2016 Insurance Survey v2

Business
unusual
Financial Services
The South African Insurance
Industry Survey 2016
July 2016
kpmg.co.za
The South African Insurance Industry Survey 2016 | c
Beyond
the ordinary
Video killed the radio star, sang the one-hit wonder band, These are the four factors that must be considered, implemented
The Buggles. and embraced if insurance players want to make a notable
difference in a market, where innovation has not always been at
The song predicted and lamented how technology was the forefront, and the market is becoming more saturated.
changing everything and is often used to suggest a big The landscape is changing and this must inspire to innovate and
shift underway in an industry1. We are all familiar with the to conduct business unusual.
diffusion of innovation model but why are there only
2.5% innovators and 50% remain behind the curve? Diffusion of Innovation Model
Typically there are four factors that amplify innovative
100
disruption in a sector: 90
a new entrant refocuses on customer needs to address 80

70
an existing issue with a product or service; 60
50
34% 34%
the new entrant usually uses a technology enabler to 40
30
gain the advantage over the incumbent; 20 13.5% 16%
10 2.5%
the nature of the disruption was not foreseen and so 0
regulations are absent or insufficient; and Innovators Early adopters Early majority Late majority Laggards
the availability of well-funded investors with an appetite Essential marketing models http://bit.ly/smartmodels
for risk2.
1
http://www.702.co.za/features/110/business-unusual 2 http://www.702.co.za/features/110/business-unusual
The South African Insurance Industry Survey 2016 | 1
Introduction 3
contents
Sold on SAM A message for the uninitiated 5
ORSA requirements and global insights 11
South Africas weak economy and its impact on the insurance industry 21
Is Tax Risk Management important 27
Psychology and behavioural economics of insurance 31
Disruptions in the reinsurance market 41
Takaful same same but different 45
The impact of blockchain on the insurance industry 49
Would the application of the premium allocation approach result in business as usual? 53
Will IFRS 9 impact insurers 69
The changing face of financial advice (RDR) 75
Privacy and wearable technologies a POPI dilemma? 79
KING IV the new frontier in governance for South Africa 83
Regulatory and reporting requirements Insurance and Banking Sector 87
Short-term Insurance Industry results 94
Long-term Insurance Industry results 116
Reinsurance Industry results 136

Epilogue 153
2 | The South African Insurance Industry Survey 2016
ALL FAILURE IS FAILURE

TO ADAPT, ALL SUCCESS
IS SUCCESSFUL ADAPTATION.
Max Mckeown
Antoinette Malherbe
Director and Editor,
Financial Services
Tel: +27 83 458 8484 Introduction
Insurance Survey 2016
Email: antoinette.malherbe@kpmg.co.za
It is with great pleasure and pride that the 2016 KPMG Allocation Approach try to read this article first thing in
Gerdus Dixon
Director,
Insurance Survey is unveiled. In this edition, we were
determined to match the spirit of innovation, which has
been embraced by the local insurance industry during
the morning with a strong cup of coffee. It is also time to
face your IFRS 9 fears our IFRS 9 article does an impact
analysis for the insurance industry.
National Head of Insurance the year.
Tel: +27 82 492 8786 If blockchain is keeping you up at night, and you dont
Email: gerdus.dixon@kpmg.co.za We have included 14 pieces of thought leadership that know where to spend your Bitcoins, we might have some
specifically focus on various aspects touching the industry. answers for you. Have you ever considered while pacing up
Our connectivity with the market has ensured that the and down what actually happens to the information on your
thought leadership that we share in this issue is topical, Fitbit and who has access to it? Then take a breather and
interesting, inspiring and most importantly, what you want enjoy the article on this topic.
to read. Whether you are interested in business, regulatory,
As always, we have included and analysed the financial
tax or accounting topics we have it covered in this edition.
results for the year gone by for the short-term insurance,
Our regulatory topics this year focus on aspects around long-term insurance and reinsurance industries.
SAM, RDR and the ORSA. We explore the benefits of SAM
We have made every effort to ensure that the content in
for the industry, we evaluate some global insights around
this publication is fresh, relevant and thought provoking.
the ORSA and we discuss the changing face of financial
We trust that you will find this publication insightful and
advice.
we invite you to contact us should you require any additional
On the accounting side, we explore the impact of IFRS 4 information or assistance.
Phase 2 by ways of a detailed example using the Premium
LIFE IS NEITHER STATIC NOR UNCHANGING.
WITH NO INDIVIDUALITY, THERE CAN BE
NO CHANGE, NO ADAPTATION AND,
IN AN INHERENTLY CHANGING WORLD,
ANY SPECIES UNABLE TO ADAPT IS
ALSO DOOMED.
Jean M. Auel
Sold on SAM:
Derek Vice
Senior Manager,
Financial Services
Tel: +27 82 711 2519
A message for the uninitiated
Email: derek.vice@kpmg.co.za One of the pleasures of being an auditor and consultant is the exposure to a cross section
of the insurance industry from large personal lines and commercial specialists to small
and niche players, we get to meet them all. One thing that has stood out from these
interactions is the multitude of opinions regarding the necessity for Solvency Assessment
Management (SAM).
Many industry players still see it should be inspiring confidence in SAM is immediately increasing the
compliance with SAM as a tick-box the insurance sector and empowering certainty of those future cash flows,
exercise, and some as a waste of progressive change. In my view, SAM translating to more value. Quite simply,
resources. is beneficial to the policyholder, the SAM is making the South African
shareholder, management, the board insurance industry more valuable to
I will be honest - I am a big fan!
and the employee it is obviously the investor.
Having grown up in the changing
advantageous to us as the consultants,
world of regulatory reporting, having You might fear that all this emphasis on
considering the costs associated with
experienced the transition from risk will result in a reduction of returns.
SAM implementation.2
the arbitrary 10 percent capital In the classic adage, higher risk is
requirement and seven percent short- For the investor: risky investments - associated with a greater probability of
term incurred but not reported (IBNR) made less risky a higher return.3
provision, to risk-based capital and best On 31 December 2015 the market
estimates, I think we are operating in capitalisation of the JSE listed This is the function of the Own Risk
a better regulatory environment than insurance sector securities was and Solvency Assessment (ORSA),
ever before. Although some people R517.3 billion. The value of these which should be examining the
have described SAM as poppycock.1 investments is a function of the future risk and return payoff in light of a
I would like to share my reasons for cash flows - normally in the form of predefined risk appetite. An insurer
believing that, although SAM might not dividends - and the certainty of those intentionally underwrites the right
be Super, Amazing and Magnificent, future cash flows. By managing risk, risk and manages, mitigates or avoids
1
Creating a blind bureaucracy to lead insurers over the edge www.timeslive.co.za
2
By the way, according to the Economic Impact Study (EIS) the industry estimated SAM implementation would cost around R2.5 billion.
3
www.economictimes.com
unwanted risk - such as catastrophe risk or poor This is useful information, especially as many of
credit risk. these risks are things that can be managed. Such
management can be achieved with reinsurance
Appropriate risk disclosure allows the investor
or, for market risk, other risk mitigation techniques
to understand the type of risks their funds are
such as derivatives.
exposed to, this allows for a more conscious
allocation of resources within the market. For the foreign investor: not so foreign after all
Furthermore, appropriate measures of performance With the looming risk of a credit rating downgrade
against a risk appetite will reveal to the investor for South Africa, attracting foreign direct
whether their funds are being managed within the investment is proving to be difficult. It would be
promised structures. even tougher if South Africa were lagging the
IT IS NOT THE STRONGEST OF

QIS 3 results indicated that 61 percent of the international community in terms of insurance
market risk in the balance sheet of non-life insurers regulation. Similar risk-based capital regimes are
arose from equity on their balance sheet (with being developed in most of our direct competitors
THE SPECIES THAT SURVIVE,

market risk contributing about 46 percent of the in the international community Brazil, Russia,
basic solvency capital requirement). Assuming this India and China. The SAM framework aligns to best
was an individual insurer, the investor could now standards of international prudential regulation.
NOR THE MOST INTELLIGENT,

ask some meaningful questions: Each working group has compared the topic
of their team to the practices of the European
If I am investing in a short-term insurer, is it Union and, in many cases, to the practices of the
really to get equity exposure?
Why is market risk such a significant component

of my investments?
Canadian and Australian authorities, to name a
few. Solvency II equivalence is on the cards and is
essential to maintain foreign investor confidence in
BUT THE ONE MOST
Am I investing to get exposure to underwriting
risk and the associated returns?
the sector.
For the investor: the economic impact

The economic impact study (EIS) performed by
RESPONSIVE TO CHANGE.
Perhaps I am happy to let my non-life insurer be
the Financial Services Board (FSB) regarding the
an asset manager, but do they have the correct
credentials to perform this function?
implementation of SAM had the following to Charles Darwin
say about the economic impact: the study
This kind of detailed risk analysis is becoming suggests that the implementation of SAM is likely
mainstream under SAM. SAM should be to lead to better risk management at a direct cost
fundamentally changing the way we expect that is small when seen in context of the size of
insurers to present their results. Did that 41 the South African insurance industry. This additional
percent catastrophe risk exposure produce an cost to the insurance industry will lead to a
equal percentage of my return and, if not, why are neutral to slightly positive impact for the economy
we not offloading that risk to companies as a whole, while also contributing to a more
that specialise in managing those risks? sustainable and stable financial sector.4
4
Solvency assessment and management economic impact study from www.fsb.co.za
The estimated ongoing cost of SAM for the works to ensure that financial regulators regulation should go some way to restoring have not been doing this all along.
insurance industry is around R500 million act in the public interest, shows that the confidence in the promises of insurers. According to the Economic Impact Study,
per annum. This equates to less than 0.1 opinion of many educated professionals Survey responses clearly indicate that
For the director, manager and employee:
percent of the insurance sectors annual is that regulators were not prioritising implementation of Pillar II requirements is
inspiring confidence
revenue.5 this. The Social Market Foundation paper, seen as having the greatest benefit.11
Nobody likes a nasty surprise. However,
titled A confidence crisis: restoring trust
For the policyholder: keeping promises a nasty but considered surprise is not so Results analysis: best estimates and the
in financial service,9 supports this concern
Despite the obvious benefits for the bad. That sinking feeling stops when you 99.5 percent confidence level
from a United Kingdom perspective.
shareholder and investor in the South realise you have a plan in place to deal Another positive development that SAM is
In Spain, there were specific protests
African insurance industry, these are with it catastrophe cover, professional bringing to financial reporting is the use of
about the barbarity of the financial sector.
merely an unintended consequence. From indemnity cover, data backup tapes, letters best estimates and capital to manage risk
Whether one deems these credible or
the outset, the intention of the Financial of credit, guarantees, security. These all rather than prudent reserving.
not, it is clear that amongst markets with
Services Board has been the protection of help directors, managers and employees
vast social differences, there are concerns It has become a standard practice in the
policyholders and beneficiaries.6 sleep better at night.
about the trustworthiness of the financial South African insurance industry to include
The Economic Impact Study reported, sector. A key aspect of SAM is the risk significant levels of prudence in the IFRS
the vast majority of respondents indicated management system, which should (published) accounts. In the long-term
For the policyholder the requirements
a view that SAM will improve policyholder comprise the totality of strategies, space, this includes the zeroisation of
related to independence at the C-level,
protection.7 Some industry commentators policies and procedures for identifying, negative reserves as well as compulsory
as well as the control functions, are key
have suggested that the robustness of assessing, monitoring, managing, and margins. In the short-term space, this
aspects that act in the public interest.
the South African insurance industry is reporting of all reasonably foreseeable has included claims reserves held at 75
Whether it be an independent challenge
evidenced through the lack of market current and emerging material risks to percent sufficiency or even higher, as
to gung-ho management, critical actuarial
failures following the 2008 crisis. In my which the insurer may be exposed.10 well as the inherent prudence in holding
analysis of proposed schemes or assurance
mind, this is akin to arguing that because Furthermore, this should be documented in unearned premium reserves at one
over processes all these things act in the
my office did not burn down in the last clearly articulated policies. The operational hundred percent sufficiency, instead of at
interest of policyholders.
fire I do not need to use the latest fire effectiveness of these should be assured a level which represents the best estimate
protection. This view seems to ignore the Many of these practices were not regularly by the mandatory internal audit of the future cash flows associated with
numerous market failures experienced this widespread in the insurance industry function. The completeness of these that business. SAM is largely doing away
century.8 before the release of Board Notice 158: should be assessed by the independent with this excessive prudence as seen in
Governance and Risk Management governance structures. Awareness of SAM the QIS 3 results. The available capital
The 2008 credit crisis has undoubtedly
Framework for Insurers. for the life industry under QIS 3 was 64
shaken the publics confidence in the throughout the organisation is required.
percent higher than on the existing regime.
financial sector as a whole. A significant Insurance is a promise of compensation for Consequently, employees, management
Furthermore, the available capital for the
portion of public opinion in South Africa specific potential future losses in exchange and directors should be reassured under
non-life industry was 54 percent higher.12
is informed by the views of the Western for payment. Much like for investors, SAM. By including emerging risks, this
media. Movements like Occupy Wall Street a reduction in the risk associated with clearly forces the risk committee (and For anyone interested in the performance
have highlighted this lack of faith and this promise increases the value of the others) to consider what is not already of an insurance company, the removal
targeted the financial services industry as promise. Effectively we all have real and encompassed, to try to anticipate the of this prudence allows for a cleaner
the cause of significant financial setbacks contingent assets on our balance sheets unexpected. With the level of comfort understanding of the actual position and
in the world. The existence of the lesser- related to the promises of life and non- this provides, it is hard to believe that performance for the period as well as
known offshoot Occupy the SEC, which life insurers. The changes in prudential large public interest entities like insurers expected future cashflow.
5
Solvency assessment and management economic impact study from www.fsb.co.za 10
Part 4: BN158 of 2014: Governance and risk management framework for insurers from www.fsb.co.za
6
SAM road map 11
Solvency assessment and management economic impact study from www.fsb.co.za
7
Solvency assessment and management economic impact study from www.fsb.co.za 12
SAM SA QIS 3 Report from www.fsb.co.za
8
Facing Facts: Things Can and Do Go Wrong KPMG Insurance Industry Survey 2013
9
www.smf.co.uk
The entire balance sheet is now balance sheet, which is potentially a

presented on an economic basis, which more realistic view of the companys
attempts to present the true position of position and performance for the period,
the company. in comparison to the current (prudent)
IFRS result.
SAM still maintains risk margins but
these are embedded in the economic The risk of compliance
balance sheet view and represent Despite my general optimism, I am not
a part of technical provisions in order convinced that the various stakeholders
to ensure that the value of technical discussed above are sufficiently educated
provisions is equivalent to the amount with regards to SAM to exploit these
that insurers and reinsurers would be benefits. Furthermore, treating SAM as
expected to require in order to take over a compliance exercise increases the risk
and meet the insurance and reinsurance that it will add no value. Hasty reporting
obligations.13 These amounts are an to the board will not be useful and is
economic margin not a prudence margin. likely to discourage further interest.
Tick-box reporting to the shareholder
This is partially a result of the current
will not promote meaningful shareholder
IFRS 4: Insurance Contract standard,
engagement. Treating SAM as a low
which is largely a disclosure standard
priority project for employees will
and provides very limited guidance
encourage them to minimalise the effort
on the measurement of insurance
they take to embed it properly in the
technical items. The standard even allows
organisation. Worst of all, treating risk
excessive prudence to be included
management as a checklist is a sure
in the IFRS accounts.14 This excessive
way to waste money and expose the
prudence is included in many cases as
organisation to threat.
an uncertainty margin. Where the current
industry interpretation of IFRS has taken Conclusion
the view that it is better to include this As I said at the outset I am a big fan of
uncertainty in the technical provisions, SAM. I think the benefits for the industry
the SAM view includes an allowance far outweigh the cost. Personally, I am
for this prudence in capital. What is happy to take a less than 0.1 percent
interesting is that once this uncertainty is increase in my premium to claim
allowed for, the free surplus is 25 percent associated benefits such as increased
and 41 percent lower for life and non-life confidence in the industry, enhanced
on the SAM basis than the current basis. reporting as well as vastly improved
Admittedly, SAMs prudence is based on governance and risk management.
a one in two-hundred year event and is For all insurers that continue to treat SAM
therefore at a much higher confidence as a compliance exercise this will remain
level. Either way, the result is a SAM the case.
13
TP 28.2 QIS 3 Technical Specifications
14
IFRS 4: Insurance Contracts, paragraph 26.
TO GIVE REAL SERVICE, YOU MUST
ADD SOMETHING WHICH CANNOT
BE BOUGHT OR MEASURED WITH
MONEY, AND THAT IS SINCERITY
AND INTEGRITY.
Douglas Adams
ORSA requirements
Susan Hunt
Associate Director,
Financial Risk Management
Tel: +27 71 686 4968
and global insights
Email: susan.hunt@kpmg.co.za
The Own Risk and Solvency Assessment (ORSA) is defined as the entirety of the
processes and procedures employed to identify, assess, monitor, manage and report the
short and long term risks an insurance undertaking faces or may face and to determine
the own funds necessary to ensure that an insurers (and groups) overall solvency needs
are met at all times and are sufficient to achieve its business strategy. It is therefore an
internal process undertaken by an insurer (group) to assess the adequacy of its own risk
Joana Abrahams
Manager,
management practices as well as current and prospective solvency positions. This needs
to be done under both normal and severe stress scenarios.
Tel: +27 82 450 1344 ORSA is a key component of Solvency
Email: joana.abrahams@kpmg.co.za Assessment and Management (SAM): The structure of the report is, important, not least as a
a risk-based regulatory regime for the
means of ensuring that the analytical framework is clear.
prudential regulation of long-term
and short-term insurers and reinsurers in Good reports include a clear summary; highlight the main
South Africa. By 31 August 2015, messages and issues; are not too long; and clearly sign-
South African (re)insurance companies
were required to submit a 2015 mock ORSA post supporting documentation.
report to the Financial Services Board (FSB). Letter from the Prudential Regulatory Authority (the UK
Insurance companies (groups) will again be
Megan Li
Junior Consultant,
required to submit an ORSA report by latest
30 September 2016 (or 30 November 2016,
Regulator) to the industry dated June 2015
if approval is granted).
Tel: +27 82 389 3186
Email: megan.li@kpmg.co.za
Governance of the ORSA Progress of ORSA Requirements

Position Paper (PP) 34 v5 states that:
tool,
The ultimate accountability of the ORSA resides tegic
r a t e d , Stra
with the Board who should approve the ORSA. Integ -add
When evaluating the ORSA, The Board and Senior Value
Management should:
tool
liance
Development
assess the adequacy of the current and future omp
solvency position; Silos, C
ensure that the ORSA is embedded in the business

and decision-making processes; and
ensure that the ORSA assumptions, inputs and
calculations are accurate and complete, through
direct review, challenge and reliance on the 2015 2016 2017
governance process.
Submission date for Submission date for Full ORSA compliance
The ORSA should be appropriately evidenced and
first mock ORSA: updated mock ORSA: implementation date:
documented.
31 August 2015 30 September 2016 1 January 2017
The ORSA document should be subject to an
The aims of this ORSA The following are Compliance with all
independent assessment either internally (e.g.
are: additional requirements relevant Guidelines (PP
Internal Audit) or externally and carried out by persons
Compliance to most of for the Mock ORSA 107 v6) will be required.
different to those performing the ORSA.
the 22 Guidelines (PP 2016*: Additional requirements
107 v6); Document for 2017 cover these
ORSA requirements 2015, 2016 and 2017 Design and conclusions and areas*:
The full set of ORSA requirements and guidelines are implement rationale; Board challenging
set out in Position Paper (PP) 107 v6. Compliance with underlying MI (Management and signing off on
the full set of ORSA principles and guidelines will be processes Information), Use assumptions and
required when the SAM framework is implemented. and produce and Embedding; methodology;
This is currently scheduled for 1 January 2017. documentation Deviations in risk Out of cycle ORSAs;
to comply with profile versus the and
Insurers were encouraged to make progress with a subset
the applicable SCR calculation; and Independent
of these requirements in 2015, and are urged to continue
requirements; and Requirement for a reviews.
to progress towards full compliance with the additional
To complete the Group ORSA.
requirements in 2016. Further requirements for the
first full ORSA cycle If insurers do not yet
Updated Mock ORSA were released on 31 March 2016.
and use the lessons comply, the amount
While not unexpected, the requirements are significant in
learnt to improve of work still to be
terms of the time and effort involved. The bar expected by
future cycles. completed is significant
the FSB is a lot higher than last year and will again be set
and complex.
higher next year as highlighted in the diagram to the right.
*Refer to the next page for the detailed updates.
2016 Updated mock ORSA requirements assumptions underlying the SCR calculation on a
Most of the additional requirements for the 2016 qualitative basis and quantify the significance of
ORSA cycle are onerous and will necessitate a deviations. Many companies have adopted the
significant amount of consideration and planning Standard Formula as their ORSA capital basis.
to deliver:
KPMG view: Regardless of the basis chosen
Paragraph 1.34g states that the ORSA report (SCR or own Economic Capital basis),
should document details on the conclusions the exercise to meet compliance with
and the rationale for them from the assessment these requirements or to demonstrate the
of the continuous compliance with the appropriateness of the chosen basis is a
requirements of regulatory capital and technical technical exercise and will require a large
provisions. amount of work from technical experts.
This needs to be thoroughly understood and
KPMG view: Insurers should understand
planned for.
what this entails and how close their 2015
ORSA was to enable this, what conclusions Guideline 16: Where only solo entities
were made and what additional work is produced an ORSA for 2015, for 2016 a Group
required for 2016. ORSA is also required for groups. If the
approach chosen was to only submit a group-
Paragraphs 1.35 to 1.38 cover Management
wide ORSA, for 2016 groups can still assume
Information (MI), embedding the ORSA into
that they have a dispensation to only produce
business decisions and demonstration of the
a group-wide ORSA for regulatory compliance
Use Test.
purposes.
KPMG view: Insurers should have already
KPMG view: If insurers chose to produce
designed ORSA MI, or have done so by
a group-wide ORSA only, they will need
the end of Q2 2016 at the latest, to allow
to ensure that the report also covers all
delivery and implementation into MI cycles
requirements for solo reporting and have a
from Q3 2016.
back-up plan in the event that they do not
Paragraph 1.38 further states . If the insurer get dispensation for 2017. In addition, local
(group) considers that the internal reports have entity management should ensure that
appropriate levels of details also for supervisory their ORSA reporting is adequate to meet
purposes then the same reports may be effective risk management and business
submitted to the supervisor. decision making regardless of the approach
chosen.
KPMG view: In an end state this will be a
best practice approach where effective risk Paragraph 1.106 is a requirement for the 2016
management and business decision-making mock ORSA and is relevant to internal model
is the primary objective and compliance users and so is not applicable to most SA
with regulatory requirements an outcome. insurers.
Paragraphs 1.73 to 1.83 require that insurers

assess deviations from its risk profiles and the
2017 ORSA requirements Guideline 10: the assessment of continuous

Category Considerations
Additional requirements for 2017 cover areas compliance with the regulatory capital
such as Board challenging and signing off on requirements should include, at least, an Risk We considered the robustness of the risk
assumptions and methodology, out of cycle ORSAs assessment of potential future changes in the management management process and how it is linked to the
and independent reviews. The full list of additional risk profile under stressed situations; the quantity system ORSA together with the roles and responsibilities
requirements is set out below: and quality of its own funds as well as the of the Board and Senior Management.
composition and changes of own funds across
Paragraph 1.27 and 1.28: Board and senior Link to business We explored how well the ORSA process was
tiers over the business planning period.
management are expected to: plan / strategy* integrated with the business planning and strategy
Guideline 11: the actuarial function should setting processes.
challenge the assumptions behind the
provide input concerning the continuous
calculation of the SCR to ensure they are Risk appetite and We examined the spectrum of risk appetite and risk
compliance with requirements on the calculation
appropriate with regards to the insurer's risk tolerance tolerance statements and how these interlinked.
of technical provisions and the risks arising from
risks; and
this calculation. Material risk We analysed the spectrum of risks, both qualitative
use the insights gained from the ORSA assessment and quantitative, which insurers (groups) consider
Guideline 14: the insurer should perform the
process to approve long and short term (qualitative and to be material to the business.
ORSA at least annually and should perform a
capital planning. quantitative)
non-regular ORSA if the risk profile changes
Paragraph 1.33: independent assessment should significantly. The insurer should justify the Assessment We looked at how and over what time horizon
include an assessment of the ORSA process and adequacy of the frequency of the assessment of solvency insurers (groups) assessed own solvency position
whether the ORSA policy has been complied and demonstrate that the ORSA is embedded in (solvency needs and needs together with which metrics were being
with. the business and used in strategic decisions. and capital used.
Paragraph 1.34 h) and m): the ORSA report South Africa benchmarking projections)
should document the following respectively: For many insurers, the 2015 mock ORSA cycle Stress testing We examined the type of stress and scenario tests
would have been the first or second cycle. For the and scenario performed by insurers and the robustness
Deviations between the insurers risk profile
largest insurance groups in South Africa, 2015 was analysis of underlying assumptions and knock-on effects.
and the SCR assumptions as well as how the
the third or fourth iteration of the ORSA. Our view
insurer has reacted or will react to significant Use in decision Where available, we considered how the ORSA
is that most of the largest groups already have
deviations. making* output was used in business decisions.
well developed ORSAs. However, on average the
The findings of the independent review of the industrys ORSAs are still being developed.
Out-of-cycle Where available, we explored which common
ORSA, together with the Board and Senior
KPMG in South Africa has analysed over 15 mock ORSA* triggers would initiate an out of cycle ORSA and
Managements responses to these findings.
ORSA reports in the market, covering both life and how well defined these triggers were.
Paragraph 1.54: an insurer is expected to non-life insurance entities and groups of various
Documentation We explored the overall quality of the ORSA reports
demonstrate the appropriateness of the standard size and complexity. Though this represents only
and identified good practices.
formula for the risks inherent in its business and a small portion of the insurance market in South
its risk profile. Africa, we believe that it is across a representative Group-wide Where applicable, we considered the extent of
sample of the South African market and therefore coverage coverage of both regulated and non-regulated
Paragraph 1.55: submitted and approved SCR
the conclusions drawn should be reasonably entities within the group, the emergence of risk
undertaking-specific parameters have to be the
representative of the industry on average. from these entities and how the solvency needs
same as those used in the overall solvency needs
were aggregated at group level.
assessment.
*Not a requirement for the 2015 mock ORSA.
2015 Mock ORSA reports - KPMG South Africa assessment results
Lagging Developing Good Leading
Risk management system
Where we expect the top insurers to be positioned

Link to business plan / strategy *
Risk appetite and risk tolerance
Material risk assessment (qualitative

and quantitative)
Assessment of solvency (solvency

needs and capital projections)
Stress testing and scenario analysis
Use in decision making
Out-of-cycle ORSA*
Documentation
Group-wide coverage
Average rating of the South African industry for the first mock ORSA
The following rating scale is used:

EXCELLENT FIRMS DON'T
Lagging
Compliance focus/led
Developing
Moving toward value add

Good
Value add
Leading
Leading edge sophistication

BELIEVE IN EXCELLENCE -
Benchmarking results
ONLY IN CONSTANT
Overall, our view is that on average South African
companies are LAGGING in the areas of:
In most areas the ORSAs are on average
DEVELOPING which is expected as the 2015 cycle
represents first or early iterations. There is still a
IMPROVEMENT AND
linking the ORSA to the business plan and strategy;
using ORSA in decision-making;

significant amount of work to be carried out by all
firms. This is consistent with observations in other
countries - UK and Canada - in early ORSA cycles. On
CONSTANT CHANGE.
out-of-cycle ORSA; and
average, material risk assessment is an area where
group-wide coverage. companies are moving from DEVELOPING to GOOD. Tom Peters
Below, we outline some of the leading and lagging practices observed:

While some of the leading practices
Observed leading practices from KPMG benchmarking Observed lagging practices from KPMG benchmarking
across themes are highlighted, it
is important to note that no single
ORSA is an integral part of business strategy and planning. ORSA process is clearly disjoint from strategy setting and the company was a leader across all the
business planning process. assessment criteria, likewise, no single
company was lagging across all the
Risk appetite and tolerance statements are expressed in Risk appetite and risk tolerance limits only cover capital targets set
assessment criteria.
terms of at least both Capital and Earnings Volatility and only at company level with the solvency target not being justified in
these are cascaded down to relevant sub-risks. Some terms of the risk profile. Some still measure the target in terms of Feedback from the Regulators
attempt is made to set tolerance levels for material current statutory capital measures. SAM is principles based, so a firm
qualitative risks. needs to consider how to meet
compliance in a way that best works
Material risk assessments cover both quantitative risks not Material risk assessment is limited to quantitative risks covered by
for the firm to achieve business value.
included in the standard formula - such as liquidity risk - as the standard formula.
Our view is that for most companies,
well as qualitative assessments with a clear description of
the focus of the first mock ORSA
control measures in place for each material risk identified.
report was to design and implement
Stress and scenario tests are well articulated and cover the Stress and scenario testing is limited to a historic point in time underlying processes and produce
business planning projection period. Better ORSAs also - usually the chosen valuation date. No consideration is given to documentation to comply with the
consider knock-on effects in addition to the stress/scenario reverse stress testing. applicable requirements. They should
test. be used as a lessons learnt cycle by
individual companies to improve future
ORSA projections are evidenced in business decisions, for There is no evidence of the ORSA being used in decision-making, cycles. Particular attention should
example in the dividend setting strategy. ORSA results are which is to be expected where the mock ORSA was the result of be given with respect to ensuring
used in an assessment of future capital needs and as an the first ORSA cycle. ownership, engagement and challenge
input to capital planning. from Senior Management and the
Clear articulation of when an out-of-cycle ORSA would be The need for and possible circumstances for performing an out-of- Board so that they clearly understand
required. cycle ORSA is not covered in the ORSA report. and can affect their obligations once
SAM is live.
Included an executive summary which covered business The process for identification, assessment, and prioritisation as
planning, strategy setting and key results of the ORSA well as monitoring and reporting of risks is theoretically described,
assessments. sometime as a future state.
The risk management system and how the ORSA process Documentation is either not clear, accurate or complete.
fits in the overall ERM framework is summarised. Roles Conclusions reached are not justified and can therefore not be
and responsibilities for the various steps in the process are challenged at Board level.
clearly outlined.
Group-wide coverage does not focus appropriately on risks

emerging from group exposures. ORSAs generally do not
sufficiently consider risks associated with non-regulated entities.
We expect Non-Executive Directors

to pose tough questions to executive
management, based on robust
MI that explains what is really happening
to the business; to the firms risk profile;
to its underwriting and reserving controls;
its capital requirement and what, if any,
innovation the firm is taking in reinsurance
or new product propositions.
Chris Moulder*
The FSB has provided high level verbal feedback to some

firms and is expected to provide high level individual
written feedback in due course. No overall industry
feedback on quality has been provided to date. We expect
that the FSBs views on ORSA will continue to evolve as
the industry ORSAs improve. So it can be expected that
the bar will rise each year as ORSAs improve. What may
have been sufficient one year may not be adequate the
next. Constant assessment, feedback and improvement
loops are required.
Feedback from Regulators in other countries can provide

useful guidance to South African companies, here follows
a summary of some recurring themes.
*Quotes taken from Current regulatory issues and PRA expectations in current market conditions speech by Chris Moulder on 04 April 2016.
Feedback from UK, Canada and Australia
Country Feedback from regulators Country Feedback from regulators
UK Have a good ORSA report with a good Australia The report should be sufficiently complete on
structure: a standalone basis, with minimum reference
to other documents.
include a clear summary;
highlight the main messages and issues; Clearly describe the nature of independent
not too long; and review including purpose, components to
clearly sign-post supporting be reviewed, planned timing and roles and
documentation. responsibilities.
Provide sufficient evidence of appropriate
Feedback provided Feedback provided Clearer risk coverage and description
stress and scenario testing.
by the Prudential by the Australian including how group-wide policies are
Regulation Authority Include more detailed post Solvency II Prudential Regulation tailored for application to individual
(PRA) in June 2015. numbers and analysis in forward looking Authority (APRA) in institutions.
assessments. March 2013.
Provide more detail on capital projections
Other important points: and/or development of projections and
ORSA policy separate from ORSA report. assumptions, including:
Evidence Board involvement, sign-off and
Reasons for the chosen capital mix and
embedding.
triggers for review of capital mix.
Consider all material risks appropriately.
Details of capital sources, including
Group ORSAs must cover each entity in
availability and fungibility (a measure of
sufficient detail.
how easy it is to transfer capital between
Evidence continued adequacy of the
different legal entities within the group).
Internal Model.
Demonstrate appropriateness of standard
Stress testing should include wider
formula for the businesss risk profile.
scenarios, reverse stress testing and more
Board involvement.
Country Feedback from regulators
Canada Establish a robust target Leverage Ratio and

risk-based capital targets as part of the capital
planning process.
Include a timeline or an explanation should

the institutions Board-approved capital
target be lower than the International Capital
Adequacy Assessment Process (ICAAP)
capital requirement.
Feedback provided
by the Federal Prudent capital management must take into
Office of the account different capital measures.
Superintendent of
If risk capital allows for tax benefits, the full
Financial Institutions
impact on available capital must be included
(OSFI) in August
under stress scenarios.
2015.
The quality of ORSA reports are expected to
improve over time, specifically in qualitative
assessment and risk quantification.
Concluding remarks
There is still a significant amount of work to be executed by all firms on their
journeys to fully meet ORSA requirements and enabling derivation of value from
the ORSA process and its outcomes.
A new, dynamic risk management centre piece,
The FSB requires that all insurers must have their ORSA reports independently
reviewed. It is good practice to get it done in the early cycles and care must
designed to capture key risk and solvency considerations -
be taken when deciding who will perform the independent review. Currently, I refer, of course, to the ORSA. And these are just some
most firms use their Internal Audit function to perform the reviews, but the
of the myriad developments the industry has had
reviews can be performed by external parties. The benefit of choosing an
external reviewer may mean that companies are able to draw on a broader to embrace Chris Moulder*
knowledge base and better understand the ORSA best practice in the industry.
This is particularly important as focus changes from a compliance exercise to a *Quotes taken from Current regulatory issues and PRA expectations in current market conditions speech by Chris Moulder on 04 April 2016.
strategic value add to the business.

