New rules to require strict solvency standards from insurers

Are your insurance company able to make payment of the claims made to the insurer? Would they have the capital required to make such payments?

Capital Rules under Solvency Assessment and Management (SAM)

The financial services industry watchdog FSB is drafting new capital rules for insurers, aimed at protecting consumers and strengthening the sector, the SA Reserve Bank said on Wednesday.

The new rules, known as Solvency Assessment and Management (SAM), requires insurers to match the capital they hold with the underlying risk they carry to be able to pay out claims should policyholders suffer losses.

SAM, which is being prepared by the Financial Services Board, would be implemented in 2014, the South African Reserve Bank said in its latest Financial Stability Review.

“It is expected that that SAM will result in a stronger industry in the longer term,” the bank said, adding that the rules also presented financial and administrative challenges to the industry.

Best Practise Standards

SAM, which is largely based on the European Solvency II framework, would provide insurers that adopt best risk practice with incentives.

The new rules would also require every insurance company to have, as a minimum, functions such as risk management and internal audit.

The South African insurance industry includes role players such as Sanlam [JSE:SLM], Old Mutual [JSE:OML], Discovery Holdings [JSE:DSY], Liberty Holdings [JSE:LBH] and Mutual & Federal Insurance [JSE:MAF] etc.

Domestic Banks well capitalised

The Reserve Bank said domestic banks were financially sound and that there no signs of fragility in the sector dominated by Standard Bank Group [JSE:SBK], FirstRand [JSE:FSR], Nedbank Group [JSE:NED] and Absa Group [JSE:ASA].

The banking sector was well capitalised in terms of Tier 1 and total capital adequacy ratios – key measures of a bank’s health – at 14.8% and 11.8%, respectively, as at the end of December, well above required 7% and 9.5% respectively, the central bank said.

“Gauging by the capital adequacy ratio, it is plausible to conclude that the sector can withstand considerable adverse shocks,” The central bank said.

“There are no compelling signs of fragility (in the banking sector).”

[Info with recognition to Reuters]

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