Company boards crucial in shift to risk-based supervision

The insurance industry has evolved during the past three decades, from one where the insurance contract was central to all aspects of the business, to one where finance, marketing and risk management are equally important. Insurance regulators have responded to this complexity by moving from compliance-based supervision to risk-based supervision – a response that requires subtle shifts in stakeholder responsibilities. “We are now putting more emphasis on the boards of insurance companies, their advisers – meaning actuaries and auditors – and also their management, to make sure that risk analysis is carried out and that proactive steps are taken to mitigate risks,” said Israel Kamuzora, commissioner of insurance at the Tanzania Regulatory Authority. He was addressing delegates at Commercial Risk Africa’s Risk Frontiers Southern Africa conference held in Windhoek, Namibia last week. The move towards risk-based supervision is an acknowledgement that problem identification and prevention is far better than attempting to resolve problems. Insurance regulators are therefore turning to actuaries and auditors to provide them with a clearer indication of the financial health of an insurer from a supervisory perspective, rather than a check-box summary of the insurers’ compliance status as was done in the past.hideThis change has ushered in an era of collaborative risk management, featuring both the regulator and the insurer. “For risk-based supervision to be successful and effective, we need to have company boards that have resolved to build and embed a strong risk culture, setting the tone from the top,” said Mr Kamuzora. In this regard, new board members should have a thorough understanding of risk in order to guide the firm in applying effective, enterprise-wide risk management. Hands-on regulators Insurance supervisors are likely to take a more hands-on and intrusive approach to regulation going forward. “You cannot make a good regulator if you disregard compliance, governance and risk,” he said. Regulatory authorities have to bring these three factors together in order to effectively regulate insurers. Intrusive regulation is seen as the only way to address common failings that persist among insurance firms throughout Africa. Despite significant progress in recent years, there are still many examples of slack internal controls at insurer firms. Of equal concern is that many firms show a level of disregard for regulatory, industry and international standards. Insurers and insurance brokers observe the competitive behaviour in their respective marketplaces and are prepared to push the boundaries, justifying this approach with the ‘our competitors are doing it so why shouldn’t we’ argument. Consumer protection remains a major factor in the regulatory debate, due to the information asymmetry between the insurer, insurance broker and the customer. The South African insurance regulator is taking the lead in addressing this asymmetry by building a consumer education component into its new regulatory framework. “Another of the lessons that insurers have been slow to learn is that they are working with other people’s money,” said Mr Kamuzora. “The insurer’s stake of the premium is limited to 8%-10%, with the rest going to pay the insurance premium, commissions, salaries, claims and so forth.” Globally, regulators are attempting to structure models of financial sector regulation that address both post-global financial crisis concerns and consumer protection issues. “Financial stability remains a big concern in South Africa due to the significant interconnectedness in the financial services space,” said Kerwin Martin, head: insurance supervision at the Financial Services Board. He said the local introduction of Twin Peaks regulation, with a separate regulatory authority for prudential and market conduct aspects, would eliminate the risk of conglomerates, with both banking and insurance licences taking advantage of regulatory arbitrage. A single prudential authority would be able to consistently apply Basel standards to banks and IIS and other necessary solvency standards to insurers. Proactive and pre-emptive “The market conduct authority – the future Financial Services Conduct Authority (FSCA) – has a specific mandate to ensure customer protection; but bear in mind that there are some cases where a conduct issue can become a prudential issue and we expect a great deal of interaction between the two authorities,” said Mr Martin. “We have moved from a compliance-based ‘one size fits all’ system of insurance regulation to a forward-looking, proactive and pre-emptive system.” Insurers operating in the South African market can expect both the prudential authority and the FSCA to adopt a more intensive and intrusive supervision function, with a clear focus on governance outcomes. The legislation to create the Twin Peaks structure is already at parliament, with the Financial Sector Regulation Bill likely to come in force early in 2017. Frameworks for microinsurance, insurance groups and reinsurance as well as solvency requirements for insurers will be introduced by way of the Insurance Bill, which is also expected early next year.

Company boards crucial in shift to risk-based supervision

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