South Africas weak economy

Christie Viljoen
Manager, and its impact on the
insurance industry
Tel: +27 63 682 0217
Email: christie.viljoen@kpmg.co.za
South Africas economy is characterised The moribund economy will grow by less than 1 percent this
year, the worst performance since the 2009 recession. South
by slowing growth, stubborn inflation and
Africa was until recently known as the continent's second-
macroeconomic imbalances, commented largest economy, but data released by the International
the South African Reserve Bank (SARB) Monetary Fund (IMF) in mid-April suggests that it is now
Lullu Krugel
Director,
in its Monetary Policy Review (MPR),
placed third behind Egypt when considering the international
standard of gross domestic product (GDP) in US Dollar terms.
released during April 2016. The central bank Fortunately, fourth-placed Algeria and fifth-placed Morocco
attributed the situation to three relatively are still far behind.
Tel: +27 82 712 4049
Email: lullu.krugel@kpmg.co.za persistent problems, namely: Economists prefer to look at an economy from the
perspective of five factors: household spending, investment,
- High levels of household debt; government expenditure, exports and imports - GDP data is
calculated by quantifying these factors. When considering
- Electricity supply constraints; and low consumer confidence, weak business confidence,
a tightening of the fiscal purse and a heated political
- An unfavourable global economic environment, low international commodity prices, and the
adverse effect of a weak Rand on the import bill, it is not
environment.
surprising that the South African economy is stuck in a rut.
Added to these issues are several short- The First National Bank (FNB)/Bureau for Economic
lived shocks, e.g. strikes and the current Research (BER) Consumer Confidence Index recorded a fifth
consecutive quarter of negative consumer sentiment during
drought. Q1 2016. It was also the 13th out of the last 16 quarters that
the index was below a reading of zero, pointing to With this in mind, gross fixed capital formation is
more consumers being negative than positive about projected to contract by more than 1 percent this year,
their financial and economic positions over the past which will undo most of the 1.4 percent expansion
four years. This negative sentiment is also reflected recorded during 2015.
in quarterly business confidence data and actual
The Medium-Term Budget Policy Statement (MTBPS)
household spending data.
and Budget Speech delivered in October 2015 and
The reasons behind weak consumer sentiment February 2016 respectively, jolted government
includes high levels of household debt (+/- 78 percent expenditure into a more austere direction. State
of disposable income), persistently high unemployment finances have already been under pressure since
rates (approximating 25 percent), rising consumer price the global financial crisis, with fiscal deficits - and an
inflation and an associated increase in interest rates, accompanied accumulation in public debt - used to help
as well as a downbeat perspective of the countrys stimulate the local economy. Combined with political
economy and politics heading towards 2017. These issues and a weak economy, this has contributed
IF YOURE NOT WILLING factors are forcing consumers to curb their expenditure
on non-essential goods and to take on a conservative
approach to their finances in general. Real household
towards the South African sovereign credit rating
nearing a downgrade to non-investment grade.
TO RISK THE UNUSUAL, expenditure growth is expected to slow from 1.6

percent in 2015 to just 0.5 percent during 2016.
Finance Minister Pravin Gordhan indicated that the
2016/17 budget is focused on fiscal consolidation. He
warned that the government cannot spend money we
YOU WILL HAVE TO SETTLE

The United Nations Conference on Trade and do not have, and cannot borrow beyond our ability
Development (UNCTAD) recorded a near 69 percent to repay. Until we can ignite growth and generate
drop in South Africas net foreign direct investment more revenue, we have to be tough on ourselves. As
FOR THE ORDINARY.

(FDI) during 2015 compared to a decline of around a result, real government consumption expenditure
30 percent for the continent as a whole. One of the will grow by less than 1.5 percent during the current
factors behind this slump is a number of new or (2016/17) fiscal year i.e. below the 2010-15 average of
proposed legislative changes that, analysts say, are 2.3 percent.
weighing on foreign investors confidence in the safety
Jim Rohn of their investments. These include the Promotion and
South Africas export revenues are under pressure
from weakness in global commodity prices. The
Protection of Investment Bill that necessitated the
Economists commodity price index reflects a more
cancellation of several bilateral investment treaties to
than 15 percent decline in US dollar metal prices in
be signed into law early in 2016.
the year ended April 2016. The Rand depreciated by
Business investment - both local and abroad - has since a similar margin over the same period, resulting in
late 2015 been hit by a myriad of other challenges. no real boost to exporters earnings from the weaker
These include an unexpected double change in the currency.
Finance Minister post, deteriorating sovereign credit
At the same time, export-oriented miners and
ratings, stuttering economic growth, a slump in the
manufacturers production costs continue to rise as
Rand to its weakest level on record, as well as political
wage and power tariff increases show no sign of
issues diverting government focus from policymaking
slowing. A key factor in South Africas export success
and implementation (a lack of electricity load shedding
during 2016 will be the health of the Chinese economy.
was a rare positive point).
The premier buyer of goods shipped from South Africa, to return on investment on the JSE.
and a key influence on commodity prices worldwide, the
Exchange rate shocks: Currency volatility associated with
worlds second-largest economy is this year expected to
low economic growth could affect some insurers depending
post its slowest rate of economic growth in 25 years. As a
on where their risk exposure and capital base is situated.
result, the real value of South Africas exports will grow by
For instance, if risk exposure is domestic and (revenue
only around 3 percent during 2016 compared to a 2010-15
generating) capital is located largely offshore, shocks to the
average of 4.7 percent per annum.
exchange rate could have a real and significant impact on
The countrys demand for imports has ebbed alongside investment revenues. Also from an offshore perspective,
a slowdown in economic growth and weakness in the weak confidence in a countrys economy could divert
Rand inflating purchasing prices from abroad. The latter foreign financiers attention away from local companies,
has undone the potential benefit to local consumers of including insurers who might be in need of cash or alternate
weaker global commodity prices. The real value of imports financing.
is expected to expand by 3 percent this year, thereby
Weaker demand: Cash-strapped households and
eroding all of the potential benefit that real exports could
businesses have a weaker ability to fund insurance
have generated in terms of GDP. Were it not for the large
premiums and therefore display a reduced demand for
amount of grains that will have to be imported this year as a
this non-essential product. In turn, insurers will have to
result of drought conditions, import growth could have been
work harder - at a lower rate of profit - to retain existing
smaller.
customers and secure new clients. On a positive note, an
Taking into account the outlook for household spending, increase in price competition could make it a bit easier (i.e.
investment, government expenditure, exports and cheaper) for households and businesses to afford insurance.
imports during 2016, it is unlikely that South Africa will The net effect of this supply-and-demand dynamic will
see any significant employment growth this year. Real however take some time to play out. For insurers, this
disposable income will grow marginally at best and at a rate could imply changes to some of their business models and
significantly below an average of 2.7 percent per annum ownership structures to cope with a weak economy.
seen during 2010-15. This is setting off alarm bells for the
Operating costs: An insurance company is an employer
local insurance industry.
and consumer of goods and services just like any other
The following paragraphs identify eight areas where a weak enterprise would be. In South Africas current context, this
economy could negatively affect insurance companies. implies increases in the cost of labour and electricity above
the consumer price inflation rate, while company revenues
Investment income: Insurance companies make a
might not grow at the same pace. The structure of South
significant portion of their income from investment
Africas labour market and utilities industry does not leave
revenues. During an economic downturn as currently seen
much room to manoeuvre for private companies on the cost
in South Africa, the returns on, for example, shares listed
of workers and energy, resulting in operating budgets being
on the stock exchange are below the long-term trend.
strained by stagflation high inflation and low growth.
While equities do not directly mirror economy dynamics,
many like the Johannesburg Stock Exchange (JSE) are External service providers: Insurers are dependent
very reliant on the health of a few core industries for their on external service providers as part of their package
performance. In a weak commodity price environment, the of services. For example, vehicle repair shops, private
fate of under pressure mining companies remains integral hospitals, and construction companies are all part of the
insurance cycle once customers claim on their risk cover. These companies are Real economic growth (%)
also vulnerable to cost increases associated with labour and utilities, amongst
other inputs. In the case of hospitals, the vast majority of specialised medical
equipment is imported from abroad at significantly higher cost compared to a
year ago due to the weak Rand.
Weather-induced economic weakness: A weak economy could result from

a phenomenon that in itself could put pressure on the insurance industry. In
the case of South Africa during 2016, the countrys worst drought in decades
is playing a role in the overall economic malaise. However, it is also a point of
great concern for insurers due to the failure of crops and some farms in their
entirety. Other adverse natural phenomena e.g. hurricanes, tornados and
earthquakes would shake an economy as a whole and its insurance sector
in particular.
Social unrest: Strain on fiscal finances as a result of the weak economy could 2014 2015 2016 2017
translate into increased unrest in low-income areas where residents are highly
dependent on the delivery of public services (e.g. schools and hospitals) for World United States China
their existence. This, in turn, could translate into protest action, which in the Euro zone Sub-Sahara Africa Nigeria
case of South Africa is too often accompanied by damage to private and public South Africa
property. Escalation into open conflict between citizens and security forces
would deepen this damage and associated insurance claims to repair after the
2014 2015 2016 2017
fact.
Changes in regulation: Economic crises could also result in increased World 3,4 3,1 3,2 3,5
legislative and regulatory burdens for insurers in order for lawmakers to protect Sub-Saharan Africa 5,1 3,4 3,0 4,0
the electorate. South Africas Insurance Bill of 2015 has its origins in the global
financial crisis of 2008-09 that laid bare many of the shortcomings in global United States 2,4 2,4 2,4 2,5
financial regulation. As part of a pact by the Group of 20 (G20) countries to Euro zone 0,9 1,6 1,5 1,6
improve the insurance industrys legal framework, South Africa is responding
with the Insurance Bill of 2015 to the need to align its insurance regulations to Nigeria 6,3 2,7 2,3 3,5
international standards.
South Africa 1,5 1,3 0,6 1,2
A further challenge posed by South Africas current situation is the expectation
China 7,3 6,9 6,5 6,2
that at least one of the three major rating agencies will downgrade the country
to non-investment grade (generally known as junk status) over the coming Source: IMF World Economic Outlook (WEO) April 2016
http://www.imf.org/external/pubs/ft/weo/2016/01/pdf/text.pdf
12 months. Downward pressure on a sovereign rating also places downward
pressure on corporate credit ratings. Insurers (and financial companies in
general) are vulnerable to weaker corporate and sovereign ratings when they
look to international markets for funding. Borrowing costs ranging from
interest rates charged by merchant banks to debt servicing costs on bonds
are influenced by these ratings.
Preparing for the future
The much anticipated Insurance Contracts Standard (IFRS 4 phase II) is expected
to be issued in 2016, with an expected effective date after 2019. Although the
effective date may seem far in the future, insurers should start getting ready to
apply the new proposed measurement model.
KPMG can guide insurers on their IFRS 4 phase II journey, to ensure a smooth
transition to the new Standard. Service offerings include training on the requirements
of IFRS 4 phase II; gap analysis between the current IFRS 4 requirements and
the requirements of the forthcoming Insurance Standard; and guidance on the
development of a project and implementation plan.
All service offerings can be tailored for each insurers business and products.
kpmg.co.za
For more information contact:

Esther Pieterse
Associate Director
T: +27 (0)82 719 5806
E: esther.pieterse@kpmg.co.za
Is Tax Risk Management

Joubert Botha
Director,
Tax Management Services
Tel: +27 83 456 7734
important
Email: joubert.botha@kpmg.co.za Businesses have not always given Tax Risk Management the attention it merits.
There have been a number of developments, both locally and internationally,
that resulted in Tax Risk Management gaining momentum insofar as importance is
concerned.
The profile of tax Stakeholders want to know what is an organisations tax
The profile of tax has become much more visible not only contribution? and what is the organisation giving back
from an investor and board perspective but also from a tax to the country and community in which it operates?.
authority and public perspective. This is even more prevalent Tax transparency has been receiving a lot more airtime in
in South Africa where we have seen a declining economy and South Africa. In the 2016 Budget Speech, Minister of Finance
increased revenue collection targets. There are a significant Pravin Gordhan stated that:
number of taxes that companies are exposed to and the tax
values are enormous. In some cases the tax bill (including
direct taxes, indirect taxes and employees taxes) that an With effect from 2017, international
organisation should manage could be as much as 40% to
agreements on information sharing will
50% of the organisations turnover. This makes the reason
for the heightened interest in Tax Risk Management more enable tax authorities to act more effectively
apparent. against illicit flows and abusive practices
Tax transparency by multinational corporations and wealthy
Tax has acquired moral, ethical and social dimensions that individuals.
are seldom discussed or considered. In particular, there has
been a growing demand by external stakeholders for greater
tax transparency on all levels including the taxes paid and
the way in which taxes are managed within an organisation.
Globally tax transparency has been receiving a lot of Apart from the OECD actions to improve tax transparency, Change in attitude
attention. The OECD Base Erosion and Profit Shifting governments are looking at introducing legislation to The attitudes of governments, regulators and tax
Project states in Action13: improve transparency and Tax Risk Management. As authorities towards tax governance and Tax Risk
part of the measures to progress large business tax Management are changing (and rightfully so). Regulators
compliance, Her Majesty's Revenue and Customs and tax authorities are increasing their scrutiny of the
The Base Erosion and Profit Shifting (HMRC) issued a document entitled: Improving Large approach companies take regarding the management of
(BEPS) Action Plan adopted by the Business Tax Compliance. This document states the their taxes. Minister of Finance Pravin Gordhan stated the
following: following around governance:
Organisation for Economic Cooperation
and Development (OECD) and Group of
To respond to the challenges described The issues around tax, tax compliance,
Twenty (G20) countries in 2013 recognised
in Chapter 1, the Government proposes and tax planning need to be on the
that enhancing transparency for tax
to introduce a legislative requirement corporate governance agendas of company
administrations by providing them with
that large businesses must publish their boards. SARS hoped to do a lot more
adequate information to assess high-level
tax strategy as it relates to or affects to interact with companies and boards
transfer pricing and other BEPS-related
UK taxation. The strategy should be to expose them to what was happening
risks is a crucial aspect for tackling the
formalised, articulated and owned by elsewhere in the world on the one hand,
BEPS problem. Against that background,
an Executive Board member within the but also to indicate the urgency for them
the September 2014 Report on Action 13
business. to bring tax onto the corporate governance
(the September 2014 Report) provides
agenda.
a template for Multinational Enterprises
(MNEs) to report annually and for each tax
jurisdiction in which they do business the
information set out therein. This report
is called the Country-by-Country (CbC)
Report.
We are also seeing legislation aimed at testing and Challenging environment pending ratings downgrade linked to increased revenue
evaluating certain aspects of an organisations Tax Risk Organisations, CFOs and tax departments may feel that targets and a stagnant South African Revenue Services
Management, in particular, the recent amendments they are in a proverbial tag-team wrestling match: headcount.
to the Tax Administration Act relating to legal privilege,
In the one corner: So is Tax Risk Management important?
prescription and documentation gathering. In some
It is not only important, but necessary. The implementation
cases one could go so far as to say that this Act may The board and investors require assurance that the
of a Tax Risk Management framework should not only
inadvertently punish inadequate Tax Risk Management. appropriate Tax Risk Management framework is
promote governance and address as well as reduce tax
implemented and shareholder value is enhanced.
In the HMRC document entitled Improving Large Business risks, but may also create value, for example:
Tax Compliance, it is highlighted that the public, investors In the other corner:
Providing the organisation the ability to proactively
and stakeholders now expect higher standards of tax
The tax authorities are looking for more taxes from the evaluate legislative changes and the potential impact on
compliance and more transparency from large businesses
taxpayers and the public is increasingly looking towards business.
about their approach to taxation. The Australian Tax Office
companies to pay the morally correct amount of tax.
commented that managing tax risk adequately is core to Providing a level of comfort to all stakeholders that risk is
good corporate governance. Emer Mulligan and Lynne It is clear that the above are ingredients for the perfect maintained at an acceptable level.
Oates explains in Tax Risk Management: Evidence from storm with a demand for increased shareholder value and
Ensuring that tax strategies, policies and processes
the US, that the need to address risk management in a reduced taxes on the one hand, and the payment of a fair
are standardised and integrated within the wider
tax context arises due to uncertainty in the interpretation share and morally correct amount of tax on the other.
organisation. The test is however going to be whether
of tax laws. Where there is uncertainty there is always a
In recent years, organisations have been exposed to your board would be happy to have the organisations
risk that needs to be identified, quantified and importantly
more legislative changes than ever before. The legislative tax strategy described, in full, in the Annual Finance
managed, and if possible avoided.
changes are complex and appear to be more towards Statements.
Based on the above, it is clear that tax management and protecting the tax base than necessarily promoting growth
Based on the above, to list a few, Tax Risk Management
tax governance are high on the agendas of regulators and business. Organisations are experiencing more and
is not just a nice-to-have but an essential must have
and tax authorities. The consequences of not paying the more tax queries which ultimately results in more disputes
in any organisation. Quite simply, Tax Risk Management
necessary attention to Tax Risk Management can result with the tax authorities.
is the right thing to do. The ultimate challenge for the
in additional taxes, costly fines, missed opportunities,
From a South African perspective, the above changes tax executive is, however, to be able to provide comfort
reputational damage and negative impact on market
and observations could be explained if one looks at the that the Tax Risk Management framework is indeed
capitalisation.
contracting economy, the low-growth outlooks and the implemented, tested for compliance and adhered to
throughout the organisation.
Psychology and behavioural

Marnus van Heerden
Accountant,
Financial Services
Tel: +27 72 789 8599
economics of insurance
Email: marnus.vanheerden@kpmg.co.za For many years, softer sciences such as The reality of human nature and behaviour, often thought to be fully
psychology and behavioural economics understood, keeps on surprising us as it is unravelled by the worlds
brightest minds. Is the South African insurance industry taking full
have been the ugly stepchildren of the advantage of the opportunities that these revelations present?
factors taken into account in decision- Psychology - understanding the African market based on
making. This has changed dramatically Maslows hierarchy of needs
in recent years with Daniel Kahneman South Africa accounted for US$49.16 billion of the US$68.97 billion
of Africas gross written insurance premium (GWP) in 2014. This is
(a Nobel Prize winner) and Dan Ariely 71.9 percent of the African insurance industry. South Africas gross
revolutionising the economics world domestic product (GDP) was US$352.8 billion in 2015. The GDP for
with their studies into human bias.1 Africa was US$2 435 billion in 2015. SA's GDP represents 14 percent
of Africas GDP. Does it make sense that a country with 14 percent of
Notable Harvard law professors have Africas GDP attains 74 percent of GWP?
backed their studies, which has resulted
in the White House and the World Bank
employing behavioural economists
to help them make better decisions.
This has brought about policies such
as Obamacare, proving that ignoring
the irrationalities of the consumer
would be simply irrational. How could
an understanding of psychology and GDP GWP
behavioural economics help us to South Africa South Africa
comprehend the insurance industry? Rest of Africa Rest of Africa
1
Thinking Fast and slow- Daniel Kahneman
Predictably irrational Dan Ariely
There are a number of factors that account for this

Top 10 African countries by gross GDP3
distribution, most of which are touched on below.
Country Gross GDP per Gini- Muslim Global FS
Enablers for South Africa are:
GDP (US capita coefficient population industry
The strength and trust in the local financial services $billion) (US$) on income (%)** ranking
industry (inequality) (trust factor)
A strong legal system necessary to enforce contractual
agreements 1 Nigeria 574 2 500 43 48.8 82+
Insurance is not the only means by which one can
distribute or avoid risks. 2 South Africa 350 10 700 65 1.7 32
Barriers other African jurisdictions face include:
A lack of reliable information to assess 3 Egypt 301 6 200 30.8 94.9 82+
creditworthiness
Religious reasons such as strict adherence to Sharia 4 Algeria 213 7 300 35.3 97.9 82+
law (the Islamic ban on certain types of insurance)
Shallow financial markets make it difficult to raise 5 Angola* 126 8 200 58.6 0.2 82+
capital
Lack of human capital and expertise 6 Morocco 110 4 800 43 99.9 42
Other factors that may influence insurance penetration

favourably or unfavourably include: 7 Kenya 60 1 125 47.7 9.7 82+
Behavioural aspects such as:

8 Sudan 63.82 2 417 45.5 6.2 82+
The specific needs of the individuals
Human irrationality and loss aversion

9 Ethiopia 55 859 29.8 34.6 82+
The availability bias
South Africa at 14.1 percent insurance penetration2 is 10 Tanzania 48 720 37.6 35.2 82+
the only country in the top 10 African countries by GDP,
which is also in the top 5 by insurance penetration. The
*High inflation and recent unstable macro-economic environment high growth potential (inflation
table to the right sets out drivers of this statistic with
decreases the value of insurance policies significantly)
enablers of insurance penetration marked in brown and
**Strict adherence to Sharia law prohibits traditional insurance products
barriers marked in yellow.
All countries (other than South Africa) in the table have

at least one factor that adversely affects insurance 2
Insurance penetration is defined as gross written premium / gross domestic product
3
World bank, NKC African economics
penetration.
There are many factors that adversely impact the insurance

market. How are these factors impacting human behaviours
that drive the insurance market?
At what point does the insurance industry penetrate the

market? At what income level will a person seek to obtain
insurance?
Maslows hierarchy of needs is a basic representation of the
needs of human beings. These needs start from the bottom
upward and dictate human behaviour.
The need for safety and security only arises when physiological
needs have been met. To estimate at what income point this Self-fulfillment
Self-actualization:
is we can look at the cost of living per country. When the needs
achieveing one's
income per capita crosses the cost of living by a fair margin, full potential, including
physiological needs will have been met and inhabitants will creative acitivities
start to strive for safety and security. One way of obtaining
Esteem needs:
Flow of needs
safety and security is by getting insurance. The preference of
prestige and feeling
insurance over other means of obtaining safety and security Psychological
of accomplishment needs
will be determined by the reliance that can be placed on the
financial services industry.
Belongingness and love needs:
The impact of insurance might even impact needs further up intimate relationships, friends
the pyramid. For example, life insurance being driven by self-
actualization - the legacy left behind. Regardless, insurance Safety needs:
will only be sought once physiological needs are met. The security, safety
attainment of safety and security and the profound impact on Need for
Basic insurance arises
human behaviour can be clearly seen in the research done needs
represented to the right. Physiological needs:
food, water, warmth, rest
In a workshop to develop an impact monitoring system, a field
worker gave as an indicator having a lock on the door. She
explained that the member had bought a lock for her house
as a result of the loan. Before the loan she had felt less than
human - she was not a person that anyone would think of
robbing. Now, although still not having anything worth stealing
she felt a part of the community and could assert her identity
and sense of worth by locking her house.4
It is also a good illustrator of how the needs work. She met her
safety and security needs through the lock. Her needs then
shifted to the next level where she wanted to belong to the
community.
4
Participatory monitoring for poverty reduction and womens empowerment: small enterprise foundation, South Africa - linda mayoux with Anton Simanowitz
Are South African insurance companies targeting African countries with a sufficient market Black lines: Represents income per person
that have the need for insurance? Green lines: Insurance barrier - cost of physiological needs in country +
Additional margin. Each graph contains two scenarios. One poor country
GDP per capita and Gini coefficient
(top green line - high cost of living relative to GDP per capita) and one
A possible method of determining the size of the market per country that has the need for
wealthy country (bottom green line - low cost of living relative to GDP per
insurance based on Maslows needs could be done by combining GDP per capita relative to
capita).
the cost of living and Gini coefficient for income.
The area below the black line and above the green line represents the
GDP per capita is the total GDP for the country divided by the number of people. Gini
value of GDP that is available to be insured.
coefficient is a measure of inequality. The higher the Gini coefficient the higher the
inequality. The total area below the black line represents total GDP - The total GDP
is the same in both graphs. To illustrate the impact of inequality (the only
Thus, a high GDP per capita - relative to other African countries - combined with a high
variable between the two graphs) the area of the GDP available to be insured
Gini coefficient means a strong upper income group. This reflects in South Africas high
is filled with a colour. Where the black line is above the green line, people
insurance penetration rate. South Africas insurance penetration rate is 14 percent. This is
earn more per person than the cost of living.
the highest of the African countries, with Morocco the second highest of the top 10 GDP
countries with 3.09 percent (having developed insurance products acceptable under Sharia In Graph one (Gini coefficient of zero complete equality) there are no
law Takaful products - and a high ranking financial services industry). assets available to be insured for the poor country and the assets available
to be insured for the wealthy country is marked in yellow.
A low GDP per Capita combined with a low Gini coefficient means that the income in
the country is fairly evenly divided between all residents, resulting in very few residents In Graph two (High Gini coefficient high inequality) the dark brown area
crossing the threshold for insurance need. represents the assets available to be insured in the poor country. The dark
brown and light brown areas combined represent the assets available to be
The impact of inequality in wealthy and poor countries is illustrated graphically below.
insured for the wealthy country.
Gini Coefficients
Note: this Graph
1.20
represents Graph one (perfect equality) Graph two (high inequality)
Fraction of Income or Wealth
cumulative income
1.00 and the graphs to
Income (per individual)

the right, is income
Income (per individual)

0.80 per person
0.60 G=0
G=.25
0.40
G=.33
0.20
G=.45
0.00 G=.72
People (poorest to wealthiest)
G=.81
99
92
85
78
71
64
57
50
43
36
29
22
15
8
1
Cumulative Percent of Population
www.youngamericansvoice.com
The graph above illustrates inequality per country worldwide:
Gini Index (Income equality =0)

25-30
30-35
35-40
40-45
45-50
50-55
55-60
60-66
No data
5
South Africa and Namibia are two of the three African countries depicted Below are the top three countries in Africa by insurance penetration and
in dark grey. They are the countries with the highest and second highest how they compare when it comes to the insurance drivers stated above.
insurance penetration rates in Africa, respectively. Botswana is the third (Lesotho is the only other African country above 4 percent and has been
country in the 60-66 bracket and has an insurance penetration of 2.77 excluded due to the size of its economy.) Enablers are depicted in colour.
percent. In relatively poor countries inequality is a definite driver of
insurance.
African countries with high insurance penetrations6

