How to confidently comply with SAM despite little regulatory clarity

By Thorsten Hein, Global Business Development Manager: Insurance, Risk Research and Quantitative Solutions at SAS Institute

South African insurers have less than a year to prepare for the Financial Services Board’s (FSB’s) Solvency Asset and Management (SAM) regime, which is expected to be implemented in January 2017.

One of the core objectives of this regulation is policyholder protection. Similar to the European Solvency II directive, and based on the same principles, SAM aims to make sure that long and short-term insurers reserve the required economic capital to avoid insolvency and cover all their liabilities, according to their risk exposure.

In doing so, SAM will also enhance insurers’ financial soundness and participation in the global insurance market
while promoting confidence in the financial stability of the sector.

Compliance confusion

SAM is defined by three pillars:

  1. Pillar 1 deals with quantitative requirements, or the models and calculations adopted by insurers
  2. Pillar 2 has to do with qualitative requirements, such as the Own Risk and Solvency Assessment (ORSA), stress testing and capital projections.
  3. Pillar 3 focuses on reporting, disclosure and transparency.

Current legislation does not fully outline all the risks that South African insurers face. As a result, insurers might not have reserved adequate capital to cover their liabilities. While SAM aims to change this, regulatory requirements, i.e. regulatory reports, have not yet been finalised, creating confusion in the market about what exactly needs to be done.

This poses a challenge for insurers: they know they have to do something to comply with SAM – and they see the value in adopting an integrated approach to compliance – but there is no final clarity on what they will need to calculate in detail and what they will need to report on. So they hold off on investing in new solutions, choosing instead to adopt SAM in a siloed or pillar-by-pillar approach. However, this may have the unintended consequence of them being non-compliant.

For example, the three- to five-year capital projections that are requested in pillar 2 are based on the results of the standard model calculated in pillar 1 and will be reported according to the reporting requirements defined in pillar 3. If the three pillars are not integrated, both risk and data governance will become a major issue for this approach.

In order to comply with SAM, insurers need to implement a fully traceable, auditable and documented solution that covers the entire process, from operational data to risk management calculations to regulatory reporting – across all three pillars.

Once SAM is implemented, insurers can also expect constant changes to be made to compliance requirements. In Europe, it is expected that regulatory changes most probably will be made every six months, with reporting requirements getting stricter and shorter, placing a lot of pressure on businesses to stay compliant and up to date.

The value of an integrated approach

Updating internal systems to keep up with biannual – or even more frequent – regulatory changes is resource intensive, both from a time and cost point of view. While it is possible to achieve minimal SAM compliance at minimal cost, insurers can realise a greater competitive advantage if they invest in achieving full compliance.

An integrated SAM solution offers value beyond compliance. Solutions that have an embedded regulatory update guarantee automatically make changes to risk calculations and reports in line with new legislation. But if insurers take this a step further and identify commonalities between business needs and compliance requirements, they can create opportunities for improving overall business efficiency and strategic planning.

Compliance with any new legislation takes time and is a learning curve for businesses. If they start now, insurers will be in a position to comply with most of the SAM framework before the official implementation date. Rather than viewing compliance as inconvenient red tape, insurers should see it as an opportunity to introduce risk management into their daily business practices as a way to gain a competitive advantage.

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