rbc - scor campus
TRANSCRIPT
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REVIEWING RISK BASED SUPERVISION IN E.A.EZEKIEL MACHARIAACTUARIAL SOCIETY OF KENYA – RISK BASED SUPERVISION WORKING PARTY
23RD SEPTEMBER 2015
SCOR CAMPUSNAIROBI, KENYA
COMPLIANCE BASED SUPERVISIONThe good old days? For whom?
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AGENDA
Review of the East African Market Risk Based Supervision Framework for Kenya Risk Based Capital Calculation Conclusion
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REVIEW OF THE EAST AFRICAN MARKET
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GDP Growth (2014): 6.3%% of population below 14yrs: 44.44% Insurance Penetration (2013): 0.6%
Key Characteristics of East African Market Growing economy Young Population Low Insurance
Penetration
GDP Growth (2014): 1.5%% of population below 14yrs: 29.4% Insurance Penetration (2013): 15.4%
Source: World Bank, Country Insurance Regulator
GDP Growth (2014): 7.0%% of population below 14yrs: 44.79% Insurance Penetration (2013): 0.9%
GDP Growth (2014): 5.3%% of population below 14yrs: 42.04% Insurance Penetration (2013): 3.4%
GDP Growth (2014): 4.5%% of population below 14yrs: 48.18% Insurance Penetration (2013): 0.85%
GDP Growth (2014): 4.7%% of population below 14yrs: 44.75%Insurance Penetration (2013):
GDP Growth (2014): 7.0%% of population below 14yrs: 42.07% Insurance Penetration (2013): 1.6%
Pop
ulat
ion
(201
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PRE-EMPTING CHANGE IN REGULATION?
Change to RBS is expected to spur M&A. This is already happening and we expect a higher level of consolidation
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Acquirer Acquired CountryPrudential Sheild Assurance KenyaPrudential Gold Star Uganda
Old Mutual Emerging Markets UAP Group Kenya, Uganda, Tanzania, S Sudan, Rwanda & DRCSanlam Emerging Markets Gateway KenyaSanlam Emerging Markets NIKO Tanzania & UgandaSanlam Emerging Markets Soras Rwanda
Soras SOCAR BurundiMetropolitan Life Canon KenyaICEA (merge) Lion KenyaBarclays Life - (greenfield) Kenya
Barclays General First Assurance KenyaBritam General Real Insurance Group Kenya, Zambia, Malawi, Mozambique
Saham Mercantile Insurance KenyaSaham CORAR Rwanda
Grean Oaks (USA) COGEAR RwandaUnion Insurance of Mauritius Phoenix of East Africa Kenya, Zambia, Malawi, Mozambique
DEALS: MERGERS & ACQUISITIONS IN EA (2013-2015)Acquired
AGENDA
Review of the East African Market Risk Based Supervision Framework for Kenya Risk Based Capital Calculation Conclusion
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KENYA MOVING TO RISK BASED SUPERVISION BY 2018
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Kenya: Risk Based Supervision Timetable*• New Insurers: RBC in 1 Oct 2015 • Existing Insurers: RBC in 30 Jun 2018
*Changes contained in Finance Bill 2015
KEY COMPONENTS OF RISK BASED SUPERVISION
8 Changes in Kenya are inline with International Association of Insurance Supervisors (IAIS) -
Insurance Core Principles (ICP). All East African (Kenya, Uganda, Tanzania, Burundi & Rwanda) countries are members of IAIS.
Onsite inspections and increased level of reporting requirements through electronic regulatory submissions.
Qualitiative Supervision DisclosureInvestment Requirements Corporate Governance (Fit & Proper forms) Financial Condition ReportValuation of Technical Provisions (non-life) Actuarial Function Quartely Solvency ReportingValuation of Technical Provisions (life) Risk Function Quartely Valuation of Technical liabilitiesCapital Compliance Function Risk AppetiteSolvency Capital Requirments Internal Audit Function Risk FrameworkMinimum Capital Requirements Treating Customers Fairly (TCF) Reinsurance Management Strategy
Onsite Inspections Investment StrategyStress Testing & Scenario Analysis
KEY FEATURES OF RISK BASED SUPERVISION ROLLOUT IN KENYA
*Roll-out Schedule - Green: Introduced in 2013, Blue: Introduced in 2014, Red: Introduced in 2015
FOCUS ON KENYA: KEY CHANGES TO MCR
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Onsite inspections and increased level of reporting (electronic regulatory submissions), disclosure and market discipline.
Introduction of an annual Financial Condition Report.
UnderwriterFixed Amount(KES 'millions) % of Proxy Risk Based Capital MCR Assets Required Capital
Insurer (Long Term) 400 5% of LiabilitiesInsurer (General Insurance/P&C) 600 20% of NEP*Insurer (Long Term) 500 5% of LiabilitiesInsurer (General Insurance/P&C) 1,000 20% of NEP**NEP - Net Earned Premium of previous year
PROPOSED REGULATION - KENYA : MINIMUM CAPITAL REQUIREMENTS (MCR)
The maximum of …
calculated on rules set by Authority from
time to time
Government SecuritiesorBank Deposits/Cash
Can be higher than specified MCR depending on nature, scale & complexity of insurer and risk
profile
KENYA: REGULATORY BALANCE SHEET
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In compliance/rules based regime, the minimum capital requirement (MCR) was the solvency capital requirement (SCR).