Country Insurance Gross GDP GDP per Gini- Muslim Global FS
penetration (US$ billion) Capital US$ coefficient population industry ranking
(%) on income (%) (trust factor)
1 South Africa 14 352.817 10,700 65 1.7 32
2 Namibia 7 13,353 10 765 61.3 0.4 82+
3 Mauritius 6 13,240 18 553 39.0* 16.6 68

5
Data Source: Table 2.9 of World Development
Indicators: Distribution of income or consumption
The World Bank M Tracy Hunter
*Estimate (World Bank figure not available) 6
Swiss Re, World bank, NKC independent
economists
Is the South African Industry targeting

the correct countries for expansion
Another good way to illustrate this
in Africa? Refer to the 2015 KPMG
insurance survey article titled Insurance statistical inaccuracy is with the
in Africa by Abou Malima for targeted
countries and draw your own conclusion.
following example:
Behavioural economics and An individual has been described by a
the insurance industry
neighbour as follows: Steve is very shy and
Irrationality and its impact on Most people reply quickly that Steve is
insurance withdrawn, invariably helpful but with very
more likely to be a librarian than a farmer.
In his book, Thinking fast and Slow, little interest in people or in the world of
New York Times bestseller and Nobel This is surely because Steve resembles
Memorial Prize in Economic Sciences reality. A meek and tidy soul, he has a need
a librarian more than a farmer, and
winner, Daniel Kahneman, explains for order and structure, and a passion for associative memory quickly creates a
that the intuitive mind is not always
statistically accurate. For insurance detail. picture of Steve in our minds that is very
purposes, it is important to draw the
librarian-like. What we do not think of in
distinction between the reality of the risk What is his most likely profession?
and the perception of the risk. answering the question is that there are
a) Steve is a farmer five times as many farmers as librarians
in the United States (and the ratio is even
b) Steve is a librarian higher in Africa), and that the ratio of male
farmers to male librarians is even higher
(this certainly did not occur to me when I
first read the question, and does not even
occur to me now as I reread it, unless
I force myself to remember). The base
Our intuitive mind is statistically rates simply do not come to mind and
inaccurate. How does this impact thus prevent an accurate computation and
answer, namely that Steve is more likely
our decision-making when it comes
to be a farmer. 7
to insurance?
7
Source: (Thinking fast and slow- Daniel Kahneman)
What is the hypothetical potential The insurance market could

value of the insurance industry? hypothetically continue to grow until
In his book Kahneman goes on premiums decrease enough to let this
to explain the risk averse nature ratio reach 1:1.5. This will then include
of people. The participants were the least risk averse people.
asked if they would take a bet on
This ratio only takes into account
the toss of a coin (50/50) for which
the risks that are currently covered
they stood to lose R100. They were
by insurance contracts. People also
offered increasing winnings until
rely on other measures including
they accepted the bet. At a level
preventative measures (e.g. alarms)
where they would win R110 and lose
and diversification of risks to mitigate
R100, barely any of the participants
risk. This is where the trust in the
accepted the bet. It quickly became Actual value of risk: Perceived value of risk insurance industry and a legal system
clear that people are not as rational
as was always presumed.
Probability of loss x amount lost: Probability of gain x amount gained necessary to enforce contractual
agreements comes in. This would
The rational decision-maker would
50% x 100: 50% x 150 make those at risk more or less likely
accept a bet even where the 1: 1.5 to 2.5 to use insurance contracts compared
winnings are R1 more than the value to other methods. A strong financial
at risk on a 50/50 bet. In reality this services industry can also serve as
did not happen. It turns out that the Claims (value at risk x probability of loss): Premium (100% probability)* a gateway to more insurance with
pain of losing R100 is greater than bancassurance becoming more
the joy of gaining R110.
Claims ratio Per FSB report prevalent throughout Africa.
They continued this experiment and

61%:100%
The minimum value of the
came to the conclusion that people 1:1.64
have a loss aversion ratio of 1:1.5 to total risk mitigation market:
1:2.5. This means that on average a *Ignoring cash back provisions
Total assets x probability
person would risk R100 on a 50/50
of loss x 1.5
bet if the winnings are between
R150 and R250.
Another way to grow the market at
This ratio can be seen directly in the 1:1.5 point would be to substitute
the insurance industry and can be non-insurance risk mitigation factors
used as a tool to see if the market is with insurance-based methods.
saturated or if price decreases would
Has the South African reinsurance
persuade more people to take out
market reached saturation? Is
insurance. It is important to note that
there room for expansion based on
the average insured person does not
premium reduction or should insurers
know the probability of loss.
strive to replace other risk avoidance
methodologies with insurance?
The endowment effect Availability bias - heuristic unusual events, such as homicide or airline accidents, and
Another factor that impacts the value that can be utilised In another Kahneman experiment, he describes another less coverage of more routine, less sensational events,
by insurers is the endowment effect. This goes hand-in- interesting bias - the availability heuristic. The availability such as common diseases or car accidents.
hand with loss aversion. heuristic is a mental shortcut that relies on immediate
This bias could be clearly seen in the recent Ebola
examples that come to a given person's mind when
A good illustration of this effect is a study done by outbreak in Africa and the reaction the world had to it,
evaluating a specific topic, concept, method or decision.
Kahneman. Participants were given a mug and then despite the low probability of contracting the disease.
The availability heuristic operates on the notion that if
offered the chance to sell it or trade it for an equally
something can be recalled, it must be important, or at For instance, when asked to rate the probability of a
valued alternative (pens). They found that the amount
least more important than alternative solutions which are variety of causes of death, people tend to rate news-
participants required as compensation for the mug
not as readily recalled. Subsequently, under the availability worthy events as more likely because they can more
once their ownership of the mug had been established
heuristic people tend to heavily weigh their judgements readily recall an example from memory. Moreover, unusual
("willingness to accept"), was approximately twice as high
toward more recent information, making new opinions and vivid events like homicides, shark attacks, or lightning
as the amount they were willing to pay to acquire the mug
biased toward that latest news.8 are more often reported in mass media than common and
("willingness to pay") when they did not own it. This is
un-sensational causes of death like common diseases.
clearly irrational. In one of many studies done to prove this phenomenon,
participants were presented a mathematical quiz as either South African media is littered with stories of homicide
Simply put, people value their own possessions higher
1x2x3x4x5x6x7x8 or 8x7x6x5x4x3x2x1. Participants who and murder. The actual murder rate (as shown to the right)
than the market does, resulting in insurance being taken
were presented the equation with the larger numbers is very high when compared to other countries. This could
out on these belongings. This can be seen in insurance
first (8x7x6...), estimated a significantly higher result than cause the South African public to overestimate their odds
marketing with insurers playing on the sentimental value
participants with the lower numbers first (1x2x3...).9 of dying and consequently over-insuring their lives.
of the consumers possessions by giving cars names or
recalling memories cars might provide. For example, after seeing news stories about child Do South Africans overestimate their odds of dying due to
abductions, people may judge that the likelihood of this the sensational (newsworthy) ways in which people in the
Is there potential for insurance companies to capitalise on
event is greater. Media coverage can help fuel a person's country are often killed?
this by providing insurance based on more than the market
example bias with widespread and extensive coverage of
value of what is at risk?
8
^ Phung, Albert. "Behavioral Finance: Key Concept- Overreaction and Availability Bias". Investopedia. February 25, 2009. p.10. December 1, 2013.
9
Tversky, Amos; Kahneman, Daniel (1973). "Availability: A heuristic for judging frequency and probability". Cognitive Psychology
Life & Non-life Insurance Penetration Although the life expectancy in South Africa is slightly lower
than the other three countries, the ratio of life to non-life
insurance has a stronger correlation with the violent crime
12.5
rating than life expectancy as this is more newsworthy
South Africa Sources: Swiss Re, NKC Research than other means of death.
Violent crime is not the only sensational cause of death.

10.0
Events such as natural disasters, large motor accidents or
terrorist attacks could also fall into this category. Although
it is one of many factors that impact the prevalence of life
7.5 insurance, it is certainly one to be considered.
Life (%)
Emerging Economies
Does this bias provide guidance for the expansion of the life-
Namibia Advanced Economies
e insurance industry into untapped markets?
5.0 Botswana 45 lin
Mauritius In conclusion
Global Avg
Human nature - and the irrationalities that go along with it -
Africa
is one of the biggest drivers of the insurance industry. The
2.5 Africa, excl SA
impact of this can also be seen in the marketing campaigns
Kenya of insurers that play to improbable sensational fears (shark
attacks, bungee jumping) to trigger the risk averse nature
Morocco
0.0 of consumers. To ignore human irrationality in the insurance
5.0
10 0.02 .5 industry would be simply irrational.
Non-life (%) As the mystery of human nature slowly reveals itself, it
Country Violent crime Life expectancy12 creates numerous opportunities in the insurance industry.
(higher rating Are you making full use of these opportunities or will you
= worse)11 miss your golden carriage?
South Africa 31 60
Kenya 6.4 61
Namibia 17.2 68 10
Swiss Re, NKC Research
11
Global Study on Homicide 2013 (PDF full report). Published in April 2014, by United Nations Office on Drugs
and Crime (UNODC).
Morroco 2.2 71 12
World Health Organization (2013) - Data published in 2015 (Retrieved on 11 February 2016
Disruptions in the
Gianmario Afeltra
Senior Manager,
Tel: +27 63 682 0045
reinsurance market
Email: gianmario.afeltra@kpmg.co.za The global and local reinsurance market is facing a number of disruptive forces including
regulatory change, provision of alternative capital, intermediary capabilities and roles,
and emerging risks. Elements of the traditional reinsurance value proposition such as
risk transfer, balance sheet protection and provision of technical expertise may have a
diminished worth in the face of these disruptions.
Regulatory change Reinsurance market competition and Implications
In a South African context, the level playing fields was one of the It should be expected that locally
outcome of the Solvency Assessment principles that informed the review of incorporated reinsurers will face
Jeanine Wilson
Manager, Financial Risk Management
Management (SAM) reinsurance
regulatory review is likely to affect
the framework. In order to create a level
playing field, the impact on cedants
pressure in writing to their available
capacity under increasingly competitive
how market participants select their solvency assessment and the prudential terms, conditions and pricing following
Tel: +27 82 450 3562 reinsurance partners, structure their requirements applied to the various a greater supply of international
Email: jeanine.wilson@kpmg.co.za contracts and manage the level and participants will differ according to the capacity. However, the proposed
mechanism of risk transfer. prudential risks inherent in the mode of treatment of reinsurer credit ratings,
reinsurance. in particular, within cedants solvency
A key proposed reform following the
assessments may act to mitigate the
review relates to reinsurance market Another key proposed reform relates to
placement of business with foreign
participants. The operation of foreign conduct of reinsurance business. Limits
reinsurers - branched or cross-border.
reinsurers on a branch basis will be will be placed on the amount of business
Non-proportional cover is expected to
allowed and the treatment of cross- to be ceded - as measured by premium -
be favoured over traditional proportional
border supply of foreign reinsurance will with the intention to prevent fronting. In
arrangements in order to comply with
be revised under the new framework. addition, the benefits brought by the use
limits on cession rates. Reinsurer
This is expected to enhance reinsurance of financial/finite reinsurance will need
contribution margins may therefore
capacity, competition and the spreading to be carefully weighed up against the
be squeezed due to lower premium
of risk. lack of recognition of this cover within
volumes.
the Solvency Capital Requirement (SCR)
calculation.
Solvency relief and financing transactions contract Of these five, one of the most widely discussed is 80 Collateralized re and others
designs may need to be addressed and this technological risk. Examples include autonomous ILW
69
70 64
will promote alternative, innovative and tailored vehicles, vulnerability in cloud computing and Sidecar 8%
solutions. cyber security, nanotechnology, infrastructure 60 Catastrophe Bonds
50 28%
breakdown and communications failure.
Emerging risks 50 44
USD billions
13%
Emerging risks are those that are particularly These advancements require insurers to
40
difficult to identify and predict as these risks determine changes to their insurance products 28 60%
are new and the development of them is largely and offerings. With the introduction of 30 22 22 24
17%
unknown. The emergence of these risks is autonomous vehicles, this will directly impact the 20 -14% 18%
6%
attributed to changes in technology and legal insurance market forcing insurers and reinsurers
theories in our society, which are likely to become to consider the changes that are likely to occur 10
actual claims in the future. In an insurance within the motor insurance space and how to 2007 2008 2009 2010 2011 2012 2013 2014 Q3 2015
setting, these risks introduce greater uncertainty sustain their business in this new environment. Source: Aon Benfield
within pricing, reserving, capital modelling and
Implications
solvency assessment. However, they may also Reduction in traditional reinsurance capacity and increase in price
Emerging risks will force insurers and reinsurers
present opportunities for innovation and product following major natural catastrophe events has created the need for
to anticipate changes in the insurance market,
development. alternative forms of capital. However, the provision of alternative capital
particularly in terms of claims, new products and
needs to be assessed on both a short- and long-term basis.
The more the world is developing and research profitability. Even with the caveats in insurance
is being conducted, the more is discovered policies now, such as restriction to claims-made The influx of alternative capital has seen a negative impact on reinsurers
about potential emerging risks particularly for policies, a change in law may expose insurers to who have experienced pressure to decrease their reinsurance rates
bodily injury and property damage. For example, unexpected risks and potentially large claims, as particularly in the catastrophe market. However, it is uncertain how
research on subatomic particles on the human seen with the asbestos claims. This has a direct long an increase in alternative capital will last and who will be left to
body have shown that everyday products (such as impact on reinsurers particularly for those with no provide capital when the dust settles after a major catastrophe event.
cleaning products) are harming us with the extent aggregated limits. Additionally, it may result in an increase in mergers between reinsurers,
of the harm unknown at this point. or reinsurers and alternative capital providers.
Reinsurers have little to no additional information
Global emerging risks can be grouped into five to provide technical expertise to insurers on how The less stringent regulations on capital investors allow for them
core categories: to deal with emerging risks and the evolution of to easily invest in riskier assets where regulated institutions may
the insurance market. be prohibited. This may result in some form of regulatory mismatch
Geopolitical
between (re)insurers and capital investors causing a change in
Provision of alternative capital
Societal regulation impacting this trend over time.
A significant increase in the provision of
Economic alternative capital in the insurance market has However, the increase in provision of alternative capital may afford an
been experienced over the last decade. The graph opportunity going forward for providers of alternative capital in Africa.
Technological
to the right shows this growth from 2002 to 2015. Where changes in the global climate may speed up the requirement for
Environmental It can be seen that the growth in recent years has this investment as an increase in weather related catastrophic events
been exponential. may become more likely.
Intermediaries
Traditionally reinsurance intermediaries were a go-
between function, performing largely administrative
and relationship management roles. The business
model and role of the reinsurance intermediary
has evolved, fast, and is continually evolving.
Progressively they are playing sturdier roles in
risk and capital management, thought leadership,
analytics, software development, business
strategy and interacting with capital markets in the
development of alternative risk transfer solutions.
As such, reinsurance intermediaries have positioned

themselves as leaders in the understanding,
CHANGE IS NOT A THREAT,
ITS AN OPPORTUNITY.
pricing and transferring of insurance risk. However,
reinsurers have historically been regarded as
the experts in this regard. With reinsurance
SURVIVAL IS NOT THE GOAL,

intermediaries becoming a driving force behind
and facilitating the provision of alternative capital,
coupled with a strong service offering, the technical
expertise and risk transfer offering of reinsurance
providers is being challenged.
Conclusion
TRANSFORMATIVE SUCCESS IS.
The insurance market is changing rapidly and there
is a risk of negative impact for reinsurers placing
their value propositions in jeopardy. However, Seth Godin
the traditional reinsurance value proposition
and business model is not expected to become
obsolete, but reinsurers will need to adapt to
survive in the current and future risk landscape,
which is continually shifting.
On the flip side of the coin, enormous potential for
innovation has been revealed and reinsurers need
to ensure they remain relevant and protect and
grow their business in light of these challenges.
Takaful - same same

Nabeelah Kolia
Manager,
Financial Risk Manager
Tel: +27 79 512 9865
but different
Email: nabeelah.kolia@kpmg.co.za When you compare an orange and a clementine, at first glance they look similar. Theyre
both round, theyre both fruit and theyre both orange in colour. Its only once you cut
them open that you realise the differences between the two. In the same way, Takaful
and conventional insurance at first glance may look similar, in that they both share the
objective of protection against financial loss, but when taking a closer look, the differences
become apparent.
However, when a loss does occur
What is Takaful? Key elements prohibited by Islamic law
there is gharar present again
Takaful is a system of insurance based
due to the uncertainty in the
on the Islamic principles of mutual
compensation amounts which vary.
assistance (taawun) and donation
The element of maysir is present
(tabarru). Takaful means joint guarantee,
Gharar Maysir because the payment of the sum
whereby a group of participants (uncertainy) (gambling) insured depends on pure chance.
contribute towards a pool of money and
The third element of riba comes in
mutually agree to protect each other by
when funds are invested in interest-
compensating those participants who
bearing securities. Takaful is an
suffer from an insured peril. Riba alternative to conventional insurance
(interest/usury)
Conventional insurance is not considered which presents itself as a form of
to be Shariah1 compliant because it mutual help in furthering good by
includes three key elements prohibited helping others who are in need or
by Islamic law: uncertainty (gharar), Gharar exists since there is uncertainty in hardship. The concept of tabarru
gambling (maysir) and interest/usury of what the insurance policyholder is eliminates gharar and maysir - the
(riba). buying or paying for if no loss occurs donation ensures that the uncertainty
and the policyholder receives nothing. concerning the contributions and
compensation is eliminated.
1
Shariah is the Islamic law which regulates many aspects of a Muslim's life, including the type of investments allowed
46 | The South African Insurance Industry Survey 2016 The South African Insurance Industry Survey 2014 | 46
There are various models for Takaful in practice. One of the Under Takaful, the Takaful operator is playing the role of a motor Takaful products to complex pension schemes,
models, the Mudharaba model, divides the contributions risk manager and not a risk-taker. However, this does not such as a Takaful Umbrella Fund. Many Takaful products
made by participants into two parts: an amount for tabarru mean that the operator bears no risk. In the event of a can be seen as parallels of their conventional insurance
which is earmarked to cover policyholder losses and a deficit arising in the fund, the shareholders of the Takaful counterparts. Even so, with close to half the population of
second portion used for investment. operator typically finance the deficit by means of an Africa being Muslim, there is room for Takaful operators to
interest-free loan. These loans are repaid from the future be innovative in their marketing strategies and to actively
There are two main stakeholders in Takaful, namely
surpluses that arise from the fund. promote education on both insurance and Takaful.
the policyholder and the Takaful operator who runs the
insurance scheme on behalf of the policyholders. The Another key difference between Takaful and conventional On the other hand, one of the challenges is the
Takaful operator is typically a commercial entity, backed by insurance is that all investments managed by the Takaful misconception that Takaful is only for Muslims. This is
shareholders, that manages the Takaful fund with duties operator are to be made in accordance with Shariah. assisted by the fact that Takaful is predominantly found in
including underwriting the risks and investing the pool of Shariah prohibits investment in sectors involved in countries that have majority Muslim populations, including
funds. In return for performing these duties, the operator alcohol, tobacco, pork, adult entertainment, weapons, Nigeria, Tunisia and Sudan. However, due to its explicit
is either paid a fee or shares in the investment profit and/ gambling and conventional banking and insurance. In ethical structure, the principles of fairness and the sharing
or underwriting surplus. addition, a Shariah fund may not invest in interestbased of burdens among members of a given community, Takaful
instruments. can be marketed to both Muslims and non-Muslims. An
The Takaful operator will also have a Shariah Advisory
illustration of this can be found in multiracial Malaysia,
Board who monitors the activities of the operations in Unlike conventional insurance, the participants of
where Takaful products have also attracted non-Muslim
order to ensure that it is Shariah compliant. Takaful retain an ownership interest in the Takaful fund.
communities. Another challenge faced by the Takaful
Contributions from the participants are invested in Shariah
Takaful vs. conventional insurance industry is the scarcity of Shariah-compliant investments.
compliant funds to derive investment income. In the event
Takaful and conventional insurance companies share the As a result, Takaful companies have had to seek
that the fund generates a surplus, it is then shared among
same objective of providing protection to you, your loved instruments in different markets to diversify their risk,
the participants - and, in some cases with the Takaful
ones and your valuable possessions. The main difference including sometimes volatile equity and property markets.
operator - or donated to charity. Under conventional
between conventional insurance and Takaful is that the
insurance, for proprietary insurers, the surplus belongs Conclusion
former is a risk-transfer model whereas the latter is a risk-
to the shareholders. In the case of a mutual insurer the After slicing through the layers of Takaful and conventional
sharing model.
situation is similar to Takaful, in that the policyholders insurance, it can be seen that although they may share
With conventional insurance, there is a transfer of risk share in the experience of the fund. Takaful also bears a the same objective, the differences in surplus distribution
from the policyholder to the insurance company in resemblance to the way that a stokvel2 is operated, as and investment allocations make the two quite distinct.
exchange for a premium. The loss is indemnified by the they are both risk-sharing mechanisms. With the growth in Takaful and rising need for protection
insurance company according to the terms and conditions in Africa, it seems like only a matter of time before Takaful
Takaful in practice
of the policy. The risk is therefore, transferred from the companies will begin attracting new clients from the
The Takaful industry in Africa is growing steadily, with
policyholders to the insurer. In this manner, the insurance existing conventional insurance franchises.
Takaful operators offering a variety of products from basic
company is the risk-taker.
2
A stokvel is a savings or investment society to which members regularly contribute an agreed amount and from which they receive a lump sum payment.
Retail distribution review
(RDR) - Ride the wave with us
We have a multi-disciplinary dedicated RDR team working across insurance, banking
and investment management to support you in understanding the impact of RDR
on your business.
Our support covers: Antoinette Malherbe
Partner
Readiness assessment
T: +27 (0)83 458 8484
Strategy and operating model design E: antoinette.malherbe@kpmg.co.za
Proposition knowledge across product
Kerry Jenkins
sectors and distribution channels
Partner
IT architecture with platform content T: +27 (0)83 297 1197
Financial modelling E: kerry.jenkins@kpmg.co.za
Taxation including VAT Michelle du Bois

Senior Manager
Assurance and compliance
T: +27 (0)83 275 2403
kpmg.co.za E: michelle dubois@kpmg.co.za
The impact of blockchain on the

Nevellan Moodley
Senior Manager,
Technology Regulatory
Tel: +27 82 717 0286
insurance industry
Email: nevellan.moodley@kpmg.co.za The concept of disruption is a topical theme witnessed throughout the market. Uber has
been dubbed a typical disrupter, completely disrupting the taxi industry across the globe,
offering a cheaper and more effective service underpinned by great customer experience,
all while employing no drivers and owning no vehicles.
Bitcoin is one of the worlds first crypto It is public, meaning it is not owned by The World Economic Forum (WEF)
currencies. Defined by the Oxford a single person or company has reported the following interesting
dictionary as a digital currency in perspectives on blockchain:
It is decentralised, which means it
which encryption techniques are used The technology is one of the six mega
is not stored in a central location but
to regulate the generation of units of trends expected to change the world
across several computers around the
currency and verify the transfer of funds,
world It currently accounts for 0.025 percent
operating independently of a central
Its synchronicity means every of global GDP (USD 80 trillion) and
bank," Bitcoin allows transactions to
decentralised copy of the database is is expected to grow to 10 percent of
occur independently of any banking
always the same GDP by 2025 (at least USD 8 trillion)
institution, making it disruptive in its
own right. However, the key technology It is secured through cryptography Blockchain is a perfect example of
which allows crypto currency to exist encryption business unusual, with this technology
is called blockchain. Email was the posed to have a major impact across all
This could be visualised as an excel sectors. The insurance sector could be
application that ran on the internet,
spreadsheet that belongs to no single disrupted significantly in the near future
similarly bitcoin is the application that
person but everyone in a specific and this represents an exciting change
runs on blockchain. I believe that bitcoin
community is in possession of a live in the industry with insurance potentially
will be remembered as the innovation
copy at any given point in time. The becoming cheaper, more inclusive
that brought blockchain technology into
spreadsheet is completely encrypted so and more personalised. Within the
our day-to-day.
while you may be able to see what is on insurance industry, the application of this
A blockchain is a database with the the spreadsheet, it resembles a series of technology has been referred to as peer-
following characteristics: symbols which require decoding. to-peer insurance and/or decentralised
insurance. The potential impact of blockchain on insurance capital and if your profile meets the level of accepted Motor vehicles with built-in sensors will provide data
companies and the industry is illustrated below. social capital, as required by the smart contract upon a vehicle involved in an accident which will provide
algorithm, you can qualify for this specific product. the blockchain with the number of sensors impacted
Smart contracts
Upon updating your status on Linkedin to unemployed as well as the average force. Based on the conditions
A smart contract is a piece of software that automatically
and actively putting yourself up for employment on a job programmed on the smart contract, this will result in
verifies the contract and thereafter executes the agreed the claim being paid out before a tow truck arrives at
platform, you can automatically qualify to be paid out an
terms. The following innovative ways have been proposed your vehicle.
unemployment income till you update your profile on
for smart contracts to be used on blockchain:
Linkedin to employed or your profile gets employed on Motor insurance premiums which are charged on a trip-
At the London FinTech Hackathon, the winning team the job platform. by-trip basis.
utilised smart contracts to develop an innovative Agricultural insurance where there are payouts if Foreign health insurance gets billed to you on a daily
solution in the provision of late flight insurance. rainfall exceeds or is less than 10 percent of average basis upon your cellphone detecting that you are out of
Their business case was based on the fact that rainfall figures in your geographic area as compared to the country.
550 000 airline passengers in the UK did not claim on the previous three years. Weather data is fed into the
their insurance for delayed flights partially due to the smart contracts from an independent source. Upon the Two motor vehicle claims have been deliberately included
difficulties experienced in the claims process. The team condition being met, a claim payment is instituted in as we predict that the impact of self-driving cars to the
presented a smart contract system that provides direct compliance with the terms of the contract without any personal auto insurance industry could result in shrinkage
compensation for affected passengers by connecting human intervention. of this market to less than 40 percent of its current size.
data feeds with flight information and smart contracts This is just another example of the rate of disruption within
The Internet of Things the industry.
on the blockchain.
The Internet of Things (IOT) refers to a proposed
The idea of an innovative unemployment insurance With blockchain being a relatively new and untrusted
development of the Internet in which everyday objects
technology, the following is anticipated:
which relies on Linkedin. There are underlying terms have network connectivity, allowing them to send and
and conditions around how long your profile must have receive data. The Internet of Things allows us to introduce An initial move towards diversifying insurance products
existed as well as further requirements, but the premise innovation in the claims process through the blockchain as into areas of insurance that have typically not been
behind this is that each person has a level of social follows: covered before.
Innovation in the personalisation of risk-based premiums for the writing of these new policies.
Publically available data will be used to trigger claim events.
Increases in automation will enhance the client experience.
Privacy and compliance with privacy rules will prove to be challenging.
Premium collection on the blockchain

Premiums could be paid in crypto currencies such as bitcoin. Policyholders on the bitcoin
platform would agree to a smart contract which permits the automatic deduction of a certain
ONE OF THE ADVANTAGES OF
amount of bitcoins on a monthly basis in order to keep the insurance policy in an active status.
If there are insufficient funds, the smart contract automatically disables the policy and the policy
lapses.
BEING DISORDERLY IS THAT
Regulatory risk
Regulators and governments around the world have struggled to regulate the blockchain due to
ONE IS CONSTANTLY MAKING
EXCITING DISCOVERIES
the decentralisation of the technology. This decentralisation effectively means that if the regulator
identified a specific instance of the blockchain that they believe is non-compliant with laws and
regulations, it will be impossible to stop this due to the fact that every node in the network will
have an identical copy of the blockchain. Regulators are going to have to investigate new and
innovative ways to regulate the blockchain.
Globally, we are seeing insurance companies investigating the use of blockchain in achieving A.A. Milne
their target operating models. The FinTech sector of the insurance market is seeing large
amounts of investments and acquisitions as part of this strategy.
The industry is weighing up the first mover benefits versus the risk of the unknown, and in
the next couple of years we are going to see a great deal of change within the industry with
blockchain becoming more of a recurring enabler.
Would the application of the

Lyndall Green premium allocation approach
result in business as usual?
Manager,
Department of Professional Practice
Tel: +27 82 710 4976
Email: lyndall.hobson@kpmg.co.za
The new Insurance Contracts Standard (ICS) is expected to be issued at the end of the year.
The focus of the ICS is the Building Block Approach (BBA) which has been introduced as the
new model to recognise and measure insurance contracts, impacting mostly life insurers.
Many short-term insurers may have argued that the new ICS will not impact them as a
simplified model, the Premium Allocation Approach (PAA), will result in business as usual.
Esther Pieterse
Associate Director,
The PAA is intended to be a proxy for the more complex BBA.
Department of Professional Practice For short and long-term insurers wanting to apply the PAA, the automatically meet the criteria to apply the PAA. Contracts
Tel: +27 82 719 5806 most important consideration is whether the contracts written with a longer tail, such as engineering and liability business,
Email: esther.pieterse@kpmg.co.za by the insurers will meet the criteria for the PAA to be applied. may not meet the above criteria for the application of the PAA,
Use of the PAA is permitted (but not required) if: and therefore the BBA should be applied. Short-term insurers
should consequently review the possible impacts which the
the coverage period of the contract at initial recognition is
new ICS may have on their contracts.
one year or less; or
We have prepared an example demonstrating the application
use of the PAA produces measurements that are a
of the PAA. We have compared the results in terms of the
reasonable approximation to those of the BBA i.e. at
PAA with the current unearned premium approach applied by
inception, the entity expects no significant variability in the
insurers as well as the application of the BBA. The example
fulfilment cash flows.
illustrates how PAA is a good proxy of the BBA.
Many South African short-term insurers are expected to be able
to meet the criteria for applying the simplified PAA - thereby Background to the example:
avoiding some complexities introduced by the BBA. However, A new insurer enters into a portfolio of 100 annual insurance
not all contracts currently considered to be short-term will policies covering damage to similar commercial buildings.
The annual period covered by all policies is from 1 April 2020 to IBNR for the current basis has been determined using an ultimate
31 March 2021. loss ratio technique.
Premium for the year is R1 200 per contract (assuming all contracts IBNR for the PAA and BBA is the difference between the estimate of
within the portfolio have the same risk profile). expected incurred claims to date and actual incurred claims to date.
Premiums are payable on a quarterly basis, i.e. R300 per contract at The risk adjustment is determined for the PAA and BBA using a
the start of each quarter. confidence level technique. The risk adjustment is determined for the
portfolio as a whole, at a point in time, based on all future cash flows.
Commission of 20 percent of the premium is payable to the brokers
It has been calculated as follows:
on receipt of the quarterly premiums (i.e. 20 percent of the R300
received per contract per quarter).
Future expected cash flows at 75th percentile xxx
If the insurance policy lapsed after a quarter, no future commission is
payable to the broker. Less: Future estimated expected cash flows (xxx)
The insurer has made an accounting policy election to defer the Risk adjustment xxx
commission expense.
Notes
The year-end is 31 December 2020.
Cumulative accounts in the income statement and statement of
The insurer has no historic experience of claims. Expected incurred financial position (presented to the right) refer to the period starting
claims are estimated on the basis that claims will be consistent 1 April 2020 and ending on the date as indicated (for example,
throughout the contract period. 30 April 2020).
Assumptions: For the PAA and BBA we have kept the same line items currently
Expected incurred claims as determined at inception of the contracts, used by insurers, for example, outstanding claims provision, etc.
are consistent month on month. The expected incurred claims The new ICS does not specifically require this detail.
and expected future cash flows per month did not change as time
Revenue of the BBA includes claims expected to occur in a particular
progressed throughout the period.
month, although the cash flows took place over two months.
The expected claims include reported claims as well as incurred but
Abbreviations used:
not reported claims.
UPP Unearned premium provision
The actual incurred claims experience was different to expectations.
CSM Contractual service margin
For claims incurred within a month, a portion of the claims was
reported and paid in that month, a portion was reported but remained OCR Outstanding claims reserve (provision)
unpaid at month-end (settled in the following month), and a portion
IBNR Incurred but not reported reserve (provision)
will only be reported and paid in the following month.
DAC Deferred acquisition costs
Premium and commission cash flows occur on day 1 of the quarter.
Due to the short duration of cash flows, no discounting was applied

for PAA. To be able to compare results, we have also ignored
discounting for the purpose of the BBA.
The actual claims experience throughout the period for the current basis, PAA and BBA are as follows:
Actual incurred Actual paid Outstanding Outstanding

and reported (movement) (balance) (movement)
(movement)
Inception - - - -
April 2 650 400 2 250 2 250
May 3 800 3 500 2 550 300
June 3 650 4 000 2 200 (350)
July 3 750 1 900 4 050 1 850
August 3 600 3 200 4 450 400
September 3 900 3 700 4 650 200
October 3 750 5 200 3 200 (1 450)
November 3 650 3 500 3 350 150
December 3 750 2 750 4 350 1 000
January 3 950 5 000 3 300 (1 050)
Februaury 3 650 4 300 2 650 (650)
March 3 750 3 650 2 750 100
Run off claims 750 3 500 - (2 750)
44 600 44 600
A LEADER TAKES PEOPLE WHERE THEY WANT TO GO.

