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

g l r n a

First year Second year Third year Fourth year and later

Lapse and surrender rates – Lapse and surrender rates – Single premiumSingle premium

0%

5%

10%

15%

20%

25%

30%

g l r a

First year Second year Third year Fourth year and later

Questions?Questions?

Thank you for your timeThank you for your time

Contact details:Contact details:

Hantie van HeerdenHantie van Heerden(012) 422 2801(012) 422 2801

hantiev@fsb.co.zahantiev@fsb.co.za

André Jansen van VuurenAndré Jansen van Vuuren(012) 428 8103(012) 428 8103

andrej@fsb.co.zaandrej@fsb.co.za