Introduction of risk based capital increases the possible solvency requirement.
Special asset classes for minimum capital. This means that Own Funds assets will be divided into Tiers with MCR backing being most restrictive
Technical provisions to be based on best estimate + risk margin
KENYA: CAPITAL ADEQUACY RATIO
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Capital Available Capital RequiredAutomatic acceptance
Paid up capitalRetained earningsCapital Reserves
Require approval by regulator
Subordinated debt (over 5 years, payable after policyholders, unsecured, redeemed at maturity or at option of insurer with prior approval from Authority,)
CAPITAL MANAGEMENT UNDER RBS
Max(RBC, MCR)
The required Capital Adequacy Ratios will depend on the size of insurer (CAR) - initial proposals show an acceptable CAR of 130%
Management of Insurers will recommend a higher CAR, say 200%.
Assets will be valued based on fair value approach, i.e. (i) readily available price (listed securities) or (ii) price determined from an arms-length transaction between willing parties.
AGENDA
Review of the East African Market Risk Based Supervision Framework for Kenya Risk Based Capital Calculation Conclusion
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KENYA: RISK BASED CAPITAL – STANDARD MODEL
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Statutory Capital Requirement (SCR)
Risk Based Capital (RBC)
Minimum Capital
Required (MCR)
Maximum of RBC
& MCR
Basic Solvency Capital
Requirement (BSCR)
+ Operational Risk Capital
Insurance Risk Capital + Market Risk
Capital + Credit Risk Capital
VaR measure of basic Own Funds with a 95% confidence interval over a one year time horizon
Insurance Risk Capital + Market Risk
Capital + Credit Risk Capital
KENYA: RISK BASED CAPITAL – INSURANCE RISK CAPITAL
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Insurance Risk Capital charge covers the variation of the actual experience from that assumed in the pricing basis
Capital requirement is based on change in Net Asset Value (Δ NAV) following a permanent increase/decrease of x% in the parameter value
MortalityLongevityMorbidity/DisabilityLapseExpenseCatastrophe
+PremiumReserveLapseCatastrophe
+Similar to Life (SLT)Non Similar to Life (non-SLT)Health Catastrophe
Life Underwriting
Risk
Non-Life Underwriting
Risk
Health Underwriting
Risk
SLT:Critical illness, Income Protection, Long-term care Insurance
Non-SLTPrivate Medical Insurance(PMI)
KENYA: RISK BASED CAPITAL – INSURANCE RISK CAPITAL
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Class of Business Outstanding Claims Risk Factor (%)
Unearned Premium Risk Factor (%)
Aviation 13 17Engineering 10 14Fire Domestic 5 9Fire Industrial 12 16Liability 10 14Marine 5 9Motor Private Material Damage 5 9 Liability 15 19Motor Commercial Liability 5 9 Material Damage 12 16Motor Commercial Liability 10 14 Material Damage 15 19Personal Accident 11 15Theft 6 10Workman’s Compensation Medical 11 15Miscellaneous 9 13
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Initial charges based on regulators internal QIS 1
New charges under consideration
Insurance Risk Capital + Market Risk
Capital + Credit Risk Capital
KENYA: RISK BASED CAPITAL – MARKET RISK CAPITAL
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Market Risk Capital charge covers the volatility in the asset prices.
Equity, Property & Currency Risk Capital charges are pre-determined
Interest Risk Capital – based on change in surplus due to change in interest rate
Equity Risk Capital Equity Portfolio
+Land & BuildingsInvestment Property
+Currency Risk
CapitalLiabilities denominated in foreign currency
+Interest Risk
CapitalChange in Surplus (Asset - Liabilities)
Property Risk Capital
Insurance Risk Capital + Market Risk
Capital + Credit Risk Capital
KENYA: RISK BASED CAPITAL – CREDIT RISK CAPITAL
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Credit/Counterparty risk capital charge covers the likely loss resulting from changes in the value of assets and liabilities as a result of unexpected default or retrogression in the credit rating of independent counterparties
Key counterparty for insurers Reinsurance and capital is required for Reinsurance share of claim provisions
AGENDA
Review of the East African Market Risk Based Supervision Framework for Kenya Risk Based Capital Calculation Conclusion
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CONCLUSION
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East Africa is moving towards Risk Bases supervision framework Kenya has taken the lead and will implement RBS in 2015 for new insurers and by 2018 for
existing insurers Disclosure requirements and internal supervision requirements already in place in Kenya with
quantitative requirements to be introduced in Q4 2015. Risk based model under review by Working Party of The Actuarial Society of Kenya Preliminary Risk Based Capital Requirement shows that Kenyan Insurers may need to inject
capital