A GREAT LEADER TAKES PEOPLE WHERE THE DON'T
NECESSARILY WANT TO GO, BUT OUGHT TO BE.
Rosalyn Carter
The IBNR and risk adjustment for each month is as follows:
IBNR IBNR IBNR (balance) IBNR Risk Risk adjustment Risk Risk adjustment
(balance) (movement) Current basis (movement) adjustment (movement) adjustment (movement)
PAA and BBA PAA and BBA Current basis (balance) BBA BBA (balance) PAA PAA
Inception - - - - 2 400 2 400 - -
April 1 050 1 050 1 250 1 250 2 365 (35) 165 165
May 950 (100) 1 350 100 2 175 (190) 175 10
June 1 000 50 1 600 250 1 960 (215) 160 (15)
July 950 (50) 1 750 150 1 850 (110) 250 90
August 1 050 100 2 050 300 1 675 (175) 275 25
September 850 (200) 2 050 - 1 475 (200) 275 -
October 800 (50) 2 200 150 1200 (275) 200 (75)
November 850 50 2 450 250 1 010 (190) 210 10
December 800 (50) 2 600 150 858 (153) 258 48
January 550 (250) 2 550 (50) 593 (265) 193 (65)
Februaury 600 50 2 800 250 363 (230) 163 (30)
March 550 (50) 2 950 150 165 (198) 165 3
Run off claims - (550) - (2 950) - (165) - (165)

The cash flows and cash balances throughout the period are as follows:
Inception 30 31 30 31 31 30 31 30 31 31 28 31 30
April May June July Aug Sept Oct Nov Dec Jan Feb March Apr
Opening - 24 000 23 600 20 100 16 100 38 200 35 000 31 300 50 100 46 600 43 850 62 850 58 550 54 900
cash
Inflows of 30 000 - - - 30 000 - - 30 000 - - 30 000 - - -

premium
Outflows of - (400) (3 500) (4 000) (1 900) (3 200) (3 700) (5 200) (3 500) (2 750) (5 000) (4 300) (3650) (3 500)
claims
Outflows of (6 000) - - - (6 000) - - (6 000) - - (6 000) - -

commission
Closing 24 000 23 600 20 100 16 100 38 200 35 000 31 300 50 100 46 600 43 850 62 850 58 550 54 900 51 400
cash
IF SOMETHING IS IMPORTANT
ENOUGH, EVEN IF THE ODDS
ARE AGAINST YOU,
YOU SHOULD STILL DO IT..
Elon Musk
The impact of the application of the current unearned premium approach, the PAA and the BBA on the income statement at inception and one
month into the period is as follows:
Income statement Cummulative accounts
1 April - Day 1 30 April - after 1 month
Current basis PAA BBA Current basis PAA BAA
Gross written premium 120 000 - - 120 000 - -
UPP movement (120 000) - - (110 000) - -
Revenue recognised for - - - - 10 000 -

coverage
Release of risk - - - - - 35
adjustment
Release of CSM - - - - 4 100
Expected claims - - - - 3 700
Acquistion costs - - - - 2 000
Revenue - - - 10 000 10 000 9 835
Reported claims - - - (2 650) (2 650) (2 650)

incurred
Movement in IBNR - - - (1 250) (1 050) (1 050)
Risk adjustment - - - - (165) -
Claims incurred - - - (3 900) (3 865) (3 700)
Acquisition costs (24 000) - - (24 000) (2 000) (2 000)

incurred
Movement in DAC 24 000 - - 22 000 - (2 000)
Acquisition expense - - - (2 000) (2 000) (2 000)
Profit or loss - - - 4100 4 135 4 135

Based on the results above, the PAA does not have a

Statement of financial Cummulative accounts
significant impact on revenue and profit for the period
position
to date.
1 April - Day 1 30 April - after 1 month
The line items in the income statement are different
as there will be no separate UPP or DAC. For the Current PAA BBA Current PAA BAA
unearned premium approach, the total incurred basis basis
acquisition cost and the corresponding DAC
Assets 138 000 24 000 24 000 135 600 23 600 23 600
movement are presented. Should the insurer have
elected to expense the commission upfront, the full Bank 24 000 24 000 24 000 23 600 23 600 23 600
R6 000 paid would have been expensed on day one
DAC 24 000 - - 22 000 - -
when applying the PAA.
Revenue Debtor 90 000 90 000 - -

The revenue recognised is slightly different for the
PAA and BBA as the latters revenue is the sum
of many components. The PAA revenue is simply Equity - - - (4 100) (4 135) (4 135)
based on the straight-line unwinding of the R30 000 Retained earnings - - - (4 100) (4 135) (4 135)
premium received upfront at the start of the quarter
(R30 000 / 3 months = R10 000 per month).
Written premiums will no longer be presented on the Liabillities (138 000) (24 000) (24 000) (131 500) (19 465) (19 465)
face of the income statement. Gross premiums are
UPP (120 000) - - (110 000) - -
often a key performance measure, and insurers may
need to change their key performance measures or Liability for remaining - (24 000) (24 000) - (16 000) (18 755)
disclose written premiums in the notes. coverage
Claims Liability for incurred - - - (3 500) (3 465) (710)

For the purposes of this example, the claims incurred claims
for PAA and BBA have been presented as follows:
OCR - - - (2 250) (2 250) (710)
the reported claims incurred (based on actual)
IBNR - - - (1 250) (1 050) -
the movement in the IBNR provision (determined
Risk adjustment - - - - (165) -
using estimated cash flows); and
the movement in the risk adjustment. Payable (18 000) - - (18 000) - -
The incurred claims is greater on the current basis,

due to the additional prudency included by calculating
IBNR using an ultimate loss ratio. The prudency
introduced by using an ultimate loss ratio is greater
than the risk adjustment, as the risk adjustment is
determined using a confidence level.
Current method BBA

In terms of the PAA, there will no longer be grossing up of the assets and The liability for remaining coverage on day one (at inception, before the day one cash inflow of
liabilities which is used when the unearned premium approach is applied. premium and outflow of commission), is calculated as follows:
The following amounts were presented in terms of the current method:
Present value of future cash flows 51 600
Amounts at inception Amounts at Risk adjustment (2 400)
30 April
CSM (49 200)
UPP 120 000 110 000
Insurance liability -
DAC 24 000 22 000
Debtor 90 000 which represents 90 000 The CSM of 49 200 will be recognised over the 12 months as follows: 49 200/12 = 4 100
the 30 000 premium to be
The liability for remaining coverage for the BBA comprises of the following building blocks as at
received at the start of the
30 April:
remaining quarters.
Payable 18 000 which represents 18 000 Present value of future cash flows 28 710
the 6 000 commission to
Risk adjustment (2 365)
be paid at the start of the
remaining quarters. CSM (45 100)
PAA Insurance liability (18 755)

Under the PAA, only the received premium and paid commission for the first
quarter are included in determining the liability for remaining coverage.
The liability for remaining coverage on day one (at inception, but after the day
one cash inflow of premium and outflow of commission), is calculated as
follows:
Quarterly premium of 30 000 received: 1 200 per 30 000

contract * 100 contracts / 4 quarters
Less: Commission of 6 000 paid: 30 000 premium * 6 000

20%
Liability for remaining coverage 24 000

The income statements for the quarter ended 30 June (one quarter into the contracts) and for the year ended 31 December are as follows:
Income statement Cummulative accounts Cummulative accounts
30 June - after 1 quarter 31 Dec - year end (3 quarters)
Gross written premium 120 000 - - 120 000 - -
UPP movement (90 000) - - (30 000) - -
Revenue recognised for coverage - (30 000) - - 90 000 -
Release of risk adjustment - - 440 - - 1543
Release of CSM - - 12 300 - 36 900
Expected claims - - 11 100 - 33 300
Acquistion costs - - 6 000 - 18 000
Revenue 30 000 30 000 29 840 90 000 90 000 89 743
Reported claims incurred (10 100) (10 100) (10 100) (32 500) (32 500) (32 500)
Movement in IBNR (1 600) (1 000) (1 000) (2 600) (800) (800)
Risk adjustment - (160) - - (258) -
Claims incurred (11 700) (11 260) (11 100) (35 100) (35 558) (33 300)
Acquisition costs incurred (24 000) (6 000) (6 000) (24 000) (18 000) (18 000)
Movement in DAC 18 000 - - 6 000 - -
Acquisition expense (6 000) (6 000) (6 000) (18 000) (18 000) (18 000)
Profit or loss 12 300 12 740 12 740 36 900 38 443 38 443
The profit or loss continues to remain consistent between PAA and BBA. The additional prudency included in the IBNR under the current basis results in a lower
profit for the current basis.
The statements of financial position at 30 June and at 31 December (year-end) are as follows:
Statement of financial position Cummulative accounts Cummulative accounts
30 June - after 1 quarter 31 Dec - year end (3 quarters)
Assets 124 100 16 100 16 100 79 850 43 850 43 850
Bank 16 100 16 100 16 100 43 850 43 850 43 850
DAC 18 000 - - 6000 - -
Debtor 90 000 - - 30 000 - -
Equity (12 300) (12 740) (12 740) (36 900) (38 443) (38 443)
Retained earnings (12 300) (12 740) (12 740) (36 900) (38 443) (38 443)
Liabilities (111 800) (3 360) (3 360) (42 950) (5 408) (5 408)
UPP (90 000) - - (30 000) - -
Liability for remaining coverage - - (2 750) - - (2 848)
Liability for incurred claims (3 800) (3 360) (610) (6 950) (5 408) (2 560)
OCR (2 200) (2 200) (610) (4 350) (4 350) (2 560)
IBNR (1 600) (1 000) - (2 600) (800) -
Risk adjustment - (160) - - (258) -
Payable (18 000) - - (6 000) - -

PAA
We note that at the end of quarter 1, under the PAA, there is no liability for
remaining coverage. The liability for remaining coverage is calculated as follows:
Premiums received for the quarter 30 000
Less: acquisition costs paid (6 000)
Less: acquisition costs expenses 6 000
Less: revenue recognised (30 000)
Liability for remaining coverage -
BBA
The insurance liability for remaining coverage under BBA is as follows:
30 June 31 December
Present value of future cash flows 36 110 10 310
Risk adjustment (1 960) (858)
CSM (36 900) (12 300)
Liability for remaining coverage (2 750) (2 848)

Below is the income statements for the three months ending 31 March 2021 (the end of the contracts) and for the four months ending
30 April 2021 (once all claims incurred prior to 31 March have been paid):
Income statement Following year new accounts Following year new accounts
31 Mar - end of contract 30 Apr - claims all paid
Gross written premium - - - - - -
UPP movement (30 000) - - 30 000 - -
Revenue recognised for coverage - (30 000) - - 30 000 -
Release of risk adjustment - - 693 - - 858
Release of CSM - - 12 300 - 12 300
Expected claims - - 11 100 - 11 100
Acquistion costs - - 6 000 - 6 000
Revenue 30 000 30 000 30 093 30 000 30 000 30 258
Reported claims incurred (11 350) (11 350) (11 350) (12 100) (12 100) (12 100)
Movement in IBNR (350) 250 250 2600 800 800
Risk adjustment - 93 - - (258) -
Claims incurred (11 700) (11 008) (11 100) (9 500) (11 043) (11 300)
Acquisition costs incurred - (6 000) (6 000) - (6 000) (6 000)
Movement in DAC (6 000) - - 6 000 - -
Acquisition expense (6 000) (6 000) (6 000) (6 000) (6 000) (6 000)
Profit or loss 12 300 12 993 12 993 14 500 12 958 12 958

As the year-end is 31 December 2021, the above income statements do not present the cumulative result for the portfolio from 1 April 2020
31 March 2021, but rather the January March movements.
For the current method, the previously recognised additional prudency within the IBNR provision has now been released at the conclusion of
the contracts.
Statement of financial position
31 Mar - end of contract 30 April - claims all paid
Assets 54 900 54 900 54 900 51 400 51 400 51 400
Bank 54 900 54 900 54 900 51 400 51 400 51 400
DAC - - - - - -
Debtor - - - - - -
Equity (49 200) (51 435) (51 435) (51 400) (51 400) (51 400)
Retained earnings (49 200) (51 435) (51 435) (51 400) (51 400) (51 400)
Liabilities (57 00) (3 465) (3 465) - - -
UPP - - - - - -
Liability for remaining coverage - - (2 755) - - -
Liability for incureed claims (5 700) (3 465) (710) - - -
OCR (2 750) (2 750) (710) - - -
IBNR (2 950) (550) - - - -
Risk adjustment - (165) - - - -
Payable - - - - - -
At 31 March 2021, although the contracts have

concluded, there are still liabilities remaining on
the statement of financial position for all three
methods. These liabilities represent the claims
reported which have not yet been paid, as well
as the claims incurred prior to 31 March which
have not yet been reported. By 30 April 2021,
these liabilities would be zero as all claims
have been reported and settled (as per the
assumption of a one month run-off).
How should this example be applied to

insurance contracts?
Many assumptions are used in this example
to simplify the illustrations, however in real life
cases nuances for each contract may create
additional complexities. When reviewing the
example, insurers should evaluate how their
contracts are different, and what impact this
would have.
Specifically, insurers should consider the timing
of cash flows and the level of prudency within
current insurance contract liabilities.
What should insurers do?

THE DAY BEFORE
As we move closer towards an issued Standard
on Insurance Contracts, insurers should
understand the differences between their
SOMETHING IS A
current accounting basis, and the PAA or BBA.
An understanding of how the PAA and BBA

BREAK THROUGH
differ will facilitate in the decision as to which
method to apply. It is time to look forward, and
brace the unusual as the application of the
IT'S A CRAZY IDEA.
PAA may not result in business as usual as
some insurers are expecting. Peter Diamandis
Wil IFRS 9
Esther Pieterse
Associate Director,
Tel: +27 82 719 5806
impact insurers?
How does IFRS 9 impact insurers? Issuing investment contracts that are measured at fair
Email: esther.pieterse@kpmg.co.za The effective date of IFRS 9 Financial Instruments (IFRS 9) is value through profit or loss (FVPL) under IAS 39 Financial
around the corner could South African insurers adopt IFRS 9 Instruments: Recognition and Measurement (IAS 39).
when the final insurance contracts standard1 is effective,
Investment contracts are also included as they are often sold
or should they start an IFRS 9 conversion project soon?
alongside similar products with significant insurance risk and
Many preparers were concerned as the effective date of the are regulated as insurance contracts (i.e. they are related to
final insurance contracts standard will only be after 1 January insurance).
2020, far later than the effective date of IFRS 9 which is for
The predominance ratio for an entity should be calculated as
year-ends commencing on or after 1 January 2018.
follows:
The International Accounting Standards Board (IASB)
addressed these concerns and published an exposure draft2
towards the end of last year, giving insurance companies,
[Liabilities arising from the activities
subject to certain criteria to be met, the options to defer the
related to insurance] + [other liabilities that are
implementation of IFRS 9 (deferral approach) or to reduce the
impact of IFRS 9 on current numbers (overlay approach). connected to those activities, such as investment
contract liabilities]
These final amendments to IFRS 4 Insurance Contracts
(IFRS 4)3 are currently expected to be published in Total carrying amount of the entitys liabilities
eptember 2016.
Deferral approach
Entities that qualify for the deferral approach will only apply An entitys activities should be deemed to be predominately
IFRS 9 for year-ends commencing on or after 1 January 2021. related to insurance only if the predominance ratio is:
A temporary exemption from applying IFRS 9 would Greater than 90 percent; or

be permitted for an entity, if the entitys activities are
Greater than 80 percent but less than or equal to 90 percent,
predominantly related to insurance and comprise of:
and the entity can provide evidence that it does not have a
Issuing contracts in the scope of IFRS 4 that give rise to significant activity that is unrelated to insurance.
liabilities whose carrying amount is significant compared
with the total carrying amount of the entitys liabilities; and
1
Final standard expected to be issued at the end of 2016.
2
We have also referred to subsequent meetings up to May of the IASB where tentative decisions were made.
3
Effective for year-ends commencing on or after 1 January 2005.
An entity is required to calculate the predominance ratio, to determine if it For example, an entity has equity instruments classified as an available-for-
qualifies, using the carrying amounts of the liabilities reported for the annual sale investment in terms of IAS 39. The fair value gain recognised for the year
reporting period that ended between 1 April 2015 and 31 March 2016. For ended 31 December 2018 is R5 000. In terms of IFRS 9 this financial asset
example, for a reporting period that ends on 31 December, the assessment will be measured at FVPL and R5 000 will be recognised in profit or loss. If
will be done on the statement of financial position as at 31 December 2015. the overlay approach is applied, an adjustment of R5 000 (as a separate line
By doing this assessment before the effective date of IFRS 9, entities can item) will be made to profit or loss and R5 000 will be recognised in OCI.
determine early if they would qualify for the deferral approach. If they do not
The effect of this adjustment is that profit or loss is not impacted by the
qualify, they can start their IFRS 9 conversion project in time.
volatility of fair value gains or losses on the financial instruments. The overlay
Would South African insurers be able to apply the deferral approach? approach can be applied until the new insurance contracts standard is
effective.
In our view, some insurers may qualify based on the insurance and related
liabilities included in the separate financial statements. It can be applied in the separate and consolidated financial statements. In
the consolidated financial statements the designated financial assets related
A group would not qualify if the consolidated financial statements include
to insurance contracts could be held by one legal entity but the insurance
subsidiaries with predominant insurance activities as well as subsidiaries with
contracts could be issued by a different legal entity. For example, in the
significant activities that are unrelated to insurance, e.g. banking activities.
consolidated financial statements, the reporting entity (i.e. holding company)
Although the insurance subsidiary may qualify for the deferral in its separate
that issues contracts in the scope of IFRS 4 may have a subsidiary that holds
financial statements, it may not be cost effective to apply as the group would
and manages financial instruments that relate to the entitys IFRS 4 contracts.
not meet the required threshold and would be required to apply IFRS 9 from
the effective date. Would South African insurers apply the overlay approach?
Overlay approach The adoption of this approach requires IFRS 9 and IAS 39 to be applied to
Entities will apply IFRS 9 for year-ends commencing on or after 1 January financial assets relating to contracts within the scope of IFRS 4. Generally,
2018. we do not believe insurers would be following this approach as it may not be
cost effective and many insurers currently account for their financial assets as
The overlay approach, if elected, should be applied to financial assets that
at fair value through profit or loss.
meet both the following criteria:
IFRS 9 conversion project
The entity designates the financial assets as relating to contracts that are in
For insurers that do not elect or do not qualify to apply the deferral or overlay
the scope of IFRS 4; and
approach, IFRS 9 has to be applied for year-ends commencing on or after 1
The financial assets are classified at FVTPL under IFRS 9 and would not January 2018.
have been classified at FVTPL under IAS 39, i.e. were previously (or would
Insurers should perform a comprehensive review of financial assets to
have been) measured at amortised cost or classified as available-for-sale.
ensure that they are appropriately classified and measured in accordance
Financial assets relating to contracts within the scope of IFRS 4 should with IFRS 9.
include financial assets that an entity holds to fund the settlement of liabilities
A business model assessment is required for financial assets that meet
arising from an expected level of claims and expenses, and additional/surplus
the SPPI criterion - i.e. where the contractual terms of the financial asset
assets that an entity holds for regulatory compliance, credit rating or its own
give rise, on specified dates, to cash flows that are Solely Payments of
(internal) capital requirements.
Principal and Interest. Financial assets that do not meet the SPPI criterion are
An entity should recognise, as an adjustment to other comprehensive income classified as at FVPL, irrespective of the business model in which they are
(OCI), an amount equal to the difference between the amounts recognised in held except for investments in equity instruments, for which an entity may
profit or loss under IFRS 9 and under IAS 39. elect to present gains or losses in OCI (FVOCI).
The classification for equity instruments and debt instruments into the principal measurement
categories can be summarised as follows:
Equity Business model as-

SPPI
investment? sessment
No assessment Yes
Are the
contractual cash Is business models Yes
Yes
flows solely objective to collect
payments of contractual cash flows?
Held for principal
trading? Yes No and No
interest?
No FVTPL
Are assets in the
No
business model
managed both to
OCI option
No collect contractual cash
elected?
flows and for sale?
(Irrevocable)
Yes
Yes Amortised
cost*
*FVTPL is available to
FVOCI FVOCI
eliminate or significantly
(equity instruments) (debt instruments)*
reduce accounting mismatch
Equity instruments
Many insurers would be required to measure investments in equity instruments at FVPL. In our
view, it is unlikely that insurers would elect the FVOCI category, as the majority of changes in
insurance liabilities will be recognised in profit or loss (in terms of the final insurance contracts
standard).
Debt instruments
The business model for debt instruments is determined at a level that reflects the way groups of
financial assets are managed to achieve a particular business objective. An entity may have more
than one business model for managing financial assets. IFRS 9 states that an entitys business
model for managing the financial assets is a matter of fact and is typically observable through
particular activities that the entity undertakes to achieve the objectives of the business model.
The following points are examples of relevant and debt instruments at a point in time. If a certain hurdle If the debt instruments at amortised cost or FVOCI could
objective evidence: is reached, namely, growth in the market value of the not be designated as at FVOCI, impairment allowances
debt instruments in excess of CPI, a performance fee based on expected credit losses should be calculated
How the performance of the business model (and the
is payable. Regular sales will take place as the asset and recognised. Expected credit losses are measured as
financial assets held within that business model) is
managers oversee the debt instruments and rebalance the present value of all cash shortfalls over the expected
evaluated and reported to the entitys key management
the portfolios. Based on the information provided, the life of the debt instrument. An insurer should decide
personnel.
objective of the business model of the debt instruments is how to apply the expected credit loss model to its debt
The risks that affect the performance of the business management on a fair value basis. Consequently the debt instruments and develop impairment methodologies and
model (and the financial assets held within that business instruments will be classified as at FVPL. controls.
model) and the way those risks are managed.
Debt instruments should be measured at amortised cost Impact on insurers
How managers of the business are compensated, e.g. if the business model is to hold the assets to collect If insurers cannot delay the adoption of IFRS 9, they
whether the compensation is based on the fair value contractual cash flows. If the business model is to hold should assess the impact of IFRS 9 as soon as possible.
of the assets managed or the contractual cash flows the assets to collect contractual cash flows and to sell Apart from the accounting impact, systems and processes
collected. them, the debt instruments should be measured at FVOCI. may need to be modified to apply IFRS 9 and to satisfy
If the debt instruments are measured at amortised cost or the new disclosure requirements required in the financial
The frequency, volume and timing of sales in prior
FVOCI, an insurer still has the option at initial recognition statements. The changes to systems and processes may
periods, the reasons for such sales, and its expectations
to irrevocably designate them as at FVTPL if doing so necessitate changes to key internal controls over financial
about future sales activity.
eliminates or significantly reduces a measurement or and regulatory reporting or impact the way in which work
The above criteria could be applied to an example where recognition mismatch. It could perhaps be argued that if is performed by relevant personnel.
an insurers portfolios of debt instruments are managed by the changes in insurance liabilities are recognised in profit
When is the perfect time to start with an IFRS 9
asset managers. The asset managers would report the fair or loss (based on the new insurance contracts standard),
conversion project?
value regularly to the insurer and would manage the debt there is a measurement mismatch between the insurance
instruments, based on their mandate, to address the risks liabilities and debt instruments. In the words of Rasheed Ogunlaruc Who can say, but
that affect performance, for example: liquidity and growth. probably somewhere between haste and delay - and it's
The asset managers are generally paid a fixed Consequently the debt instruments will be designated as usually most wise to start today.
management fee based on the market value of the at FVPL.
Finance transformation
With the ever increasing pressure on finance executives not to be historians but
strategists, business executives are looking for finance partners who can help
drive the business corporate strategy, growth and profitability whilst improving
the financial and operational performance.
With this change in finance focus, KPMG has developed an integrated finance
transformation solution to help finance executives navigate through finance
performance enhancement whilst making critical, relevant decisions using
strategically applied processes, technology and tools.
KPMG Management Consulting can assist finance executives evolve their

operating models to encompass leading edge strategies and approaches.
kpmg.co.za For more information contact:

Kobus Venter
Partner
T: +27 (0)83 419 7862
E: kobus.venter@kpmg.co.za
Nicole Medefindt
Associate Director
T: +27 (0)82 718 8535
E: nicole.medefindt@kpmg.co.za
The changing face

Michelle DuBois
Senior Manager,
Tel: +27 60 997 4512
of financial advice (RDR)
The changing face of financial advice The future face of the financial adviser
Email: michelle.dubois@kpmg.co.za
The rumblings of the new era started in 2002 with the Its a whole new world out there for the financial adviser who is
publication of the FAIS Act, followed quickly by the Statement willing to evolve his practice. Many advisers will tell how they
of Intent in 2005. Fast forward to 2016 and there is no have spent years perfecting their sales skills. No longer content
doubt that the Retail Distribution Review (RDR) is going to with a compelling sales technique, the adviser of the future
fundamentally change the face of the industry. Far from a tick needs to create and, more importantly, constantly validate a
box exercise, the RDR will have a profound impact on product value proposition that is beyond fault.
development, innovation and systems, which will provide
Rumour has it that the far reaching changes proposed by the
business with an opportunity to reassess their distribution
RDR will see financial adviser numbers drop significantly, that
models, product design, IT systems and general business
clients will be reluctant to embrace the concept of advice fees,
capability. Ultimately building a business that is well positioned
and will thus go direct for their insurance needs, contributing
to move forward into the new era.
to the increasing advice gap. With every risk, however, is an
The RDR discussion paper, released in November 2014, opportunity and for the financial adviser who is willing to evolve
outlines a total of 55 proposals which it suggests will be his business, the future has never been brighter. Perhaps in the
implemented in a three phase approach. The first phase, words of Socrates, The secret to change is to focus all of your
implementing 14 of the 55 proposals, will address aspects energy, not on fighting the old, but on building the new.
such as product supplier influence, commission anomalies and
The advisory relationship is complex and demanding. Based
equivalence of reward, whilst also addressing the key concept
heavily on trust and reputation, the decision to engage the
of adviser categorisation. This, in turn, will require structural
advisers services are reliant on emotive factors as well
changes to distribution models, placing greater responsibility on
as historical performance, recommendations from other
product suppliers to ensure delivery of fair customer outcomes.
professionals and qualifications.
Innovation designed to effectively address conflict of interest,
maintain a competitive edge and enabling a self-directed, Clients will question whether a financial adviser really
advice driven sales force will secure a successful paradigm understands their needs, as well as demanding a differentiated
shift and an out with the old and in with the new approach to service that cannot simply be obtained online or via a call
business. centre.
Easy to access, and promising to cut the middle man persuade clients to pay for advice, and how do we make it Services Boards (FSB) stated intention to enhance
out in what is traditionally a grudge purchase, added profitable? The opportunity to critically assess the current professionalism and improve customer outcomes.
to tight economic conditions, clients are in danger of operating model, provides the ideal occasion to determine However, professionalism and quality advice come at a
not even realising what their needs are. A non-existing the success factors for a sustainable practice. This is price, one which the South African customer is not used
comprehensive financial needs analysis and single needs where the value proposition becomes critical: what are we to paying for. This could mean that a large portion of
selling could result in dangerous shortfalls. selling, who are we selling it to and at what price? customers are priced out of the market, as a result of a
reluctance to pay for advice. All while the same result can
Added to this subjective assessment is the fact that Cash flow matters
supposedly be achieved by an online purchase, or the view
advisers are unwittingly competing against the newest Moving from a commission-based model to a fee-based
that in tough economic times financial advice is a grudge
player in the market the robo-adviser. Sounding slick and model comes with its own set of complications and cash
purchase which can be pushed further down the list of
sophisticated with a compelling futuristic title, the robo- flow is only one of them. Having that initial conversation
adviser is a sales process driven by an automated web priorities. Either way, the potential result is an increasing
with a client can be awkward and requires a solid belief
of decision trees. However, the robo-adviser is far more advice gap which could easily become a vacuum,
in skill, professionalism and value proposition. A fee-
than a financial calculator. The term robo-adviser implies defeating the very intention of the RDR. The net effect
based model can have the upside of mitigating the risk
in itself that an element of advice would be retained in will only be seen when the client lifecycle runs its course:
of commission claw backs and reducing the possibility
the process but without the intervention of a traditional the uninsurable middle-aged client who neglected to take
of clients not taking up the product recommended after
(human) financial adviser. A robo-adviser, in its pure form, out critical illness, disability or life cover whilst young and
the time has been spent researching and completing the
provides a certain degree of advice, although on a more healthy, the client who faces retirement with insufficient
financial needs analysis. Advisers who choose to embrace
limited basis, and such advice would assist a client in capital to meet his needs, or the dependants who are left
this model sooner rather than later will be more likely to
making certain financial decisions. Attractive especially without provision on death of the breadwinner.
transition successfully. A growing annuity income will
when markets are performing well and returns are solid, mean that their business will be more resilient to cash This very real threat begs the question: how do we enable
the model is likely to be favoured by the younger tech flow problems as research shows that clients are more the mid-market to understand the nature and value of the
dependant investors, enabling an anytime, anywhere likely to favour a fee model which charges on a per task financial planning process? How do we ensure that the
opportunity to transact. basis. It is estimated that cash flow challenges accounted advice models catering for their needs are both affordable,
Product suppliers need to carefully consider how they for as much as 11 percent of the reduction in financial appealing and profitable? How do product suppliers
distribute their products in the RDR world, and perhaps a adviser numbers in the UK, post implementation of these market their products in an intermediated market that is
robo-advisor will assume the role off a sales enabler rather changes. More importantly for the adviser of the future, shrinking?
than evolve into an additional distribution model. However, the critical success factor lies in building a sustainable
Many firms have adopted a wait and see approach to what
to truly gain maximum benefit of the robo-adviser model, practice with a solid value proposition and an appropriate
will actually be required by the RDR, however one thing is
clients need to understand that this model may simplify pricing model.
clear: a clear change in business activities in the UK was
the investing process, but is unlikely to be able to replace
The advice gap evident: a move from pushing a product into the market,
the holistic advice given by the traditional financial adviser,
RDR is well established in the UK, so it serves well to a clearly defined focus on financial planning. Product
even if it does only lack the personal touch. By its very
that we can draw some valuable lessons from their suppliers offering an effective financial planning platform to
nature, the scope of the robo-adviser is limited and
experiences. First and foremost, we must remember that the financial adviser recorded a successful transition with
unlikely to usurp the financial adviser.
in South Africa we have seen a more staggered evolution product sales being an obvious next step.
Building a sustainable practice of the financial advice market. Minimum standards of
Brian Foster, founder of Brian Foster Coaching & professionalism are now widely accepted as the norm After all, the very first desired outcome stated by the RDR
Consulting says, The problem for advisers is that this in the industry and have already raised the bar, resulting is its intent to support the delivery of suitable products
isnt really a regulation problem, its a business model in more comprehensive financial planning and improved and provide fair access to suitable advice for financial
problem. RDR raises a key two-part question: how do we advice to clients. This result aligns well with the Financial customers.
SAM is here
- let KPMG assist you
Twin peaks is around the corner and the new Prudential Authority
will be keen to assert its authority - are you ready? For more information contact:
KPMG has a leading team of insurance prudential experts who understand the regulatory Malcolm Jewell
and practical challenges the new solvency regime will pose. We have assisted numerous Partner
insurance companies and groups with assurance, advisory and structuring services. T: +27 (0)82 683 5505
E: malcolm.jewell@kpmg.co.za
Let us help you stay on top of prudential change.
Peter Withey
kpmg.co.za Associate Director
T: +27 (0)82 719 1654
E: peter.withey@kpmg.co.za
Derek Vice
Senior Manager
T: +27 (0)82 711 2519
E: derek.vice@kpmg.co.za
Privacy and wearable technologies

Claire Bond-Myatt
Senior Consultant,
Advisory
Tel: +27 61 29346 5889
- A POPI dilemma?
As technology becomes less of a was estimated to increase by 2019 to a at the risk of potentially invading the
Email: cbonbmyatt@@kpmg.com.au utility and begins to retain intelligence whopping US$ 53 Billion1. privacy of their policyholders and users.
about who we are through wearables,
Security and privacy
organisations will begin to invest in Rapid innovations in technology, falling
Wearables present multiple attack
such technologies to gain competitive costs in the unit price of devices, and
vectors, in that they often require
advantage and consumer insights a general social trend toward health
data to be transmitted to a processing
through what has become human by tech-savvy consumers, are largely
application typically housed on a smart
telematics. As consumers increasingly held to be the drivers of the increased
devices such as phones, tablets or
demand meaningful, personalised, demand for health-related wearables. Ian computers. Furthermore, applications
communications and engagement Chen, a marketing manager at Freescale
Ashleigh van with their insurance providers through Semi-Conductors Sensor Division,
may store the data online. Gary Davis,
the Chief Consumer Evangelist at Intel
Kerckhoven
seamless platforms such as wearables, believes that by 2025, there will be Security believes that the data collected
insurers will, by necessity, be required more data generated from sensors through wearable devices is worth 10
Manager, to integrate wearable technologies and devices than all of the data being times more than that of a credit card on
Technology into their product offering to retain generated today from every source. the black market.
Tel: +27 82 719 4444 their competitive edge. Technological
With increased demand comes a highly Reviews by various security firms2,3 have
Email: ashleigh.vankerckhoven@kpmg.co.za integration positively impacts both
competitive market with new and found multiple vulnerabilities in wearable
insurers and consumers, however,
old entrants battling it out to produce devices and related applications, these
we need to draw a line in the sand
better, more accurate and more useful range from exposed login credentials,
between utility and the right to privacy
wearables. The pace of innovation and network sniffing (wherein data
so as to avoid over-reaching privacy
demand in this space is increasingly transmitted from the device is visible
invasions.
leading to concerns over privacy and to potential attackers), to being able
The wearable device market, also inadequate security safeguards as to monitor a users location through
known as the quantified self market, development outstrips legislative and the devices tracking mechanisms
has amassed popularity in recent years. regulatory requirements. However, there and public networking capability. It is
In 2015, global retail in this market was is a further commercial benefit that worth considering the security risks of
expected to reach US$ 4.5 Billion, and insurers have been quick to leverage wearables when linked to smart devices.
1
http://www.juniperresearch.com/press/press-releases/smart-wearables-market-to-generate-$53bn-hardware
2
http://www.forbes.com/sites/symantec/2014/08/19/how-safe-is-the-data-on-your-wearable-tech/
3
http://www.wickhill.com/blog/main-category/wearable-tech-just-how-secure-is-it/#.VWr61EaPMtl
Careless users may leave their wearable or smart the world are quickly made available worldwide. Many
phone unattended, where any person may pick it up and countries have established privacy laws which regulate
peruse the data stored thereon. Wearables themselves
are not typically password protected or secured, and
smartphones and other devices are only as secure as their
the processing of personal information, including health
information, and in some countries more stringent
safeguards to ensure the privacy of individuals health-
INFORMATION TECHNOLOGY
lock screen password, if enabled.
Future concerns include the susceptibility of the Internet

related information (such as HITECH in the United States)
would need to be considered. AND BUSINESS ARE
BECOMING INEXTRICABLY
of Things to cyber-attacks. While not currently viewed as Furthermore, some countries require mechanisms to be
a serious problem, it is poised to become one as smart in place to protect personal information that is transferred
devices, wearables and other smart appliances become across borders. Through increased accessibility of
INTERWOVEN. I DON'T THINK

more widely adopted, providing would-be thieves with a wearables and related applications globally and the
plethora of information about individuals4. differing legal requirements for privacy between countries,
challenges are presented to both users and service
Privacy of the user is closely linked to the security
ANYBODY CAN TALK

providers to determine the applicable legislation and
considerations and concerns that are inherent to
regulatory framework that is to be applied.
wearables. Wearables that process health-related
information - which may be anything from vital statistics Breaches of personal information held by organisations,
to sleeping patterns - and track user locations, require
additional safeguards to be in place to ensure the
protection and lawful processing of such information
especially health-related information, are also a concern.
In 2014, the top five health-related breaches in the
USA alone affected 7.4 million individuals.6 Breaches
MEANINGFULLY ABOUT ONE
in accordance with various legislation and regulations
in place worldwide. However, despite the number of
countries with laws regulating the use of personal
of personal information are not only costly to the
organisations responsible for the data as highlighted in
a recent IBM study which estimated the average cost of a
WITHOUT THE TALKING
information, few laws holistically address the collection,
storage, use, sharing and disclosure of personal
information obtained through wearables.
breach to companies was US$3.5 Million7- but also to the
individual whose sensitive health information becomes
public or falls into the wrong hands.
ABOUT THE OTHER.
Wearables are often used with a number of applications
which may be free, paid for or come preinstalled on
wearable devices. What is not evident is who has access
Bil Gates
to the data once you have loaded it from the wearable
onto the application. Even more disconcerting is that once
you have done so, you may not own the data anymore.
A review of 100 health and fitness apps available on the
iOS and Android app stores found that more than half of
the reviewed programmes did not have a Privacy Policy5
in place, which may be an indication of their lack of
commitment to ensuring the privacy of users. Theft of individual health data, such as
electronic medical records (EMR), for
Globalisation provides another facet of complexity.
sale on the black market is extremely
Wearables and applications developed in one part of
lucrative
4
http://securelist.com/blog/research/66439/wearable-security-present-and-future/
5
http://www.forbes.com/sites/symantec/2014/08/19/how-safe-is-the-data-on-your-cwearable-tech/
6
http://www.databreachtoday.com/biggest-health-data-breaches-in-2014-a-7705
7
http://www.935.ibm.com/services/multimedia/SEL03027USEN_Poneman_2014_Cost_of_Data_Breach_Study.pdf
Another emerging phenomenon regarding the theft of consumers, insurers and medical aid schemes. responsibility for processing information in a responsible
health information is medical identity theft, which is the Imagine an insurer or medical aid scheme being able to manner and ensuring the protection of information does
use of stolen medical details to obtain medical care, buy calculate, in real-time, the risk profile of its policy holders not end with the policy holder or member; insurers and
drugs or submit fraudulent billing to medical aid schemes.8 and members and provide competitive premiums based medical aid schemes play a pivotal role and should be
Medical records are worth up to US$50 per record on on the health profile of each of its policy holders or held accountable for ensuring that information obtained
the black market9, which when compared to US$1 per members uniquely. This not only incentivises members to through wearables is processed in a fair manner that does
stolen credit card record, indicates why medical identity lead healthy lifestyles but enables the insurer and medical not infringe on the rights of its policyholders or members.
theft is so lucrative.10 While data coming from your fitness aid scheme to accurately quantify and underwrite its risk In most instances, insurers and medical aid schemes
band or glucose meter may not be as valuable as your exposure. From a consumer perspective the benefits are will need to balance the right of its consumers to privacy
electronic health record on the black market, users of numerous and range from customised premiums, as well against their own business interests. Insurers and medical
wearables and their related applications need to be aware as health-related savings and promotions, to early warning aid schemes should ensure that they are transparent in
of the pervasive nature of the health information being of possible health risks enabling more relevant, just-in-time the type of data collected through wearables, the purpose
collected and stored about them, and what a breach of treatment. for which this is processed, how it is used and secured,
that information might mean. and who it is shared with to ensure transparency.
Privacy awareness in South Africa is still in its infancy.
With health-related information fetching such a high However, there are currently several pieces of legislation All organisations integrating new technologies into their
price on the black market, and cybercrime already a that provide a framework to understand the rights and day-to-day interactions with consumers, like insurers and
problem, it probably will not be long before medical obligations of the user, service provider and other parties, medical aid schemes, will need to start considering the
identity theft and other health data-related crime where personal information is concerned. Policy holders privacy impact of adopting these technologies and the
becomes prevalent in South Africa. While South Africa has and scheme members will need to become more astute consequent business, consumer, and compliance risks.
enacted legislation to protect the privacy of individuals as to the purposes for which their personal information, Organisations should consider the privacy impact in light
and electronic transactions through legislation, such as health-related data, and other data collected through of the following:
the Electronic Communications and Transactions Act wearables provided or utilised by insurers and medical aid nature of information processed (i.e. health information);
(ECT) and Protection of Personal Information Act (POPI), schemes is processed to ensure that their privacy is not
cybercrime is often difficult to detect, and identifying and unreasonably infringed. how the information is collected, used and why the
apprehending the culprit even more so. organisation requires it;
Discerning policy holders and members may protect
What does this mean in the South African context? their data and themselves by carefully reading terms and where the information is located and volume of
South Africans have also been swept up in the wearable conditions, and available privacy policies on the wearables information retained;
fever. Fitness bands, for example, are common features and applications they wish to use, as well as knowing their who has access to the information and whether it is
in public and in the workplace. Large insurers and medical rights under their local privacy legislation. Furthermore, shared with third parties; and
aid schemes offer incentives to members who buy and they can defend their data by taking cognisance of
use wearables and share the related health information the threat of cybercrime and following good security the legal obligations in respect of the information.
with the organisation. In turn, this information is utilised practices such as taking precautions to secure their Based on this assessment, the organisation will be
in profiling, and incentivising policy holders and scheme devices through strong passwords, encryption and dual able to accurately determine what the privacy impact
members. The benefits of the technological integration authentication, as well as being aware of who they are of technology adoption, such as wearables, is and most
are multi-faceted and present opportunities for both allowing to access their data and devices. However, the importantly where to draw a line in the sand.
8
http://oig.hhs.gov/fraud/medical-id-theft/
9
http://www.medscape.com/viewarticle/824192
10
http://www.secureworks.com/assets/pdf-store/other/infographic.healthcare.pdf
King IV the new frontier

Thingle Pather
Director,
Tel: +27 83 704 0064
in governance for South Africa
Email: thingle.pather@kpmg.co.za
The Institute of Directors in Southern Africa and the King Committee released the
draft King IV Report on Corporate Governance for South Africa 2016 (King IV) for
public commentary on 15 March 2016. The comment period closed on 15 May 2016 and
represents phase one of the public consultation process on King IV. Phase two of the public
consultation process relates to sector supplements to the King IV Report. The official
launch of King IV is planned for 1 November 2016.
The King IV reflects developments both locally and The application regime has changed in King IV to apply and
internationally and refines the philosophical underpinnings of explain as opposed to apply or explain contained in King
King III. At first glance, draft King IV has a different look and feel III. Therefore, in terms of King IV, organisations will have to
to King III, most notably it is much shorter and contains 16 + 1 provide disclosure of the practices that have been implemented
principles compared to King IIIs 75 principles. towards giving effect to each principle, whereas with regard to
King III, an explanation was only required where a principle was
The application of King IV, as with King III, is to all organisations
not applied. Draft King IV provides an example of an Application
and goes a step further with the issuance of sector
Register which organisations should use as a guidance for King
supplements. The concept of proportionality is introduced
IV disclosure. The King IV Application Register should be posted
and allows for adaptation based on the size, resources and
on the organisations website.
complexity of the organisation.
The five chapters of draft King IV contain principles, practices
King IV is outcomes orientated. It places accountability on the
and governance outcomes that interact as follows: the
governing body to attain organisational outcomes of an ethical
application of the practices give effect to the principle, and once
culture, sustainable performance that creates value, adequate
the underlying principles are fully achieved then the governance
and effective control and sound stakeholder relationships. This
outcome benefits are realised. The practices are organised
becomes possible through the discharge of its responsibilities
to address the strategy, policy, oversight and disclosure
relating to strategic direction, approval of policy, effective
responsibilities of the governing body.
oversight and disclosure. It aims to reduce the tick box or
compliance approach to governance.
King IV has been revised to bring it up to date with The oversight thereof is also separated to sharpen the As first line of assurance: line functions that own and
international corporate governance codes, to align it focus on each as a distinct area. Cyber security being manage risk and opportunity;
to the shifts in the approach to capitalism (towards globally recognised as the biggest potential risk, also As second line of assurance: specialist functions
inclusive, sustainable capitalism with integrated reporting) makes an appearance in King IV with oversight assigned to that facilitate and oversee risk and opportunity
and to take account of specific corporate governance the governing body. arrangements, such as enterprise-wide risk and
developments in relation to, inter alia, effective boards, opportunity management and compliance;
New perspective on risk King IV links risk and
increased compliance requirements, new governance
opportunities in a way that supports the organisation As third line of assurance: internal assurance providers
structures , emerging risks and opportunities from new
in defining its core purpose. This is an important shift that offer objective assurance such as internal audit,
technologies e.g. cyber-crime and social media, and new
where in the past the focus was predominantly on the internal forensic examiners, fraud examiners and
reporting and disclosure requirements.
negative effects of risk and the avoidance thereof. A auditors, safety and process assessors, and statutory
Key developments in King IV new lens has been provided for organisations to look at actuaries;
Remuneration governance has come under the the opportunities that could arise and that need to be
spotlight in the recent past and King IV addresses this capitalised on to set and achieve the strategic objectives. As fourth line of assurance: external assurance
through requiring that both the remuneration policy providers such as external audit, sustainability and
Auditor independence and the audit committee The environmental auditors or regulatory inspectors,
and an implementation plan be tabled for a separate
spotlight on auditor independence globally together with external actuaries and external forensic examiners, as
non-binding advisory vote of shareholders. Where the
developments in auditing standards in terms of the long well as fraud examiners and auditors; and
policy or implementation plan is not approved by at
form audit report has pre-empted King IV into introducing
least 75 percent of the shareholders, the remuneration As fifth line of assurance: the governing body, and audit
two new provisions for audit committees. Firstly, the
committee must consult with shareholders and disclose or other committees.
audit committee should disclose audit firm tenure as well
the nature and outcome of such consultation. The social
as audit partner rotation and significant management
and ethics committee has been tasked to oversee fair The model emphasises that assurance is not primarily
changes during the course of the audit and secondly, the
and responsible executive remuneration practices in the about defence, rather, it is about having an adequate
audit committee should disclose significant matters that
context of overall employee remuneration. There is an and effective control environment and strengthening the
the audit committee considered and how these were
emphasis on the sustainable value created across the integrity of reports for better decision-making.
addressed.
economic, social and environmental context rather than
The above makes it evident that companies and their
focussing on financial targets only. Group governance A welcomed introduction in King IV
Boards have much to consider with the eminent release
is the inclusion of recommended practices around group
Separation of technology and information The Fourth of King IV. The release of King IV will ensure the continued
governance which represents an important element for
Industrial Revolution is a paradigm shift in King IV. King evolution of governance in our business sector, while, at
organisations operating under this structure.
III introduced IT governance and placed the oversight the same time, presenting a vast array of organisational
thereof at the door of the board. King IV separates the Combined assurance King III introduced the combined benefits.
two, information is recognised separately from technology assurance model. King IV expands the traditional three
and the two are treated as such from a policy, decision- lines of defence to five lines of assurance
making, management and culture perspective. to incorporate all assurance role players:
Transforming insurance
through customer centricity
The insurance world is changing, not just incrementally, but fundamentally. At the same time,
the digital revolution is transforming the way we interact and do business. The entire insurance
value chain is impacted, from distribution to intermediation, risk carriers and service providers,
as other industries from e-retailers to automotive set foot in insurance markets.
At the centre of this transformation into a more connected world are customers, who expect to
be able to select from the products of a vibrant marketplace defined and driven by their needs,
preferences and convenience. To grow your business, successfully navigating and taking
advantage of these forces is critical! For more information contact:
Through our Customer Centre of Excellence, KPMG can assist insurers on their journey from Tanja Ferreira
Customer Insights, using KPMGs in-house data analytics tools and methodologies, through Partner
to operationalising Service Excellence across insurance organisations. KPMG has the right T: +27 (0)82 719 2053
insights, tools and experience to help insurers rapidly achieve change, and ultimately help E: tanja.ferreira@kpmg.co.za
secure a competitive advantage.
Justin Larsen
Principal Consultant
kpmg.co.za T: +27 (0)82 521 8473
E: justin.larsen@kpmg.co.za
Regulatory and reporting requirements -

Susan Hunt
Associate Director,
Tel: +27 71 686 4968
Insurance and Banking Sector
Regulatory and reporting requirements are likely to be very A further added complexity can be insurance standards
Email: susan.hunt@kpmg.co.za high on managements agenda for the foreseeable future, applying to traditional non-insurance entities (where for
taking considerable time, budget and resources across the example the FSB could consider a predominantly banking
organisation. The objectives underpinning all the current and group to fall under insurance supervision) or where a banking
upcoming change cannot be argued with, these are: group owns insurance businesses.
better risk, governance, protection of policyholders and For requirements already effective (BN158) and soon to
the ability of management to make risk-based, real time be effective (CBRs and SAM), it is likely that there will be
business decisions on the regulatory side; and significant ongoing remediation and improvement over a few
years before companies fully comply and see true business
consistency, transparency and better alignment to an
value.
economic risk-based view for reporting for stakeholders to
understand results. An Effective Insurance Enterprise Risk Management
Framework (ERMF) Does the current regulation get us
It will be easy to get lost in the complexity of the numerous
there?
requirements from all these changes and deliver something
SAM is a risk-based regulatory regime for the prudential
that misses the mark and does not deliver adequate business
regulation of both long-term and short-term insurers and is due
value, particularly if delivery programmes are developed
to become effective on 1 January 2017.
independently rather than holistically,
The overriding objective of SAM is encapsulated in the Own
For Banks, G-SIBs (global systemically important banks) had
Risk and Solvency Assessment (ORSA) which is defined as:
to comply with BCBS239 by 1 January 2016, D-SIBs (domestic
systemically important banks) by 1 January 2017, and IFRS 9 the entirety of the processes and procedures employed to
has an implementation date of 1 January 2018. identify, assess, monitor, manage, and report the short and
For Insurance companies, BN158 had an implementation date long term risks an insurance undertaking (and group) faces
of 1 April 2015; BN158 of 2015 was to be applied by or may face and to determine the own funds necessary to
1 September 2015; Conduct of Business Returns (CBRs) need ensure overall solvency needs are met at all times; sufficient
to be submitted in the second half of 2016; SAM has to achieve its business strategy (including being within the risk
an implementation date of 1 January 2017; and IFRS 4 Phase 2 appetite and risk tolerance) and aligned to business planning
will be effective after 1 January 2018 (following IFRS 9). horizon.
Position Paper 34 describes the accountability of the Board with respect to ORSA as set ORSA then brings in the requirement to fully integrate risk management and capital
out below: management so that risk management processes feed into capital management
processes and vice versa. This requires an insurance entity to be sufficiently capitalised at
The ultimate accountability of the ORSA resides with the Board who should approve the
all times, including over the future business planning horizon.
ORSA. When evaluating the ORSA, the Board and Senior Management should assess the
adequacy of the current and future solvency position. In addition the Board and Senior We are in the second cycle of the mock ORSA report and for 2016, Management
Management are responsible to ensure that the ORSA is embedded in the business and Information (MI), embedding the ORSA into business decisions and demonstration of the
decision making processes. use test are requirements.
The Board and Senior Management should also, through direct review and challenge and ORSA reporting covers all internal risk and capital management reporting that enables
through reliance on the governance process, conclude on the accuracy and completeness and delivers an effective ERMF with full integration between risk, capital and solvency.
of the ORSA calculations, assumptions and data used as input to the ORSA. The latter should be the top priority for the CRO and a key concern for Board members.
The ORSA should be appropriately evidenced and documented. So while individual pieces of the regulatory puzzle are being delivered by an organisation,
do they really come together? Regulatory reporting requirements may be owned by
The implications of complying with the above are broad and far-reaching, covering the
the actuarial, finance or the capital function, with the ERMF being owned by the CRO.
entire organisation. These requirements are onerous and while some of the pieces
Is the organisation treating the ORSA as a compliance exercise with the output being
to enable this are covered within the SAM regulations, they are disjointed and dont
an annual report, or is the ORSA an enabler for effective risk and capital management?
completely fit together to meet the objective of ORSA.
Are the underlying processes in place to enable risk reporting required by the ERMF?
How many Boards currently are comfortable with this accountability either in the current Does the risk reporting enable management and the Board to discuss and manage the
state or can see the clear path to readiness once SAM is live? Currently, how many risks, and what is the quality of risk discussions at Executive and Board level? Where
Senior Management teams can clearly articulate this journey for themselves and for their business as usual risk reporting is in place, what is the quality of the supporting data
Boards? and does management understand any limitations where data quality may be less than
ideal? Are processes in place to improve underlying data quality? Is risk reporting looked
BN158 (of 2014) was effective 1 April 2015 and is the precursor to SAM Pillar 2. It sets
at holistically across the organisation or is it siloed by risk type leading to overlap and
out effective governance and a risk management framework for both short- and long-term
confusing reporting, or even gaps in coverage?
insurers.
The above are just some problems that may still need to be resolved, for risk and capital
It requires insurers to establish and maintain an effective risk management system,
management to be effective, even after a company ticks the regulatory SAM boxes.
comprising the totality of strategies, policies and procedures for identifying, assessing,
monitoring, managing and reporting all reasonably foreseeable current and emerging New regulatory guidance is often applied to solve a particular problem (from the
material risks to which the insurer may be exposed. BN158 (of 2014) sets out policies and regulators point of view). An example is the requirement for Conduct of Business
control functions that an insurance company must have. Returns (CBRs) which is a new set of market conduct returns - applicable for all life and
non-life insurers in South Africa, excluding reinsurers and captives.
By now, most insurance companies should have reasonably well-developed ERMFs and
control functions, including risk management. The maturity of the effectiveness of the How many companies are integrating CBRs into their current SAM/risk reporting versus
EMRF will depend on the organisation, with some still implementing their frameworks, setting up separate conduct risk processes, data solutions, etc., and potentially creating
some self-assessing the effectiveness, and more mature entities already in a business more organisational confusion?
as usual cycle that includes Combined Assurance Reviews and continuous improvement
Introducing BCBS (Basel Committee for Banking Supervision) 239
feedback loops.
BCBS239 sets out principles for effective risk data aggregation and risk reporting.
Risk data aggregation is the action of defining, gathering and processing risk data An opportunity to implement best practice for insurance risk and capital management;
according to the banks risk reporting requirements to enable the bank to measure its or
performance against its risk tolerance/appetite. The objective of BCSB239 is to enhance
Possibly, a future South African insurance regulatory requirement as Prudential
risk management and decision-making processes in banks. A SARB Directive was
Regulation falls under the Prudential Authority within SARB under Twin Peaks.
published in February 2015 and requires Domestic Systemically Important Banks (D-SIBs)
to comply by 1 January 2017. Lessons learned from BCBS239 for insurance
Applying BCBS239 to an insurance entity provides a unique way of looking at risk and
There are 14 principles under the headings of: Governance and Infrastructure, Risk Data
capital management effectiveness which is not achieved by applying current SAM
Aggregation, Risk Reporting Practices and Supervisory Review.
regulatory requirements, despite both comprising overlapping objectives.
Risk data aggregation capabilities and risk reporting practices should be subject to
Practically the starting points are to:
strong governance arrangements.
Define how the principles will be applied to the business. This provides an opportunity
Data architecture and IT infrastructure should fully support risk data aggregation
to not only define compliance but also additional future states. These could fit into
capabilities and risk reporting practices during normal times and times of stress/crisis.
managements view of what good looks like or could go further to a target end state
Risk Data Aggregation must be accurate and reliable, complete, timely and adaptable. for risk, finance or customer centricity and support a transformation programme.
Define what the risk data, risk aggregation processes and risk reporting in scope are.
Risk Reporting Practices must be accurate, comprehensive, clear and useful, meet the
For insurance this takes us top-down from: the ERMF, the reporting that goes to Risk
needs of recipients (as set by the Board and Senior Management), and be distributed to
Committees/Forums responsible for managing risks, the Key Risk Indicators in the
relevant parties ensuring confidentiality is maintained
reports; to the underlying processes, datasets and systems. This provides an end-to-
In the Banking Sector, BCBS239 has driven significant transformational data and IT end view of risk and finance reporting from source data to Board level reporting.
remediation activity.
A gap analysis against the current state to the future requirements and planning of a
Applying BCBS239 to insurance? roadmap to deliver future target states, answers the key questions: What is the state of
Some South African insurers will need to comply with BCBS239 to some extent if they risk management/reporting and what are the short, medium and long term priorities?
are part of the D-SIB group, as categorised by SARB. This may be viewed as additional
Key findings and themes from an exercise probably wont come as a surprise to an
regulatory requirements to comply with that may add to organisational complexity and
organisation but will uncover gaps where a siloed approach to implementing SAM has
confusion. Alternatively, it could be seen as providing clarity within insurance regulation
been applied, or where SAM guidance may not fully cover requirements i.e. the missing
regarding bringing the puzzle pieces of effective risk and capital management together.
puzzle pieces.
The principles are all quite sensible and could provide a list of what the CRO needs to
Key themes Gaps in BCBS239 compliance
achieve to enable senior management and the Board to meet their obligations under
It is likely that under the ERMF there will be a Data Policy. But where does this sit?
ORSA - not only the letter but also the spirit.
Typically it will be under IT and the remit of the CIO. Does the Data Policy adequately
The practical application of the principles to insurance versus banking are as different as cover SAM requirements? Has it been implemented in a way that works for the business
the sectors themselves, but the outcome will be similar i.e. enhanced risk (and capital) and ensures that risk and capital data is appropriate, complete and accurate?
management and decision-making processes.
In a non-life company, risk data can come from many sources, with some being external
Applying BCBS239 to insurance could be: presenting the concern of data quality.
A regulatory requirement for an insurance company due
These are just a couple of likely themes that may emerge.
to an organisations ownership structure;
WHEREVER YOU SEE

A SUCCESSFUL BUSINESS,
SOMEONE ONCE MADE
A COURAGEOUS DECISION.
Peter Drucker
SAM Standard Formula Actuarial Tool -

How can KPMG help?
Simplify, enable, calculate,
analyse and automate your SCR
calculations and actuarial CPR
submissions
The FSB has recently released an updated
technical specification (tech spec) with
which insurance companies have to comply
Save SAM
when calculating their 2016 Solvency Capital
Requirement (SCR). The first applicable
reporting date is 30 June 2016.
costs
This represents a challenge for most
insurance companies, as within a
Understand the
updated tech spec
and time! Submit returns
according to the
short period they are required to: and the impact of the updated CPR reporting
changes templates
The SAM Standard Formula Actuarial Tool
alleviates these challenges by simplifying
Possibly update
the inputs, enabling companies to comply
Develop calculation systems to comply
with the revised regulations, calculate the methodologies with revised
SCR based on the revised tech spec, analyse
the results through the generated graphs and
consistent with the segmentation and
tables, and automatically populate the actuarial updated tech spec data requirements
sheets of the CPR submission.
Please contact us if you would like any more information regarding the SAM Standard Formula
Actuarial Tool, would like a demonstration or would like to find out how it can save your
organisation time and money.
Malcolm Jewell Jason Strauss Gianmario Afeltra

Director, Senior Manager, Senior Manager,
Financial Risk Management Financial Risk Management Financial Risk Management
T: +27 82 683 5505 T: +27 60 612 0362 T: +27 63 682 0045
E: malcol.jewell@kpmg.co.za E: jason.strauss@kpmg.co.za E: gianmario.afeltra@kpmg.co.za
Antoinette Malherbe
Director and Editor,
Financial Services
SHORT-TERM
Tel: +27 83 458 8484
Email: antoinette.malherbe@kpmg.co.za
INSURANCE
INDUSTRY
A review of the business activity in the insurance industry over the last The Rand depreciated against the Dollar by 34% for the year, closing at
twelve to fifteen months gives us a clear indication that insurers are R15.515:USD1. A most notable factor was Nenegate the biggest financial
trying to overcome tough times by embracing the principles of business crisis South Africa has experienced since the advent of democracy resulting in
unusual . . . or disruptive innovation. Traditional insurers want to enjoy half a trillion Rand being wiped off the value of South African stocks and bonds.
the growth rates that more innovative and niche players have attained
and who have significantly contributed to the increase in gross written Adding fuel to the fire, South Africa is facing the worst drought in the last
premium for the year of 11%.1 No longer are traditional expansion plans 111 years. Water shortages are of significant concern and the drought is
adequate. Thinking outside the box is key to make fundamental strides far-reaching, affecting most of the South African regions. This is increasing
in an industry where market share is hard to come by. harvesting losses and also creating conditions for increased fire losses.
The participants (referred to as the industry) reported gross written . . . and with the average South African consumer becoming poorer due to the
premiums of R89.1 billion in 2015 an increase of 11.4% when compared economic environment and rising unemployment, insurance products still
to the R80.0 billion written in 2014. Growth in the industry is being hindered remain a luxury product. Approximately 60% of motors on South African roads
by unfavourable macro-economic factors, weather related disruptions and are uninsured due to the unaffordability of insurance. The unemployment rate
shrinking disposable household income due to increasing unemployment in South Africa increased to 26.7% in the three months to March of 2016 from
rates. 24.5% in the previous quarter and above market expectations of 25.3%. It was
the highest reading since September 2005.
Salient features of featured participants 2015 2014
Brokers who have over the years increased fees without too much questioning
Increase in gross written premiums 11.4% 8.0%
from their clients are starting to feel the pressure. Cash-strapped consumers
Increase in net earned premiums 8.8% 5.4% are continuing to compare their bottom-line spend. In the UK, more consumers
make use of DIY insurance platforms like online insurance quote comparison
Increase in investment income 12.4% 5.7%
sites, especially post RDR. This behaviour, is forcing brokers to re-evaluate the
Claims incurred 57.2% 63.5% sustainability of their business models and in-house administration, which in
turn impacts the ultimate cost to the consumer. Another reason why brokers
Combined ratio 94.4% 98.6%
are revisiting their business models is the talk about the FSB wanting to do
Operating ratio 83.2% 88.4% away with fees (other than commission) payable to insurers and brokers in its
RDR review paper. Many underwriting managers (UMAs) have not delivered
Pressure points the required returns for their carriers, which has resulted in the consolidation
The South African Gross Domestic Product growth approximated 0.4%2 and the resultant exiting of many UMAs whose business models have proven
for the year ended 31 December 2015. Post 31 December 2015 GDP has to be unsustainable. The South African market has seen the proliferation
worsened and the outlook for 2016 seems to be poor. of many UMAs who cannot add value in their selected market segments.
The net premiums written of the companies featured in this publication approximate 90% (2014 : 85%) of the industrys net written premiums and based on that, the survey results are a fair representation of the results of the overall industry. 2www.tradingeconomics.com
1
Many of these are typically in the motor and personal business lines. True The use of technology
specialist UMAs who retain and apply subject matter expertise (i.e. marine, MiWay is creating positive customer experiences through the effective use
aviation, specialist liability, engineering, complex property risks, etc.) do add of their Miway App. From 12 October 2015, customers using the App to log
value as their product pricing is typically not influenced much by system and a motor vehicle accident claim, received a R1000 reduction in their applicable
procurement efficiency advantages because their insurance products are not excess. The MiWay App also allows users to request roadside assistance
high volume-based transactional insurance deals.3 to their exact location, instantly notify up to three contacts that they need
assistance, request a call back from MiWay Client Services and locate the
Growth nearest inspection centres.
Despite the challenges documented above, business unusual concepts have
resulted in the 11% growth recorded in the gross written premium. Some of New products and players
the highlights that we have read about in the year under review include: Phishield
With South Africa posting the highest average rate for phishing activity globally
New partnerships in 2014, with an overall average phishing rate in organisations of 1 in 568 users
Leppard Underwriting and Abelard partnership4 for the year, it only made sense to tailor an insurance product to cover these
Two of South Africas oldest UMAs, Leppard Underwriting and Abelard losses. Phishield is a brand new GENRIC Insurance UMA that brings a unique
Underwriting Agency, announced that they were joining forces. Leppard cyber fraud insurance to the South African market. This insurance includes, but
Underwriting was a specialist underwriter in professional indemnity, general is not limited to phishing fraud.
and broadform liability. Abelard had also focussed on general and broadform
liability products (with particular expertise in the liability insurance for security MyWater Insured
companies) as well as professional indemnity, directors and officers insurance Unexpected water loss (for instance due to an unknown pipe leak) has a
and event liability. negative impact on both the consumer and the council that supplies it and these
losses can now be insured.
Current market conditions, specifically the increased cost of regulatory MyWater Insured, is underwritten by Hollard through LSG Insurance Services.
oversight, the need to invest in technology and the rise of the direct supply
chain, make it vital for UMAs to scale up in order to remain viable, said Doug Innovation in home warranty
Laburn, head of Lombard Partnerships who is the business support and licence Hollard Home Warranty offers protection against a list of defects that may
partner of Leppard Underwriting. surface in a property in the first two years after a buyer takes ownership. This
product is aimed at giving buyers and sellers peace of mind. The product covers
MotoVantage5 faulty or defective design, structure or workmanship for a number of the key
Is a partnership between NewInvest, a FirstRand group company, and The areas of the home, including the roof, walls, foundations, tiling and paving.
Hollard Insurance Company for the formation of a new value-added products Faulty electrical, drainage, plumbing and irrigation systems, as well as water
company, branded MotoVantage. waste management issues, will also be covered.
This new company (which includes 100% equity stake in Motorite and Smart) is Market share
a clear indication of FirstRand and Hollards intent to play a significant role in the The top 10
value-added insurance industry. The charts below reflect the gross written premiums (GWP)6 of the ten largest
short-term insurance companies.
3
www.cover.co.za 4www.cover.co.za 5www.cover.co.za 6The gross written premiums for Absa include the premiums for Absa idirect and Absa Insurance Risk Management Services. Premiums for Telesure include premiums written by the other Telesure Group short-term underwriters being Dial
Direct, Budget and First for Women and Auto and General.
2015 Guardrisk published financial results for a fifteen month period after the MMI
Santam takeover which has resulted in higher reported premium.
M&F
Santam, Guardrisk and ECIC contributed to 52% of the additional R9.1 billion
11% 24% OUTsurance
GWP for the year. Their premiums increased as follows:
10% Hollard
Guardrisk Santam through rate increases increased GWP by R1.2 billion or 6,1%.
7%
Telesure Guardrisk increased GWP by R1.8 million or 33.2% due to a fifteen month
Zurich reporting period and ECIC increased GWP by R1.7 billion to R1.8 billion due to
8% 21% a policy underwritten for the Cenpower project in Ghana generating R1.4 billion
Absa
3% in GWP. ECIC is an export credit insurer and its revenue is very dependent on
Standard Insurance
the number of projects that are being financed for which they are providing
2% 6% AIG insurance.
4% 4%
Other
The market is predominantly providing cover for motor vehicle risks. Motor
2014 net written premiums made up 43.9% of the total net written premiums and
Santam
together with the property risks reached a level of 76.0%.
M&F
The market is still being dominated by the four largest insurers that underwrite
9% 25% OUTsurance 52.7% (2014: 52.1%) of the markets GWP. Guardrisk has replaced OUTsurance
11% Hollard (exluding Youi) as the fourth largest insurer in 2015. Although not included
Guardrisk in the results of this survey it is interesting to note that OUTsurances
8%
Telesure Australian business (Youi) continues to show significant growth in its GWP.
Zurich Youi experienced growth of 28% in GWP for the calendar year ended
7% 18% 31 December 2015. Locally OUTsurance only achieved growth of 9%. This is
Absa
3% consistent with the trend we have been observing for the other mature direct
Standard Insurance
players in addition to the fact that policy count is not increasing.
2% 7% AIG
4% 6%
Other The bancassurers
Standard Insurance and Nedgroup Insurance showed top line growth at
about 8% when compared to prior year mainly due to rate increases. The
Hollard and Guardrisk are the only two companies in the top 10 who have homeowners/ property book continues to be the largest contributor to GWP
managed to increase market share. Respectively, their GWP increased by at around 70- 80% for bancassurers, however, growth in the property book
R2.0 billion (26.9%) and R1.8 billion (33.2%). The growth in the GWP of Hollard remains a challenge. Both Standard Insurance and Nedgroup Insurance achieved
mainly stems from a full year of Etana business being included in the 2015 growth in their commercial books which is a strategic objective for both
results after their merger in January 2014. This has resulted in Hollard replacing insurers. Absa Insurance reported a decrease in GWP. The sale of the Absa crop
M&F as the second largest short-term insurer in the South African market. book of business, although concluded late in 2015, was effected from
1 July 2014, the start of the crop season. The book was sold to Landbanks Increased service delivery protests have increased the Sasria loss ratio by
insurance subsidiary and for the 2015 financial year effected through a 100% 6,8%. Approximately 81,0% of these claims emanate from strike and labour
quota share arrangement with Landbank Insurance. disturbances and 19,0% from non-political riots, which include service delivery
protests, xenophobia and taxi violence. We dont expect an improvement in
Although crop GWP approximated R450 million, the margins were low and the Sasrias underwriting performance for 2016 due to the Pickitup strikes and
overall impact on the net underwriting margin in 2015 was positive. #feesmustfall.
The bancassurers, Nedgroup Insurance and Standard Bank Insurance again

The commercial books performed well for Standard Insurance and Nedgroup
managed to limit their claims ratio to below 50% at 46,3% and 41,1%
Insurance. This was not the case for Absa Insurance. Commercial business is
respectively. Absa with a slightly more diversified portfolio recorded a 66,0%
sold through a network of independent brokers. As a result of a restructuring loss ratio and 75,1% for Absa idirect.
in the banks commission arrangements due to the impending RDR legislation,
Absa lost some of their commercial brokers and the portfolios they administered Previously we reported that Zurich embarked on an exercise to offload non-
mainly to Santam profitable business. This year they have reaped the benefits from this and
improved their loss ratio by 9,0%.
Profitability
Improved claims ratios have resulted in the combined ratio improving from As expected motor business was the class of business with the worst claims
98,0% recorded in 2014 to 94,4% in 2015. This combined ratio differs from the ratio at 64%, only 1% lower than 2014.
results announced by the Financial Services Board (reported a combined ratio
of 87%) in their quarterly report for 2015 due to the following factors: The expense ratio for the industry increased by 1,2%. Intermediary supported
The report published by the FSB is for the calendar year ended insurers continue to struggle to avoid duplication of their administration activities
31 December 2015 whereas the KPMG survey focusses on the published and those performed at the intermediary. The implementation of SAM is adding
results for the companies based on the their specific financial year-end date 0.7% on average to the cost ratio (0.5% of GWP).
during the 2015 calendar year.
The KPMG survey does not include the results of some of the niche insurers. The JSE All Share Index closed the year only 2% higher than in 2014. 25% of
the short-term insurance industrys investments are invested in shares and as
It is predominantly these insurers that improve the claims results due to their
a result there is an expectation that the investment performance would be flat
speciality lines of business.
and that upside would really be generated from the increase in the interest rates
Different treatment of the results posted by the cell-captives. that were effected during the year. The investment return increased by only 1%
during the year for the industry.
Natural disasters such as significant hail events or flooding were benign in 2015.
It is also expected that the full impact of the drought will only become apparent
in the 2016 claims statistics.
. . . and in other news
We are reminded of recent headlines that have made the last 12 months
exciting and unique in the industry:
Despite the improved claims statistics for the industry as a whole, there are
Chubb launches multinational political violence & terrorism cover in South
some outliers that must be considered.
Africa.
A significant improvement in the Escap claims ratio (improved from 222,0% to
80,3% or R1,4 billion). The 2014 claims were blemished by the loss incurred at King Price Insurance extends its product offering to include business
the Duvha power station. insurance.
Value Master Protector (VMP), a subsidiary of the Phika Group (Phika) and The objective of the review was to assess how best to revise and develop
firstEquity, launched the Depreciation and Shortfall Protector (DSP) the worlds the current prudential regulatory framework to ensure that reinsurance
first value-added product (VAP) not to rely on comprehensive insurance (or arrangements within South Africa allow for and support the objective of
other ancillary insurance) to admit liability and settle legitimate claims. insurance regulation namely, to promote the maintenance of a fair, safe and
PPS group officially launched a short-term insurance company in partnership stable insurance market for the benefit and protection of policyholders.7
with Santam in March 2016.
The bedding down of the Twin Peaks regulation will also provide some answers
In February 2016 it is announced that Zurich Global, the parent of Zurich
to the industry in terms of market conduct and prudential regulation. The twin
Insurance Company South Africa Limited, will embark on a footprint review
peaks regulatory framework will provide a comprehensive framework for
exercise that might result in the brand disinvesting from its insurance units in
South Africa and Morocco. regulating the financial sector.
A new Prudential Authority within the Reserve Bank. This Authority will be
Regulatory front responsible for the oversight of the safety and soundness of banks, insurers
With the expectation of the SAM go-live date of 1 January 2017, the industry
and financial conglomerates.
entered into the implementation phase of SAM during 2014, with the first
parallel run concluding with the annual CPR return submitted at the end of A new Market Conduct Authority to protect customers of financial services
August 2015 for companies with a December year-end. However it was firms, and to improve the way financial service providers conduct their
announced in the first week of July 2015, that the SAM go-live date had been business. This Authority will also be responsible for ensuring the integrity and
delayed resulting in the parallel run phase being extended. efficiency of financial markets, and promoting effective financial consumer
education.
The industry has been assaulted by increasing regulation during the year under
review and BN 158 became effective 1 April 2015. The Board Notice introduced Where to from here?
a corporate governance, risk management and internal control framework for Early indications in trading updates provided by insurers for the first half of
South African insurers. The framework forms part of the interim measures 2016 are that their underwriting performance will not be stellar. Although
of the FSBs Solvency Assessment and Management (SAM) regime and it no individually significant loss events have taken place in the 2016 year to
aligns the South African insurance market with the principles of Solvency II date insurers have struggled to achieve their desired premium rates in a very
and the International Association of Insurance Supervisors (IAIS) for insurance competitive environment. Also, the investment markets have been volatile
supervision and regulation. experiencing the economic rollercoaster ride following the countrys possible
credit rating downgrade and Brexit. Also, the industry will monitor with
In April 2015 the reinsurance review discussion paper was released. This
interest the conclusion of Zurichs disinvestment in its local operations and
Discussion paper
other potential entries into the local market by including life insurers wishing
outlined the results of the reinsurance regulatory review carried out by the
to add short-term insurance to their product offering. In summary, the trading
FSB;
conditions for the year ahead will not become easier than 2015 but as can be
sets out the challenges inherent in the current regulatory framework relating seen from our write-up above, the entrepreneurial approach to the industry
to reinsurance; and allows it to adapt and offer adequate returns to its shareholders. No reason to
puts forward a number of proposed reforms aimed at mitigating these believe that will not be the case for 2016.
challenges.
FSB Reinsurance review discussion paper
7
SHORT TERM INSURERS | Statement of Financial Position | R000

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Nov-15 Nov-14
Group/Company Absa idirect Absa Insurance Absa Insurance Risk ACE Insurance AIG South Africa Limited
Limited Company Limited Management Services Limited
Limited
FSB classification Traditional Traditional Cell captive Traditional Traditional
Share capital and share premium 118510 118510 31000 31000 20000 20000 115000 115000 1600 1600
Retained earnings/(deficit) 50376 29595 1089994 1408122 19954 15047 36838 17284 435900 320900
Reserves, including contingency reserve - - 1195 804 - - 3904 4280 165249 152442
Total shareholders' funds 168886 148105 1122189 1439926 39954 35047 155742 136564 602749 474942
Total shareholders' funds and non-controlling 168886 148105 1122189 1439926 39954 35047 155742 136564 602749 474942
interests
Gross outstanding claims 50718 42910 475488 417200 131381 - 453723 403011 2535791 2329056
Gross unearned premium reserve 20821 16162 709694 883678 8284 176 215597 203235 932703 817415
Reinsurers' share of expected salvages and - - - - - - - - - -
recoveries
Owing to cell owners - - - - 100644 47158 - - - -
Deferred reinsurance commission revenue - - 7079 33201 - - 50376 44769 260512 170094
Deferred tax liability - - - - - 3 1168 1708 - -
Other liabilities 42821 26656 140666 236838 - 408010 107175 92729 2335784 1567471
Total liabilities 114360 85728 1332927 1570917 240309 455347 828039 745452 6064790 4884036
Total investments including investments in 184654 172328 1553615 1678808 80990 22625 148679 122740 716448 1410439
subsidiaries
Deferred tax asset, intangible assets and PPE 6962 5239 124764 200018 11 - 5006 4883 105053 80167
Reinsurers' share of outstanding claims 24252 8059 283653 223706 131381 - 360282 351477 2324308 2119249
Reinsurers' share of unearned premium reserve 3789 886 59078 167225 8284 176 170378 153588 813214 668550
Gross expected salvages and recoveries - - - - - - - - - -
Deferred acquisition costs - - 123603 140106 - - 29614 30414 139716 124524
Cash and cash equivalents 54877 27158 179582 248965 54866 6322 161300 132325 1935952 456265
Other assets 8712 20163 130821 352015 4731 461271 108522 86589 632848 499784
Total assets 283246 233833 2455116 3010843 280263 490394 983781 882016 6667539 5358978
International solvency margin 44% 46% 55% 56% N/A N/A 140% 145% 144% 96%
Total assets/Total liabilities 248% 273% 184% 192% 117% 108% 119% 118% 110% 110%
Change in shareholders' funds 14% (22%) 14% 14% 27%

Accounting year end Mar-15 Mar-14 Dec-15 Dec-14 restated Jun-15 Jun-14 Jun-15 Jun-14 Jun-15 Jun-14
Group/Company Alexander Forbes Allianz Global Corporate Auto and General Bidvest Insurance Budget Insurance
Insurance Company and Specialty South Insurance Company Limited Company Limited
Limited Africa Limited Limited
FSB classification Traditional Traditional Traditional Traditional Traditional
Reserves, including contingency reserve - - - - - - 229361 205484 - -
interests
Gross outstanding claims 236941 267157 1408918 1450030 350426 340911 166977 141862 210119 192403
Reinsurers' share of expected salvages and - - - - 51141 28779 - - 20729 16257
recoveries
Owing to cell owners - - - - - - 3162 1219 - -
Deferred reinsurance commission revenue 4819 4603 92867 80817 - - - - - -
Deferred tax liability - - - - - 222 52524 44633 - -
Other liabilities 95650 84781 292033 189616 177060 143469 13857 15048 65528 82154
Total investments including investments in 249017 207522 - - 644507 710009 644823 587654 81869 69691
subsidiaries
Deferred tax asset, intangible assets and PPE 12358 11155 5527 7552 2693 - - - 214 410
Reinsurers' share of outstanding claims 178199 214395 1366974 1448894 52174 58255 - - 17897 21179
Reinsurers' share of unearned premium reserve 18491 17785 324061 224813 - - - - - -
Gross expected salvages and recoveries - - - - 104994 79031 - - 60312 47682
Deferred acquisition costs 2210 2597 70240 71744 13913 13317 41928 30617 - -
Other assets 31725 30892 258090 219906 260358 147786 115746 122716 103107 76193
Total assets 516862 509077 2225635 2053280 1263445 1545102 1062344 1008954 560993 537791
International solvency margin 44% 40% (5201%) 173674% 42% 72% 158% 159% 42% 42%
Change in shareholders' funds 20% 4% (39%) 1% 6%

Accounting year end Dec-15 Dec-14 Jun-15 Jun-14 Dec-15 Dec-14 Mar-15 Mar-14 Mar-15 Mar-14
Group/Company Centriq Insurance Dial Direct Enpet Africa Escap SOC Export Credit Insurance
Company Insurance Limited Insurance Limited Limited Corporation of South
Limited Africa Limited
FSB classification Cell captive Traditional Captive Captive Niche
Reserves, including contingency reserve - - - - 18906 22242 (1014) (2808) 2689895 1258378
interests
Gross unearned premium reserve 1630918 1410556 97610 102934 632 - 899541 1061417 2955903 1213730
Reinsurers' share of expected salvages and - - 17109 11336 - - - - - -
recoveries
Owing to cell owners 880276 831773 - - - - - - - -
Deferred reinsurance commission revenue 16995 4585 - - - - 32502 38869 - -
Deferred tax liability - - - 20 - - - - 38350 42012
subsidiaries
Deferred tax asset, intangible assets and PPE 22321 18134 249 - 854 597 123095 311422 9305 4978
Reinsurers' share of outstanding claims 192852 156913 16360 18203 17755 25270 2983351 1959211 - -
Reinsurers' share of unearned premium reserve 63202 39375 - - 311 - 325018 388693 - -
Gross expected salvages and recoveries - - 35673 31759 - - - - - -
Deferred acquisition costs 23079 22843 - - - - 16251 19435 - -
Other assets 450146 399154 46694 108227 2861 9829 318114 457073 1555070 428722
Total assets 3898760 3441097 495456 582298 205308 191314 9826372 7957470 7964563 5549667
International solvency margin 22% 23% 47% 61% 281% 271% 103% 76% 242% 2860%
Change in shareholders' funds (5%) (27%) 6% 56% 16%

Accounting year end Jun-15 Jun-14 15 month period ended
Jun-14 Dec-15 Dec-14 Jun-15 Jun-14 Sep-15 Sep-14
Jun-15
Group/Company First for Women Insurance Guardrisk Insurance HDI-Gerling Insurance The Hollard Insurance Indequity Group
Company (RF) Limited Company Limited Company of South Africa Company Limited Limited
Limited
FSB classification Traditional Cell captive Traditional Traditional Traditional
Reserves, including contingency reserve - - - - (50) (2) 4012 4012 - -
interests
Reinsurers' share of expected salvages and 24929 16744 - - - - - - - -
recoveries
Owing to cell owners - - 4109310 3100596 - - - - - -
Deferred reinsurance commission revenue - - 98063 101751 20063 19079 - - - -
Deferred tax liability - - 20804 24737 - - 409493 311747 137 -
Total investments including investments in 81962 49405 6702962 5976319 58997 70871 4595046 4099484 - -
subsidiaries
Deferred tax asset, intangible assets and PPE 144 126 33000 10575 246 280 186278 111749 1481 1236
Reinsurers' share of outstanding claims 23455 20614 850513 552759 278104 191692 1283487 839975 41 45
Reinsurers' share of unearned premium reserve - - 416227 416210 91732 212650 471094 447678 - -
Gross expected salvages and recoveries 26197 24809 - - - - 291538 272451 1525 1707
Deferred acquisition costs - - 61078 100201 15365 13506 155022 169530 - -
Other assets 79090 83125 774301 624022 51512 170635 1613378 2110712 105 54
Total assets 314228 304572 9237287 7862595 502883 665656 10955197 9725045 33845 30596
Change in shareholders' funds 12% 51% (3%) 7% 21%

Accounting year end Jun-15 Jun-14 Jun-15 Jun-14 Jun-15 Jun-14 Jun-15 Jun-14 Dec-15 Dec-14
Group/Company Legal Expenses Insurance Momentum Alternative Momentum Short Term Momentum Structured Mutual & Federal
Southern Africa Limited Insurance Limited Insurance Company Insurance Limited Insurance Company
Limited Limited
FSB classification Niche Traditional Traditional Traditional Traditional
Retained earnings/(deficit) 370664 371695 2801 4198 (159913) 1495 (1796) (1152) 2801000 2186000
Reserves, including contingency reserve 9084 7178 - - - - - - 51000 53000
interests
Gross outstanding claims 197318 174779 - - 92676 69072 - - 2925000 2815000

Gross unearned premium reserve - - - - 1420 5964 - - 787000 799000
recoveries
Owing to cell owners - - - - - - - - - -
Deferred reinsurance commission revenue - - - - - - - - 62000 65000
Deferred tax liability 9850 8083 30 55 - - 11 15 - -
Other liabilities 68780 64631 - - 43428 29546 6005 5665 1414000 1919000
subsidiaries
Deferred tax asset, intangible assets and PPE 55334 39915 - - 33851 8621 - - 485000 516000
Reinsurers' share of outstanding claims - - - - 173 2005 - - 658000 600000
Reinsurers' share of unearned premium reserve - - - - - - - - 287000 281000
Gross expected salvages and recoveries - - - - - - - - 204000 216000
Deferred acquisition costs - - - - 142 69 - - 132000 140000
Other assets 11921 12765 69 44 5517 11993 - - 2434000 1966000
Total assets 672330 643000 27831 29253 396857 254082 13220 11528 9837000 9634000
International solvency margin 58% 62% N/A N/A 50% 44% N/A N/A 58% 51%
Change in shareholders' funds 0% (5%) 73% 23% 15%

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Jun-15 Jun-14
Group/Company Mutual & Federal Risk Nedgroup Insurance New National Assurance Nova Risk Partners OUTsurance Insurance
Financing Company Company Limited Limited Company Limited
Limited Limited
FSB classification Cell captive Traditional Traditional Cell captive Traditional
Reserves, including contingency reserve - - - - 28137 25713 - - 83824 70373
interests
Gross unearned premium reserve 339014 285591 214258 165141 102749 83863 - - 431052 449356
recoveries
Owing to cell owners 763873 681887 - - - - 3049 2808 - -
Deferred reinsurance commission revenue 77239 67539 4834 7027 - - - - - -
Deferred tax liability 1190 958 34019 22338 4977 4840 - - - -
subsidiaries
Deferred tax asset, intangible assets and PPE - - 1157 897 19578 16908 132 123 159623 126816
Reinsurers' share of unearned premium reserve 319317 265187 4000 3323 77523 63581 - - - -
Gross expected salvages and recoveries - - - - - - - - - -
Deferred acquisition costs 77239 67539 78163 65984 - - - - - -
Other assets 269570 120641 35181 22925 116113 107885 491 1931 335788 403981
Total assets 2006085 1546679 1209244 989987 750438 816616 27618 27569 4937021 4613643
International solvency margin 410% 1064% 84% 72% 61% 53% (776%) 2877% 45% 43%
Change in shareholders' funds 14% 24% 6% (56%) 15%

Accounting year end Jun-15 Jun-14 Jun-15 Jun-14 Mar-15 Mar-14 Dec-15 Dec-14 Mar-15 Mar-14
Group/Company Regent Insurance Renasa Insurance Safire Insurance Santam Limited Sasria SOC Limited
Company Company Company Limited
Limited Limited
FSB classification Traditional Traditional Traditional Traditional Niche
Share capital and share premium 455504 455504 50500 50500 10053 10053 103000 107000 - -
Retained earnings/(deficit) 45040 119 (6554) (8401) 90461 83446 7330000 6715000 4674237 4296106
Reserves, including contingency reserve 174313 173432 - - 18049 16980 134000 - 377385 350610
interests
recoveries
Owing to cell owners - - - - 102047 83628 - - - -
Deferred reinsurance commission revenue - - - - - - 250000 215000 5146 4159
Deferred tax liability 48258 42037 - - 6302 6604 60000 239000 47223 48705
subsidiaries
Deferred tax asset, intangible assets and PPE 205306 119523 6357 5536 18161 16963 327000 275000 54198 51019
Reinsurers' share of unearned premium reserve 1082 581 25297 21257 9286 7822 1044000 931000 17153 13864
Gross expected salvages and recoveries 12059 8064 - - - - - - - -
Deferred acquisition costs - - 5066 4183 10152 9669 484000 408000 - -
Other assets 74218 59592 76611 88290 140283 119767 3385000 3170000 256850 201469
Total assets 2003971 1956922 359746 328565 398438 363515 22807000 21212000 6058898 5478731
Change in shareholders' funds 8% 4% 7% 11% 9%

Accounting year end Dec-15 Dec-14 Jun-15 Jun-14 Dec-15 Dec-14
Group/Company Standard Insurance Unitrans Insurance Zurich Insurance
Limited Limited Company South Africa
Limited
FSB classification Traditional Traditional Traditional
Share capital and share premium 30000 30000 15150 15150 4650 4650
Retained earnings/(deficit) 1337730 1176346 289331 264413 1340519 1362834
Reserves, including contingency reserve 140 140 - - 297010 302796
Total shareholders' funds 1367870 1206486 304481 279563 1642179 1670280
Total shareholders' funds and non-controlling 1367870 1206486 304481 279563 1642179 1670280
interests
Gross outstanding claims 327710 299327 33458 8466 1183154 1242672

Gross unearned premium reserve 82728 71882 135281 133553 719731 587984
Reinsurers' share of expected salvages and - - - - - -
recoveries
Owing to cell owners - - - - - -
Deferred reinsurance commission revenue 5705 5445 9089 17219 34629 25754
Deferred tax liability 14080 12103 5359 4499 - -
Other liabilities 91433 44855 100616 97489 951304 919844
Total liabilities 521656 433612 283803 261226 2888818 2776254
Total investments including investments in 1551393 1280566 86424 79805 2246354 2241146
subsidiaries
Deferred tax asset, intangible assets and PPE 2273 1068 - - 345739 278223
Reinsurers' share of outstanding claims 42998 6832 12364 5307 428562 394819
Reinsurers' share of unearned premium reserve 34452 31299 58554 60939 298463 186944
Gross expected salvages and recoveries - - - - - -
Deferred acquisition costs 9011 8758 37828 39950 88207 62067
Cash and cash equivalents 100538 213397 189207 200471 315705 432891
Other assets 148861 98178 203907 154317 807967 850444
Total assets 1889526 1640098 588284 540789 4530997 4446534
International solvency margin 71% 67% 390% 511% 58% 59%

Total assets/Total liabilities 362% 378% 207% 207% 157% 160%
Change in shareholders' funds 13% 9% (2%)
SHORT TERM INSURERS | Statement of Comprehensive Income | R000

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Nov-15 Nov-14
Group/Company Absa idirect Limited Absa Insurance Company Absa Insurance Risk ACE Insurance Limited AIG South Africa
Limited Management Services Limited
Limited
Gross premiums written 407031 339661 2354529 3115574 560637 1060309 522195 562701 2431753 2174561
Net premiums written 380038 323226 2041430 2553528 - - 111504 94440 418969 497065
Earned premiums 383245 323321 2091616 2575077 - - 115933 84864 448346 472487
Total net investment income 14128 11596 120669 119176 23413 17236 5393 10335 33006 50176
Reinsurance commission revenue 580 421 82711 92709 - - 109112 119756 554373 365875
Other income 4491 3928 58004 40662 16 - 2608 2877 30306 7396
Total income 402444 339266 2353000 2827624 23429 17236 233046 217832 1066031 895934
Net claims incurred 287979 241145 1380555 1790034 - - 82590 65728 366187 348127
Acquisition costs 62136 51897 407865 504786 - - 92458 103259 349076 284710
Interest allocated to cell owners - - - - 16258 12369 - - - -
Employee benefit expense - - - - - - - - - -
Management and other expenses 23467 25281 384553 341722 376 689 28926 48644 332648 336098
Total expenses 373582 318323 2172973 2636542 16634 13058 203974 217631 1047911 968935
Net profit/(loss) before taxation 28862 20943 180027 191082 6795 4178 29072 201 18120 (73001)
Taxation 8081 5863 46456 51483 1888 1170 9518 126 (5313) (18048)
Net profit/(loss) after taxation 20781 15080 133571 139599 4907 3008 19554 75 12807 (54953)
Other comprehensive income/(expense) - - (804) 734 - - - - - -
Total comprehensive income/(loss) for the year 20781 15080 132767 140333 4907 3008 19554 75 12807 (54953)
Transfer to/(from) retained earnings - - - - - - - - - -
Other comprehensive (income)/expense - - 804 (734) - - - - - -
Dividends - 1000 451700 237000 - - - - - -
Change in retained earnings 20781 14080 (318129) (97401) 4907 3008 19554 75 12807 (54953)
Net premium to gross premium 93% 95% 87% 82% 0% 0% 21% 17% 17% 23%
Claims incurred to earned premium 75% 75% 66% 70% N/A N/A 71% 77% 82% 74%
Management and other expenses to net earned 6% 8% 18% 13% N/A N/A 25% 57% 74% 71%
premium
Combined ratio 97% 98% 100% 99% N/A N/A 82% 115% 110% 128%
Operating ratio 94% 95% 94% 94% N/A N/A 77% 103% 103% 117%
Return on equity 12% 10% 12% 10% 12% 9% 13% 0% 2% (12%)

Accounting year end Mar-15 Mar-14 Dec-15 Dec-14 restated Jun-15 Jun-14 Dec-15 Dec-14 Jun-15 Jun-14
Group/Company Alexander Forbes Allianz Global and Auto and General Bidvest Insurance Budget Insurance
Insurance Company Corporate Specialty Insurance Company Limited Company Limited
Limited South Africa Limited Limited
Net premiums written 348382 320285 (2117) 61 1298150 1246910 308882 302951 614871 579335
Earned premiums 348157 317912 2583 (2165) 1292996 1207162 295728 244886 613000 579753
Reinsurance commission revenue 246144 225266 198564 131281 619585 571619 1728 120 284022 267770
Other income 52522 47559 3745 5842 49297 55297 - - 41890 42601
Total income 663986 601301 210732 142008 1999717 1905224 354531 386741 955117 908381
Net claims incurred 233335 238659 40380 (1592) 837532 792619 125887 113470 423884 397586
Acquisition costs 60133 50309 87052 32914 413066 365080 61017 39584 25527 27584
Interest allocated to cell owners - - - - - - - - - -
Total expenses 627764 598695 204802 135757 1837675 1706335 243076 207138 869771 800189
Net profit/(loss) before taxation 36222 2606 5930 6251 162042 198889 111455 179603 85346 108192
Taxation 10237 1169 1769 2542 39099 55715 25788 36665 24578 30355
Net profit/(loss) after taxation 25985 1437 4161 3709 122943 143174 85667 142938 60768 77837
Other comprehensive income/(expense) - - - - - - - - - -
Total comprehensive income/(loss) for the year 25985 1437 4161 3709 122943 143174 85667 142938 60768 77837
Transfer to/(from) retained earnings - - - - - - (23877) (67636) - -
Other comprehensive (income)/expense - - - - - - - - - -
Dividends - - - - 475000 120000 79188 55300 45000 110000
Change in retained earnings 25985 1437 4161 3709 (352057) 23174 (17398) 20002 15768 (32163)
Claims incurred to earned premium 67% 75% 1563% 74% 65% 66% 43% 46% 69% 69%
Management and other expenses to net earned 96% 97% 2995% (4824%) 45% 45% 19% 22% 69% 65%
premium
Combined ratio 110% 117% 242% (207%) 94% 94% 82% 85% 96% 92%
Operating ratio 105% 114% 15% 119% 91% 88% 62% 27% 93% 89%
Return on equity 17% 1% 4% 4% 22% 16% 18% 30% 23% 32%

Accounting year end Dec-15 Dec-14 Jun-15 Jun-14 Dec-15 Dec-14 Mar-15 Mar-14 Mar-15 Mar-14
Group/Company Centriq Insurance Dial Direct Insurance Enpet Africa Insurance Escap SOC Limited Export Credit Insurance
Company Limited Limited Limited Corporation of South
Africa Limited
Net premiums written 879032 873103 409873 436742 32445 31650 1383400 1214844 1788350 130642
Earned premiums 669836 695844 415196 436758 32188 31666 1481601 1155724 379999 264143
Reinsurance commission revenue 180410 125255 217479 225630 3033 2775 25609 19428 - -
Other income 110312 86268 22278 20873 - 5 1499 589 14352 875
Total income 1159331 1084833 678624 710060 54052 43765 1955134 1541360 671453 508768
Net claims incurred 593214 582461 312279 353738 25600 17790 1189513 2566000 (60766) (167835)
Interest allocated to cell owners 71659 61931 - - - - - - - -
Total expenses 1098599 1027977 566676 607846 32006 23325 1257739 2635759 393940 279796
Net profit/(loss) before taxation 60732 56856 111948 102214 22046 20440 697395 (1094399) 277513 228972
Taxation 21355 13902 32885 28692 5351 5641 187630 (313433) 209723 185053
Net profit/(loss) after taxation 39377 42954 79063 73522 16695 14799 509765 (780966) 67790 43919
Other comprehensive income/(expense) - - - - (3752) 4167 1794 (1988) 519483 468177
Total comprehensive income/(loss) for the year 39377 42954 79063 73522 12943 18966 511559 (782954) 587273 512096
Transfer to/(from) retained earnings - - - - (416) (1430) - - (912035) 318186
Other comprehensive (income)/expense - - - - 3752 (4167) (1794) 1988 (519483) (468177)
Dividends 50000 19435 150000 55000 7500 - - - - -
Change in retained earnings (10623) 23519 (70937) 18522 8779 13369 509765 (780966) (844245) 362105
Claims incurred to earned premium 89% 84% 75% 81% 80% 56% 80% 222% (16%) (64%)
Management and other expenses to net earned 35% 27% 60% 58% 19% 17% 4% 6% 120% 169%
premium
Combined ratio 126% 121% 84% 88% 90% 65% 83% 226% 104% 106%
Operating ratio 97% 95% 78% 81% 32% 35% 53% 195% 31% 14%
Return on equity 20% 21% 41% 28% 18% 17% 36% (85%) 2% 1%

Accounting year end Jun-15 Jun-14 15 month period ended
Jun-14 Dec-15 Dec-14 Jun-15 Jun-14 Sep-15 Sep-14
Jun-15
Group/Company First for Women Insurance Guardrisk Insurance HDI-Gerling Insurance The Hollard Insurance Indequity Group
Company (RF) Limited Company Limited Company of South Africa Company Limited Limited
Limited
Earned premiums 21929 18673 3487385 2810786 3013 2070 7541329 5953919 43144 39676
Reinsurance commission revenue 199400 189589 401159 298144 41654 35799 - - - -
Other income 16687 19410 145248 69401 2049 1690 135661 65671 72 76
Total income 247753 235963 4600176 3544077 51189 42793 8635782 6854895 44919 40952
Net claims incurred 34087 37258 599848 466568 1366 927 4387587 3503719 18991 18696
Total expenses 193761 183287 4453084 3439146 44501 38424 7628513 6057814 34874 32940
Taxation 21997 14807 49875 28168 2027 1201 156385 127644 2802 2273
Other comprehensive income/(expense) - - - - (49) (19) - - - -
Transfer to/(from) retained earnings - - - - - - - (473951) - -
Other comprehensive (income)/expense - - - - 49 19 - - - -
Dividends 20000 65000 - 158870 6000 - 554958 521643 2435 2463
Change in retained earnings 11995 (27131) 97217 (82107) (1339) 3168 295926 621745 4808 3276
premium
Combined ratio (26%) (34%) 116% 112% 94% 127% 101% 102% 81% 83%
Operating ratio (70%) (78%) 100% 99% (54%) (29%) 88% 88% 77% 80%
Return on equity 29% 38% 34% 40% 10% 6% 19% 16% 26% 25%

Group /Company Legal Expenses Insurance Momentum Alternative Momentum Short Term Momentum Structured Mutual & Federal
Southern Africa Limited Insurance Limited Insurance Company Insurance Limited Insurance Company
Limited Limited
Gross premiums written 683057 633938 - - 519962 343232 - - 9038000 8886000
Net premiums written 683057 633938 - - 516288 337978 - - 8082000 7874000
Earned premiums 683057 633938 - - 520832 338215 - - 8100000 7893000
Reinsurance commission revenue - - - - - - - - 152000 243000
Other income 3247 4361 - - - - - - 9000 3000
Total income 722992 710339 1662 1602 536860 353302 668 577 9141000 8686000
Net claims incurred 94781 78669 - - 440673 203915 - - 5325000 5469000

Acquisition costs 93389 96629 - - 97966 60838 - - 1487000 1436000
Total expenses 657595 595592 902 1836 723537 383506 1312 2692 8211000 8172000
Net profit/(loss) before taxation 65397 114747 760 (234) (186677) (30204) (644) (2115) 930000 514000
Taxation 12951 19012 157 (1) (25269) (8453) - 5 117000 81000
Net profit/(loss) after taxation 52446 95735 603 (233) (161408) (21751) (644) (2120) 813000 433000
Other comprehensive income/(expense) 1906 (215) - - - - - - 2000 3000
Total comprehensive income/(loss) for the year 54352 95520 603 (233) (161408) (21751) (644) (2120) 815000 436000
Transfer to/(from) retained earnings - - - - - - - - 2000 (361000)
Other comprehensive (income)/expense (1906) 215 - - - - - - (2000) (3000)
Dividends 53477 49957 2000 - - - - - 200000 600000
Change in retained earnings (1031) 45778 (1397) (233) (161408) (21751) (644) (2120) 615000 (528000)
Net premium to gross premium 100% 100% N/A N/A 99% 98% N/A N/A 89% 89%
Claims incurred to earned premium 14% 12% N/A N/A 85% 60% N/A N/A 66% 69%
Management and other expenses to net earned 69% 66% N/A N/A 36% 35% N/A N/A 17% 16%
premium
Combined ratio 96% 94% N/A N/A 139% 113% N/A N/A 99% 100%
Operating ratio 91% 83% N/A N/A 136% 109% N/A N/A 89% 94%
Return on equity 13% 24% 2% (1%) (62%) (15%) (9%) (36%) 17% 11%

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Jun-15 Jun-14
Group/Company Mutual & Federal Risk Nedgroup Insurance New National Assurance Nova Risk Partners OUTsurance Insurance
Financing Limited Company Limited Company Limited Limited Company Limited
Gross premiums written 1728258 997944 1055695 978786 1015397 1110677 - - 6580001 6048468
Net premiums written 40345 13618 925628 863216 338935 369108 (410) 251 6489861 5947347
Earned premiums 41052 24598 877188 852075 333991 369765 (410) 251 6489698 5929979
Reinsurance commission revenue 253868 118244 19668 10558 124768 117460 - - - -
Other income - - 37295 33195 12913 8118 571 4169 - -
Total income 304988 161583 1015212 949754 486667 509459 1194 5683 6740683 6181412
Net claims incurred 5923 5962 406113 395799 260391 285656 217 (1589) 3279979 3130979
Interest allocated to cell owners - - - - - - 466 436 - -
Total expenses 277087 139280 740341 726821 474239 495816 1250 4070 4766158 4455871
Net profit/(loss) before taxation 27901 22303 274871 222933 12428 13643 (56) 1613 1974525 1725541
Taxation 7397 6292 74698 59664 3143 3818 16 597 572458 511497
Net profit/(loss) after taxation 20504 16011 200173 163269 9285 9825 (40) 1016 1402067 1214044
Other comprehensive income/(expense) - - - - 2423 5047 - - 13451 24486
Total comprehensive income/(loss) for the year 20504 16011 200173 163269 11708 14872 (40) 1016 1415518 1238530
Transfer to/(from) retained earnings - - - - - - - - (13451) (24012)
Other comprehensive (income)/expense - - - - (2423) (5047) - - - -
Dividends - - 50000 50000 679 679 4000 4000 1029000 1063250
Change in retained earnings 20504 16011 150173 113269 8606 9146 (4040) (2984) 399969 199292
Net premium to gross premium 2% 1% 88% 88% 33% 33% N/A N/A 99% 98%
Claims incurred to earned premium 14% 24% 46% 46% 78% 77% (53%) (633%) 51% 53%
Management and other expenses to net earned 37% 51% 17% 18% 13% 10% (80%) 156% 22% 22%
premium
Combined ratio 57% 86% 82% 84% 105% 102% (191%) 1448% 73% 75%
Operating ratio 32% 9% 73% 78% 100% 99% 61% 945% 70% 71%
Return on equity 12% 11% 26% 26% 5% 5% (1%) 14% 48% 48%

Accounting year end Jun-15 Jun-14 Jun-15 Jun-14 Mar-15 Mar-14 Dec-15 Dec-14 Mar-15 Mar-14
Group/Company Regent Insurance Renasa Insurance Safire Insurance Company Santam Limited Sasria SOC Limited
Company Limited Company Limited Limited
Earned premiums 1432266 1407576 130217 102105 155231 127782 16861000 15654000 1358649 1194730
Reinsurance commission revenue 10589 12488 178049 144166 15983 16720 1066000 1013000 24049 22632
Other income 30868 32665 20962 17122 23342 14213 - - 129 37
Total income 1637103 1740420 333914 266135 205787 173819 19734000 18019000 1772582 1665368
Net claims incurred 699326 752019 94906 72900 105907 76677 10442000 9847000 440559 306382
Total expenses 1377923 1416761 331208 263341 191180 152845 16726000 15692000 938442 721328
Taxation 58018 68165 859 839 3980 5435 714000 515000 223456 258113
Other comprehensive income/(expense) - - - - 1069 4599 97000 - - -
Transfer to/(from) retained earnings (132929) (117435) - - - - (775000) 32000 26775 105468
Other comprehensive (income)/expense - - - - (1069) (4599) (97000) - - -
Dividends 23302 198129 - - 3612 2821 904000 829000 205778 107287
Change in retained earnings 44931 (60070) 1847 1955 7015 12718 2165000 951000 378131 473172
premium
Combined ratio 95% 100% 118% 117% 113% 107% 93% 94% 67% 58%
Operating ratio 84% 79% 114% 114% 106% 95% 82% 85% 39% 21%
Return on equity 20% 28% 4% 5% 9% 14% 30% 27% 12% 15%

Group/Company Standard Insurance Unitrans Insurance Zurich Insurance
Limited Limited Company South Africa
Limited
Gross premiums written 2070591 1918416 167544 154483 3735903 3484869
Net premiums written 1919085 1796717 77979 54734 2821730 2832790
Earned premiums 1888365 1777305 73867 48904 2801503 2875812
Total net investment income 125685 103170 19702 19911 182225 379531
Reinsurance commission revenue 20601 17272 8319 15500 87876 89768
Other income - 1 14818 25771 5220 22391
Total income 2034651 1897748 116706 110086 3076824 3367502
Net claims incurred 776325 869442 34272 7794 1830716 2126463

Acquisition costs 297878 274481 41678 38699 602820 612055
Interest allocated to cell owners - - - - - -
Employee benefit expense 99639 74608 - - - -
Management and other expenses 180492 178204 6856 8646 677686 616217
Total expenses 1354334 1396735 82806 55139 3111222 3354735
Net profit/(loss) before taxation 680317 501013 33900 54947 (34398) 12767
Taxation 187360 139172 8982 14498 (12083) (23072)
Net profit/(loss) after taxation 492957 361841 24918 40449 (22315) 35839
Other comprehensive income/(expense) - - - - (5153) (94997)
Total comprehensive income/(loss) for the year 492957 361841 24918 40449 (27468) (59158)
Transfer to/(from) retained earnings - - - - - -
Other comprehensive (income)/expense - - - - 5153 94997
Dividends 331573 276140 - 20078 - 24359
Change in retained earnings 161384 85701 24918 20371 (22315) 11480
Net premium to gross premium 93% 94% 47% 35% 76% 81%
Claims incurred to earned premium 41% 49% 46% 16% 65% 74%
Management and other expenses to net earned 10% 10% 9% 18% 24% 21%
premium
Combined ratio 65% 73% 101% 81% 108% 114%
Operating ratio 59% 68% 74% 40% 101% 100%
Return on equity 36% 30% 8% 14% (1%) 2%
Gerdus Dixon
Director,
National Head of Insurance
LONG -TERM
Tel: +27 82 492 8786
Email: gerdus.dixon@kpmg.co.za
INSURANCE
INDUSTRY
Overview of the industry financial results

Life insurers thrive on stability. Over the years, our survey has plainly shown that when investment
markets steadily increase and bond yields remain largely unchanged, the industry is prosperous.
And 2015 offered that, or at least for the first eleven months. Up until the end of November 2015 the
Johannesburg Stock Exchange (JSE) All Share Index was up 4% from the previous year and the 10-
year bond yield had only changed by 0.6% from the beginning of the year.
But then came the financial turmoil in December sparked by an unexpected appointment of a new
Finance Minister. The JSE gave back some of its earlier gains and generated volatility to come in
the months following, but potentially more importantly for the 2015 financial results of insurers with
reporting dates at the end of December, was that the long-term bond yield increased by 1.3% to
9.9% during the month.
Below is a table showing the 10-year bond yield as at every quarter end during 2015.
Date 2014/12/31 2015/03/31 2015/06/30 2015/09/30 2015/12/31
10 year 8.0% 7.9% 8.4% 8.5% 9.9%

bond yield
Insurers reporting under IFRS use a prospective basis to value non-linked policyholder liabilities
estimating future cash flows and discounting those to present value. The assumed inflation and
discount rates used by insurers are impacted significantly by bond yields, and a relatively small
change in a discount rate on future cash flows stretching over 30-odd years, has a pronounced
effect on current year profit and loss. The impact of such a change is dependent on the mix of
business and the level of negative reserves, which is very different by insurer.
Liberty reported that their policyholder liabilities increased by R237 million as a result of economic
assumption changes but the effect was not easy to spot for many other insurers. This again
highlights the disparity in accounting practices amongst insurers. Some insurers were able to shield
the adverse impact of the discount rate by utilising discretionary margins created in previous periods
or use different valuation methods to fund the valuation strain. The IASBs proposals for insurance
contract accounting that will become mandatory during reporting periods in 2020 or 2021 (effective
date still to be decided) will bring about much needed transparency and objectivity in accounting for
assumption changes. Despite the investment volatility experienced late in the Simultaneously, discretionary margins held largely to fund these overheads
year, on an aggregate basis, participants in the survey were able to report a 5% were also adjusted with the net profit impact for Liberty being immaterial.
increase in total assets year-on-year. The table below shows the total assets Also, MMI Holdings during the release of its results for the six months
of the four largest individual insurers that make up more than 80% of the total ended 31 December 2015 highlighted that as part of the implementation of
assets of the participating insurers. its client-centric model areas have been identified where further efficiencies
could be extracted. MMI is targeting a further reduction in annual expenses
Total assets in Rand Billion of R750 million by financial year 2019.
Old Mutual Life Assurance Company 619.8
(South Africa) Limited The total profit before tax of all insurers covered by this survey decreased
from R45.8 billion in 2014 to R31.3 billion in 2015. It is, however, not fair to
Sanlam Life Insurance Limited 482.7 conclude that the industry performance was 30% weaker than the previous
year. The main contributor to the lower profitability is fair value movements
Liberty Group Limited 358.4
on strategic shareholder investments within the larger life offices. For
MMI Group Limited 373.3 example, Old Mutuals strategic holding by its life company in Nedbank
Group is valued R5.2 billion lower year on year following investors aversion
The increase in industry assets suggests positive net client cash flows which to bank holdings in 2015. Another example is the carrying value of Sanlams
is then corroborated by statistics released by The Association for Savings and investment in Santam that decreased by nearly R2.0 billion based on the
Investment SA (ASISA). These ASISA life insurance statistics covering the JSE share price movement.
2015 year report net positive client cash flows of R23.4 billion (2014: R12.1
billion). On closer scrutiny, the inflows from individual single and recurring Following on from the lower profit the taxation expense reported by the
premiums increased by 13%, however, lump sums from group/institutional participants decreased from R9.7 billion last year to R7.3 billion in the
decreased by 5%, from R105.0 billion in 2014 to R99.6 billion in 2015. The current year. The taxation for life insurers is fluid and due to undergo
lower lump sums from group business, follows on from reduced bulk annuity substantial change over the next few years with the introduction of the risk
sales reported by a few of the listed insurers partially offset by Old Mutual fund (5th fund) and the tax base of policyholder liabilities transitioning from
reporting more buoyant sales. Also interesting to note that for the first time regulatory to IFRS. We have seen some insurers adopt elements of this
in many years, the growth in the assets backing non-linked policies (9%) was change in their valuation models of policyholder liabilities at the 2015 year
stronger than the assets backing linked policies (3%). end but it is difficult to do so on a grand scale without running the risk that
the changes need to be reversed in the future once the final tax basis has
A key theme from many insurers recent results presentations is the need settled.
to better understand and focus on expenses. In its 2015 directors report
Liberty notes that certain categories of expenses previously defined as general It is interesting to note when reading the FSBs quarterly report at
overheads, were redefined as maintenance and asset management expenses. 31 December 2015, that the aggregate capital requirement (CAR) for the
industry reduced over the year from bases (mostly mortality) reported by some
R42.5 billion to R39.5 billion. The main insurers. The prospects for 2016 are not
contributor to the lower capital was rosy though. During the first half of 2016
Old Mutual (R2.9 billion) who aligned investment markets were lower and volatile
the regulatory basis for its investment with concerns about pedestrian economic
contracts with its IFRS valuation basis growth, a downgrade for South Africa in
and in turn reduced the lapse risk capital its international sovereign rating to below
requirement. investment grade and a general global
fallout from the UKs Euro referendum.
The aggregate return on equity (net profit Insurers that derive substantial fees from
after tax as a percentage of shareholder the management of assets will bear the
funds) of insurers covered in the survey brunt of this uncertainty. Also, towards the
decreased from 22% in 2014 to 14% in last quarter of 2015 insurers started seeing
2015. The return is impacted negatively more strain on its persistency of its risk
by the valuation losses on strategic business.
shareholder assets discussed above.
Dividends paid to shareholders also These economic conditions offer
reduced to R13.1 billion, compared to substantial obstacles to grow new business
R14.6 billion declared during 2014 with volumes which is much needed to replace
Sanlam Life not declaring a dividend (2014: the industrys high margin legacy business
R3.9 billion) in 2015. that continues to mature. Having said all
this, 2016 will not be the industrys first
In summary, when external factors are rodeo and they have prepared themselves
excluded, such as the higher policyholder for tough trading conditions through the
discount rate and downward valuation diversification of their business models
movements on strategic shareholder and investing in new distribution areas.
investments, the industry results for The year 2016 will therefore be a true
2015 was relatively strong. The financial test of the industrys resilience and how
result was underscored by positive client successful insurers have been in morphing
cash flows, persistency that was under into financial services groups that have
strain but largely held tight and favourable assorted and non-correlated income
changes in the policyholder valuation streams.
LONG TERM INSURERS | Statement of Financial Position | R000

Accounting year end Jun-15 Jun-14 Dec-15 Dec-14 Nov-15 Nov-14 Jun-15 Jun-14 Jun-15 Jun-14
Group/Company 1Life Direct Insurance Absa Life Limited AIG Life Limited AVBOB Mutual Assurance Bidvest Life Limited
Limited Society

Share capital and premium 398000 360000 24000 24000 10000 10000 - - 10000 10000
Other reserves - - 12660 - - - - - 112017 100729
Non-controlling interests - - - - - - - - - -
Policyholder liabilities under insurance contracts - - 1854804 1972202 198227 236615 6179232 5401892 26733 27829
and contracts with DPF's
Policyholder labilities under investment - - 21665284 20276315 - - - - - -
contracts
Reinsurance contract liability - - 85692 95436 - - - - 319 446
Cell owners interest - - - - - - - - - -
Deferred tax liability/(asset) 284316 245130 15314 25500 - - 214012 189711 20720 18417
Total investments - - 24783983 23401120 217357 296333 9569573 8473244 305827 278985
Assets arising from insurance contracts 1211784 1052014 - - - - - - - -
PPE; goodwill and intangible assets - - 330432 265464 - - 119657 142206 - -
Reinsurers' share of policyholder liabilities 5840 (7795) 24374 18459 - - 11000 12092 748 1687
Deferred acquisition costs - - - - - - - - - -
Other assets 71846 49284 160420 156849 67594 85987 314395 295073 16170 32495
Income tax asset - - - - - - - - 2072 -
Deposits held with cell option - - - - - - - - 36696 50955
Total assets 1544067 1329449 25453876 23957499 456951 559582 12218442 10851468 363367 367637
Regulatory surplus assets to CAR 1,91 2,25 Information not available 4,90 5,10 4,60 4,80 27,60 30,50
Total assets/total liabilities 308% 312% 105% 105% 225% 201% 176% 181% 645% 631%
Increase in shareholders' funds 15% 4% (10%) 10% (1%)

Accounting year end Dec-15 Dec-14 Jun-15 Jun-14 15 month period ended
Mar-14 Jun-15 Jun-14 Dec-15 Dec-14
Jun-15
Group/Company Centriq Life Insurance Clientele Life Limited Guardrisk Life Limited Hollard Life Assurance Liberty Group Limited
Company Limited Company Limited
FSB classification Cell captive Traditional Cell captive Traditional Traditional

Share capital and premium 15000 23428 4 853 4853 50000 10000 20000 20000 29000 29000
Retained earnings/(deficit) 5640 5370 563 600 490765 62608 28086 2354187 2123744 19182000 17649000
Other reserves - - 25 717 21783 - - - - (10000) (568000)
Total shareholders' funds 20640 28798 594 170 517401 112608 38086 2374187 2143744 19201000 17110000
Policyholder liabilities under insurance contracts 36740 38219 689 676 695554 943604 467335 4601546 6242485 206672000 203009000
Policyholder labilities under investment 1867 1900 942 336 998338 1584508 1541752 5576191 6855446 87553000 80833000
contracts
Reinsurance contract liability 254429 - - - - - - - - -
Cell owners interest 121331 109507 - - 2025596 1948040 - - - -
Deferred tax liability/(asset) (461) (454) (16 712) (9742) (59778) (107279) 549106 524269 4300000 4049000
Other liabilities 22379 14018 258 800 251024 169990 89933 1119541 874129 40650000 23301000
Total liabilities 436285 163190 1 874 100 1935174 4663920 3939781 11846384 14496329 339175000 311192000
Total investments 114449 139671 1 876 745 1973891 4372101 3887225 11224844 14049790 321274000 309498000
Assets arising from insurance contracts - - - - - - - - - -
PPE; goodwill and intangible assets - - 50 191 48052 1609 97 11379 4300 2371000 2178000
Reinsurers' share of policyholder liabilities 10028 11204 3 015 3242 251544 15668 127095 131585 1334000 1245000
Deferred acquisition costs - - - - - - - - 651000 572000
Cash and cash equivalents 3649 1641 156 995 71334 69837 38683 1950900 1956905 9496000 5235000
Other assets 74026 38689 381 324 356056 81437 36194 906353 497493 23250000 9574000
Income tax asset 344 783 - - - - - - - -
Deposits held with cell option 254429 - - - - - - - - -
Total assets 456925 191988 2 468 270 2452575 4776528 3977867 14220571 16640073 358376000 328302000
Regulatory surplus assets to CAR 6,10 5,80 2,32 2,03 2,60 3,70 3,70 3,10 5,15 3,07
Increase in shareholders funds (28%) 15% 196% 11% 12%

Group/Company Metropolitan Life Metropolitan Odyssey Momentum Ability MMI Group Limited Nedgroup Life Assurance
International Limited Limited Limited Company Limited

Share capital and premium 40000 40000 35000 35000 10000 10000 1041000 1041000 55000 55000
Other reserves - - - - - - 7096000 6316000 - -
Policyholder liabilities under insurance contracts - - 222744 227184 237129 237679 121439000 122087000 3906139 4345334
Policyholder labilities under investment 132067 125310 - - 1443846 1527037 208429000 191134000 2824299 568241
contracts
Reinsurance contract liability - - - - - - - - - -
Cell owners interest - - - - 593118 518354 - - - -
Deferred tax liability/(asset) - - (607) (10769) 1982 12170 1765000 1628000 890 (1644)
Total investments 183613 196025 177892 278570 1171426 1278605 344172000 319705000 7503949 5434655
Assets arising from insurance contracts - - - - 141554 183465 - - - -
PPE; goodwill and intangible assets - - - - - - 4461000 4310000 5920 8902
Reinsurers' share of policyholder liabilities - - - - 172111 199224 1597000 1661000 - -
Deferred acquisition costs - - - - - - - - - -
Other assets 75 494 54184 179 175407 141671 10009000 8318000 487205 560092
Income tax asset - - 4534 - - - - - - -
Deposits held with cell option - - - - - - - - - -
Total assets 206420 208738 281068 321308 2434539 2403720 373276000 349441000 8240924 6252130
Regulatory surplus assets to CAR 5,60 8,00 5,90 5,90 4,90 3,90 2,50 2,40 14,40 10,10
Increase in shareholders' funds (30%) 1% 2% 3% 29%

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Jun-15 Jun-14 Mar-15 Mar-14
Group/Company Nedgroup Structured Life Old Mutual Alternative Old Mutual Life Assurance OUTsurance Life Prescient Life Limited
Limited Risk Transfer Limited Company (South Africa) Insurance Company
Limited Limited
Share capital and premium 26351 26351 12425 12425 6423000 6423000 385002 325002 10000 10000
Retained earnings/(deficit) 36814 28351 14549 11662 40853000 42113000 31877 (5654) 45786 37101
Other reserves - - 142 - 276000 689000 - - - -
Policyholder liabilities under insurance contracts - - 867345 882311 154809000 157742000 110325 48010 - -
Policyholder labilities under investment 8163624 11178329 2240601 - 366263000 336996000 - - 9817582 6685086
contracts
Reinsurance contract liability - - - - - - - - - -
Cell owners interest - - 179673 178777 - - - - - -
Deferred tax liability/(asset) - - - - 3691000 3555000 4859 (4353) 4012 2448
Total investments 8163624 11178329 2854925 703822 589287000 557294000 501724 325689 9880249 6737991
Assets arising from insurance contracts - - - - - - - - - -
PPE; goodwill and intangible assets - - - - 3147000 2860000 149 298 - -
Reinsurers' share of policyholder liabilities - - 235203 270270 608000 477000 71231 41815 - -
Deferred acquisition costs - - - - 947000 985000 - - - -
Other assets 7387 10793 85876 79234 7862000 6280000 21989 22440 1955 4120
Income tax asset - - - - - - - - - -
Deposits held with cell option - - - - - - - - - -
Total assets 8227957 11234108 3386918 1137096 619791000 585161000 600411 415562 9886241 6742487
Regulatory surplus assets to CAR 1,80% 1,62 5,20 4,50 3,20 3,10 1,60 2,50 1,61 1,10
Increase in shareholders' funds 15% 13% (3%) 31% 18%

Group/Company Professional Provident Regent Life Assurance Sanlam Life Insurance
Society Insurance Company Limited Limited
Company Limited
Share capital and premium 10000 10000 144688 144688 5000000 5000000
Retained earnings/(deficit) 319844 274674 423390 308648 67541000 57727000
Other reserves - - (6512) (7565) 5429000 5429000
Non-controlling interests - - 45876 42035 - -
Total shareholders' funds 329844 284674 607442 487806 77970000 68156000
Policyholder liabilities under insurance contracts 25577153 23711492 122627 191170 140418000 148804000
Policyholder labilities under investment 1139647 825699 246425 254684 217796000 191255000
contracts
Reinsurance contract liability 6184 107233 - - - -
Cell owners interest - - - - - -
Deferred tax liability/(asset) 331214 355444 122334 112560 1635000 1693000
Other liabilities 333711 240212 255415 241410 44911000 46666000
Total liabilities 27381725 25240080 746801 799824 404760000 388418000
Total investments 25251529 24133928 938173 644835 466870000 442849000

Assets arising from insurance contracts - - - - - -
PPE; goodwill and intangible assets 779965 544885 10084 18498 1703000 1690000
Reinsurers' share of policyholder liabilities - - 110192 142089 650000 642000
Deferred acquisition costs - - - - 2672000 2561000
Cash and cash equivalents 1401234 692352 219954 418601 3190000 647000
Other assets 265908 153589 75840 63607 7645000 8185000
Income tax asset 12933 - - - - -
Deposits held with cell option - - - - - -
Total assets 27711569 25524754 1354243 1287630 482730000 456574000
Regulatory surplus assets to CAR 2,6 2,6 8,00 4,20 5,80 4,50
Total assets/total liabilities 101% 101% 181% 161% 119% 118%
Increase in shareholders' funds 16% 25% 14%
Bespoke
insurance training
Our tailor-made training courses are designed to meet the specific needs of your organisation
whether its information on insurance regulations, market conduct, financial reporting or the
latest industry developments.
All our courses are accredited by the Insurance Institute of South Africa, and can be conducted
either at our premises or yours. We also offer annual training packages covering our entire suite
of training courses.
kpmg.co.za

Kashmira Naran
Manager
T: +27 (0)82 710 7629
E: kashmira.naran@kpmg.co.za
LONG TERM INSURERS | Statement of Comprehensive Income | R000
Accounting Year end Jun-15 Jun-14 Dec-15 Dec-14 Nov-15 Nov-14 Jun-15 Jun-14 Jun-15 Jun-14
Limited Society

Recurring premiums no split no split 2944764 2696693 no split no split 2298817 1968042 49382 48319
Single premiums provided provided - - provided provided 2654 2274 - 71
(total is (total is (total is (total is
Other premiums R860 597) R604 967) - - R615 355) R657 283) - - - -
Reinsurance premiums 125990 122327 503078 460308 30009 29559 (1919) (2175) (4675) (6682)
Net premium income 734606 482639 2441686 2236385 585346 627724 2299552 1968141 44707 41708
Service fees from investment contracts - - 77432 62919 - - - - - -
Commission received 1996 8777 - - - - - - 1498 1833
Other unallocated income 14477 16845 - - - - 422 1074 - -
Total income 764054 518201 3305846 3679100 608743 656533 3335440 3777027 69803 108519
Death/disability no split no split 713031 605452 234361 210672 520027 416155 6704 8229
provided provided
Maturities 36613 26985 - - 629 786 - -
(total is (total is
Annuities R317 835) R191 262) - - 1635 3103 - - - -
Surrenders 169077 184563 - - 174220 161215 - -
Withdrawals and other benefits 54599 23694 - - 110814 89144 - -
Reinsurance recoveries (92632) (62399) (172645) (138028) (6627) (8967) (798) (488) (556) (492)
Net policyholder benefits under insurance 225203 128863 800675 702666 229370 204808 804892 666812 6149 7737
contracts
Change in preference share liability - - - - - - - - - -
Change in assets arising from insurance (137068) (171896) - - - - - - - -
contracts
LONG TERM INSURERS | Statement of Comprehensive Income | R000 (continued)
Limited Society

Change in policyholder liabilities under insurance - - (125389) 138960 (38388) (2873) 776742 1448868 (1095) (2346)
contracts
Fair value adjustments on policyholder liabilities - - 637700 987944 - - - - - -
under investment contracts
Administration, management and other 416130 305795 491574 478152 104577 154251 669070 572506 22649 18656
expenses
Total expenses 624008 340764 2263914 2749680 487150 645975 2701296 3065093 38582 34895
Profit/(loss) before tax 140046 177437 1041932 929420 121593 10558 634144 711934 31221 73624
Tax 39213 49682 300174 268261 34321 2036 139123 164042 6254 14147
Profit/(loss) after tax 100833 127755 741758 661159 87272 8522 495021 547892 24967 59477
Other comprehensive income - - - - - - (2124) (5545) - -
Total comprehensive income/(loss) for the 100833 127755 741758 661159 87272 8522 492897 542347 24967 59477
year
Other transfers to/(from) retained income - - - - - - - - 11288 30852
Other comprehensive income not charged - - - - - - - - - -
against retained earnings
Ordinary dividends - - 704000 892000 115000 46100 - - 27279 23400
Allocated to preference shareholders - - - - - - - - - -
Change in retained earnings 100833 127755 37758 (230841) (27728) (37578) 492897 542347 (13600) 5 225
Management expenses to net premium and 57% 80% 20% 21% 18% 25% 29% 29% 51% 45%
service fees on investment contracts
Tax as a % of NIBT 28% 28% 29% 29% 28% 19% 22% 23% 20% 19%
Comments Company Company Company Company Company Company Society Society Company Company
Accounting Year end Dec-15 Dec-14 Jun-15 Jun-14 15 month period ended
Mar-14 Jun-15 Jun-14 Dec-15 Dec-14
Jun-15
Group/Company Centriq Life Insurance Clientele Life Guardrisk Life Limited Hollard Life Assurance Liberty Group Limited
Company Limited Limited Company Limited

Recurring premiums no split no split 1 395 093 1208079 1712665 1159548 5059648 4857289 split split
Single premiums provided provided 653770 77706 21635 1181912 provided, provided,
(total is (total is but includes but includes
Other premiums R222 593) R196 372) - - 94512 94943 investment investment
contracts contracts
(total is (total is
R36 419 000) R39 708 000)
Reinsurance premiums 214207 188934 113 155 99125 1378756 733688 764652 726 611 1056000 905 000
Net premium income 8386 7438 1 281 938 1108954 987679 503566 4411143 5407533 35363000 38803000
Service fees from investment contracts 5711 4514 - - - - - - 1123000 914000
Total net investment income 10305 8942 173 472 202242 423495 267931 770629 821090 22444000 28891000
Commission received 5896 4601 - - 27603 19529 - - - -
Other unallocated income 106 112 159 373 171653 - - 31919 49302 688000 670000
Total income 30404 25607 1 614 783 1482849 1438777 791026 5213691 6277925 59618000 69278000
Death/disability no split no split 188 043 145094 no split no split 1648793 1670951 split split
Maturities provided provided - - provided provided 1748127 680976 provided provided
(total is (total is (total is (total is but included but included
Annuities R99 744) R86 298) - - R380 239) R226 811) 144445 166783 payments to payments to
Surrenders 186 265 207381 204535 202782 investment investment
contracts contracts
Withdrawals and other benefits 18 620 31376 58210 81578 (nett total is (nett total is
R32 720 000) R31 534 000)
Reinsurance recoveries (93831) (81495) (117 250) (96639) (347527) (183141) (553020) (685577) (923000) (853000)
Net policyholder benefits under insurance 5913 4803 275 678 287212 32712 43670 3251090 2117493 31797000 30681000
contracts
Change in preference share liability - - - - 384066 242803 - - - -
Change in assets arising from insurance - - 227 95 - - - - - -
contracts
Group/Company Centriq Life Insurance Clientele Life Guardrisk Life Limited Hollard Life Assurance Liberty Group Limited
Company Limited Limited Company Limited

Change in policyholder liabilities under insurance 7149 5745 (5878) (41396) 49502 (66975) (1638360) 432854 3707000 15187000
contracts
Fair value adjustments on policyholder liabilities (138) 886 72 275 49184 - - - - 6052000 7382000
Acquisition costs 6582 4776 689 445 658926 - - 430028 516539 3994000 3992000
Administration, management and other 3365 4033 152 372 144173 916282 537404 1702218 1630360 8256000 7237000
expenses
Total expenses 22871 20243 1 184 119 1098194 1382562 756902 3744976 4697246 53806000 64479000
Profit/(loss) before tax 7533 5364 430 664 384655 56215 34124 1468715 1580679 5812000 4799000
Tax 2263 426 119 438 95476 15693 9869 392630 424449 1834000 1780000
Profit/(loss) after tax 5270 4938 311 226 289179 40522 24255 1076085 1156230 3978000 3019000
Other comprehensive income - - - - - - - - (123000) (72000)
Total comprehensive income/(loss) for the 5270 4938 311 226 289179 40522 24255 1076085 1156230 3855000 2947000
year
Other transfers to/(from) retained income - - (18 729) (13724) - - 9612 9303 (16000) 17000
Other comprehensive income not charged - - - - - - - - (56000) 80000
Ordinary dividends 5000 1288 219 662 213069 6000 40292 855254 885347 2250000 1290000
Change in retained earnings 270 3650 72 835 62386 34522 (16037) 230443 280186 1533000 1754000
Tax as a % of NIBT 30% 8% 28% 25% 28% 29% 27% 27% 32% 37%
Comments Company Company Company Company Company Company Company Company Company Company
Accounting Year end Jun-15 Jun-14 Jun-15 Jun-14 Jun-15 Jun-14 Jun-15 Jun-14 Dec-15 Dec-14

Recurring premiums - - - - 1954322 1796141 no split no split no split no split
Single premiums 1497 2099 provided provided provided provided
Other premiums - - R22 458 000) R21 184 000) R1 966 690) R3 506 042)
Reinsurance premiums - - - - 1752902 1590566 3476000 3111000 246472 281246
Net premium income - - - - 202917 207674 18982000 18073000 1720218 3224796
Service fees from investment contracts 427 2555 - - 5358 5018 2097000 1711000 - -
Commission received - - - - - - - - 53809 70726
Other unallocated income - 26 - - - - 1051000 1104000 36846 8922
Total income 20985 21105 15308 23957 319683 351570 48272000 72267000 2050267 3725796
Death/disability - - no split no split 531259 412197 7508000 6730000 570570 633254
Maturities - - provided provided - - 5140000 5739000 226108 181099
(nett total is (nett total is
Annuities - - R5 820) R41 619) 3710 3482 3266000 2506000 165226 141155
Surrenders - - - - 2837000 2796000 121243 240794
Withdrawals and other benefits - - - - 3011000 3059000 - -
Reinsurance recoveries - - - - (516341) (400087) (1944000) (1534000) (194737) (188012)
Net policyholder benefits under insurance - - 5820 41619 18628 15592 19818000 19296000 888410 1008290
contracts
Change in preference share liability - - - - - - - - - -
Change in assets arising from insurance - - - - 70073 (200291) - - - -
contracts
Accounting Year end Jun-15 Jun-14 Jun-15 Jun-14 Jun-15 Jun-14 Jun-15 Jun-14 Dec-15 Dec-14

Change in policyholder liabilities under insurance - - (2657) (37778) (25240) 254444 (586000) 7276000 (553229) 849913
contracts
Fair value adjustments on policyholder liabilities 13167 14419 - (250) 42586 107113 15579000 32221000 66063 63184
Acquisition costs - - - - - - 3101000 2970000 355889 433354
expenses
Total expenses 14163 16574 4269 4555 262431 299238 43739000 67204000 1038459 2647436
Tax 2002 2042 10662 9420 15877 14628 1323000 1820000 282665 301821
Other comprehensive income - - - - - - 794000 201000 - -
year
Other transfers to/(from) retained income - - - - - - 14000 301000 - -
Other comprehensive income not charged - - - - - - (794000) (200000) - -
Ordinary dividends 30000 20000 - - 40000 54284 3549000 3200000 420000 420000
Allocated to preference shareholders - - - - - - 31000 28000 - -
Change in retained earnings (25180) (17511) 377 9982 1375 (16580) (356000) 317000 309143 356539
Management expenses to net premium and 233% 84% N/A N/A 75% 58% 28% 28% 16% 9%
Tax as a % of NIBT 29% 45% 97% 49% 28% 28% 29% 36% 28% 28%
Accounting Year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Jun-15 Jun-14 Mar-15 Mar-14
Limited Limited
Recurring premiums - - no split no split no split no split no split no split - -
Single premiums provided provided provided provided provided rovided
(total is (total is (total is (total is (total is total is
Other premiums R849 017) R790 742) R43 523 000) R35 001 000) R316 491) R237 419)
Reinsurance premiums - - 841 440 785 067 1076000 998000 (20910) (19660) - -
Net premium income - - 7 577 5 675 42447000 34003000 295581 217759 - -
Service fees from investment contracts 9625 10209 456 - 3107000 2769000 - - 18524 15948
Total net investment income 3318 2454 98 791 51 462 39507000 65004000 28251 16935 252210 242680
Commission received - - - - 1877000 1361000 - - - -
Other unallocated income 2088 1979 21267 15996 257000 323000 - - - -
Total income 15031 14642 128091 73133 87195000 103460000 323832 234694 270734 258628
Death/disability - - no split no split no split no split 58520 35280 - -
Maturities provided provided provided provided - -
Annuities R231 800) R289 948) R51 751 000) R54 622 000) - -
Surrenders - -
Withdrawals and other benefits - -
Reinsurance recoveries (775954) (782810) 1426000 471000 (17609) (8321) - -
Net policyholder benefits under insurance - - (544154) (492862) 50325000 54151000 40911 26959 - -
contracts
Change in preference share liability - - 406260 368407 - - - - - -
Change in assets arising from insurance - - - - - - - - - -
contracts
Accounting Year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Jun-15 Jun-14 Mar-15 Mar-14
Limited Limited
Change in policyholder liabilities under insurance - - split not split not split not split not 41351 19840 - -
contracts provided, provided, provided, provided,
included included included included
in claims in claims in claims in claims
expense line expense line expense line expense line
Fair value adjustments on policyholder liabilities - - 45102 - 18566000 19957000 - - 242977 237309
Acquisition costs - - 15771 24915 4309000 3480000 - - - -
expenses
Total expenses 3277 3538 (33437) (73803) 83676000 87190000 271738 232193 259869 248352
Tax 3291 3109 158641 144288 469000 2994000 14563 850 2180 2412
Other comprehensive income - - 142 - 115000 96000 - - - -
year
Other transfers to/(from) retained income - - - - 376000 (72000) - - - -
Other comprehensive income not charged - - (142) - - - - 17 - -
Ordinary dividends - - - - 4801000 3510000 - - - -
Change in retained earnings 8463 7995 2887 2648 (1260000) 9790000 37531 1668 8685 7864
Tax as a % of NIBT 28% 28% 98% 98% 13% 18% 28% 34% 20% 23%
Accounting Year end Dec-15 Dec-14 Jun-15 Jun-14 Dec-15 Dec-14

Company Limited
Recurring premiums no split no split 751920 706810 no split no split
Single premiums provided provided - - provided provided
Other premiums R3 063 836) R2 732 925) - - R13 195 000) R12 214 000)
Reinsurance premiums (179042) (158903) 84415 83884 880000 789000
Net premium income 2884794 2574022 667505 622926 12315000 11425000
Service fees from investment contracts 50253 38136 - - 602000 590000
Total net investment income 1329064 2762128 132164 165242 31821000 46080000
Commission received - - - - - 2000
Other unallocated income 979415 (320842) 54876 47248 - -
Total income 5243526 5053444 854545 835416 44738000 58097000
Death/disability no split no split 213010 220854 no split no split
Maturities provided provided 19568 3394 provided provided
Annuities R2 101 127) R1 718 708) (113) 10157 R4 248 000) R4 139 000)
Surrenders 84659 62672
Withdrawals and other benefits - -
Reinsurance recoveries (116673) (67998) (66327) (48690) 768000 661000
Net policyholder benefits under insurance 1984454 1650710 250797 248387 3480000 3478000
contracts
Change in preference share liability - - - - - -
Change in assets arising from insurance 69023 53318 - - - -
contracts
Accounting Year end Dec-15 Dec-14 Jun-15 Jun-14 Dec-15 Dec-14

Company Limited
Change in policyholder liabilities under insurance 1728244 2255497 (36646) 26402 5000000 16464000
contracts
Fair value adjustments on policyholder liabilities 2105976 2519441 10292 26488 18244000 18353000
Acquisition costs - - 169894 181217 1599000 1413000
Administration, management and other 1084073 829975 180796 162338 4870000 4460000
expenses
Total expenses 4865794 4789500 575133 644832 33193000 44168000
Profit/(loss) before tax 377732 263944 279412 190584 11545000 13929000
Tax 332562 242864 63298 45859 1731000 1327000
Profit/(loss) after tax 45170 21080 216114 144725 9814000 12602000
Other comprehensive income 1374 1548 - - - 144000
Total comprehensive income/(loss) for the 46544 22628 216114 144725 9814000 12746000
year
Other transfers to/(from) retained income - - (29546) (20051) - -
Other comprehensive income not charged - - - - - -
Ordinary dividends - - 71826 98198 - 3950000
Allocated to preference shareholders - - - - - -
Change in retained earnings 45170 22628 114742 26476 9814000 8796000
Management expenses to net premium and 38% 32% 27% 26% 38% 48%
Tax as a % of NIBT 88% 92% 23% 24% 15% 10%
Comments Company Company Company Company Company Company
Benjamin Vosloo
Senior Manager,
Financial Services
REINSURANCE
Tel: +27 82 710 9640
Email: benjamin.vosloo@kpmg.co.za
INDUSTRY
The South African reinsurance market faced many difficult decisions in would be for a prompt transition, as the burden of parallel regulation is high in
2015. Decisions, amongst others, in respect of growth and structural terms of costs and the strain on staff. Reinsurance regulatory review proposals
developments, were driven primarily by far-reaching economic and are very topical and the industry is scrutinising their options through the proposal
regulatory change. process.
Tough economic conditions persist. The weakening of the Rand, poor GDP Industry performance
growth and the potential downgrade of South Africa's sovereign rating, provided Illustrated below is the composition of the reinsurance market by Gross Written
for a challenging environment for the insurance and reinsurance markets in Premium (GWP), as reported in the audited annual financial statements of the
2015. South Africas economic growth is sluggish, with real GDP growth in 2015 reinsurers participating in this survey, including a combined view of life and non-
floundering at 0.4% and projected to worsen in 2016, due to a combination of life results.
domestic constraints and external headwinds arising from the fall in commodity
prices and a slowdown of the Chinese economy. The impact of Brexit will also 0%
put pressure on commodity prices, export volumes and capital flows to South OTHERS2
1%
Africa in the mid-term. To achieve the growth expected by foreign parents,
South African reinsurers will have to focus on alternative high growth markets, MUNICH RE 32%
mobilising renewed focus on the rest of Africa. These markets are attractive due 33%
to lower insurance penetration and reduced competition. There are however
major regulatory constraints, particularly in Nigeria, one of the biggest target 30%
HANNOVER RE1
markets. South African insurers will also look to capture African market share, 27%
with capital and innovative ideas key to access them. Reinsurers will have to
GENERAL RE 12%
consider how they will be able to assist their cedants in this regard. Concerns
remain regarding a sovereign credit rating downgrade that could adversely affect 12%
the competitiveness of local reinsurers going forward. 12%
AFRICAN RE
On a regulatory front, the regulations pertaining to reinsurance are less stringent 12%
when compared to those applicable to the primary insurance market. The
5%
differences stem from the primary purpose of insurance regulation, which SCOR RE
6%
is to protect insurance consumers who may lack insight or sophistication in
understanding the business of insurance. Reinsurance, on the other hand, is
8%
often referred to as the wholesale arm of the insurance industry. RGA RE
8%
2015 marks a milestone in the SAM process and this risk-based regulatory
regime is close to being fully implemented. The industry has gone to great 2014
lengths to ready itself for SAM implementation. An industry-wide preference 2015
For the purposes of overall market performance, Hannover Reinsurance Africa Limited and Hannover Life Reassurance Africa have been combined to make the results comparable to the composite licenses.
2
Reinsurers included in the Other caption includes Emeritus Reinsurance Company (SA) Limited and GIC Re South Africa Limited
Munich Re and Hannover Re1 remain the dominant players in the local reinsurance Some of these movements are a direct result of reinsurers reviewing their
industry. For 2014 and 2015 they had a combined market share of more than 60% portfolio of treaties and cedants and offloading non-performing business.
as measured by GWP volumes. The market share distribution across reinsurers
Below we illustrate market share in terms of GWP for life and non-life reinsurers
remained consistent between 2014 and 2015, with the exception of Hannover Re
separately.
losing market share and Scor and Munich Re gaining market share.
Non-life
SCOR RE
AFRICAN RE
GENERAL RE
HANNOVER RE
MUNICH RE
OTHER SA
500,00 1 000,00 1 500,00 2 000,00 2 500,00 3 000,00 3 500,00
2014 Millions
2015
For the purposes of overall market performance, Hannover Reinsurance Africa Limited and Hannover Life Reassurance Africa have been combined to make the results comparable to the composite licenses.
Life
RGA RE
SCOR RE
GENERAL RE
HANNOVER RE
MUNICH RE
500,00 1 000,00 1 500,00 2 000,00 2 500,00 3 000,00
Millions
2014
2015
The South African reinsurance industry (based on South African reinsurers The business lost to foreign markets is mainly in the facultative reinsurance space.
participating in our survey) recorded GWP of ZAR 17.8 billion for the 2015 year Globally the reinsurance market is in a soft cycle, spurred on by the introduction
(2014: ZAR 17.5 billion). The growth of only 2% is far lower than the growth rate of pension fund capital. More business is being written out of the London market.
of the primary insurance industry, indicating that larger parts of local primary There is sufficient capacity on offer, as well as diversification benefits for these
insurance are placed directly with foreign reinsurers or are retained for the net players. Direct writers are optimising their reinsurance and ceding less business.
account. The life reinsurance market experienced a 10% increase in terms of For example, non-proportional cover is outselling proportional cover.
GWP and the non-life reinsurance market, experienced a 5% decrease.
The regulatory reported GWP for reinsurers, as per the FSBs quarterly report performance has however not filtered through to the bottom line. This is mainly
for the period ended 31 December 2015, amounted to ZAR 19.7 billion (2014: due to adverse claims experience.
ZAR 18.5 billion). This amounts to 7% (2014: 12%) year-on-year growth.
The new kid on the block, GIC Re, made its impact by increasing its GWP by ZAR
The differences in the FSB-reported results and surveyed results, reflect the
140 million between 2014 and 2015, capturing 1% of the reinsurance market.
differences in IFRS and Regulatory reporting. For example, the treatment of
Most of the increase is due to a book of business transferred by their holding
products with minimal risk transfer.
company, a state-owned insurer in India. The licence (old Saxum Re licence)
Based on the survey results, net earned premiums increased by 3% for 2015. was only active for three months. Most of their business is written in other
The net underwriting profit, before taking management expenses into account, African countries.
increased by 62%. This is mainly as a result of the decrease in net commission
RGA increased its GWP and earned premiums by 4% and 14% respectively
expenses. One of the reasons noted for the decrease is the reduced profit
between 2014 and 2015. These increases carried through to the bottom line.
commission incurred on life business.
General Re increased their GWP and earned premiums by 5% and 6%
It was a very stable year in terms of incurred losses. The financial year loss ratios
respectively between 2014 and 2015. This growth stems from the life business
have remained similar to 2014. The expense ratio increased by 3%. Some of
and is mainly attributable to individual life business, group lump sum and group
contributing factors include inflation, weakening of the Rand, and the investment
permanent health insurance business.
in human resources required to support increased regulatory obligations, growth
aspirations and client service. African Re achieved 1% growth in terms of GWP. Their underwriting profit
increased by 3%, which is mainly due to improved claims experience. African Re
Individual underwriting performance
experienced a 20% increase in its management expenses.
Munich Re increased its written top-line by 6% (2014: 14%). The Munich Re
life division did not perform as well when compared to the previous year when Investment performance
measured by premium volume. However, GWP is not necessarily the best Reinsurers achieved an average return on investments (including cash and cash
measure to utilise when it comes to life entities. The non-life division ended equivalents) of 5.62% (2014: 5.5%). This was 6.1% (2014: 6.3%) when the
with a solid overall increase of 18% in premium volume. We expect the Munich effects of cash are excluded. These returns are quite low when compared to an
Re results to change significantly going forward due to the decision to close average prime rate of 9.38% and the average 10-year government bond yield of
its Mauritian subsidiary at the end of 2015 after 18 years in operation. Munich 9.77%. They are closest to the average three-month NCD rate of 6.22%. This
Re aims to streamline and strengthen the organisations business model by does talk to the average asset allocation at 31 December 2015, as reported by
establishing Johannesburg as the hub for its Sub-Saharan African business. the FSB for reinsurers and shown below.
Hanover Res GWP decreased by 8%. This puts Hannover Re back to a similar RGA Re and General Re were the top performers with 8% and 7% investment
top-line performance when compared to 2013. Excluding the Hannover Re income on investments, including cash. Not surprisingly, they are the
premiums, the remaining industry players participating in the KPMG insurance two reinsurance companies with the highest CAR ratios with 4.6 and 5.9
survey, grew by 7% in terms of GWP. respectively, affording them the opportunity to diversify the investment portfolio
beyond the regulatory constraints. An alternate strategy would be to pay out
Scor outperformed the market and increased its GWP by 18% (2014: 8%).
excess capital in dividends and invest free from regulation elsewhere; however,
The strong growth in the life business continued in 2015. The top-line
this would result in more prudent application to the remaining capital base. All Africa Re (2014s top performer) showing a decrease in investment income of
other companies surveyed have investment income percentages between 43%, to Scor showing a 93% increase in investment income. Africa Re invests
4%-6%. Investment income in total, for reinsurers surveyed, increased by approximately 20% of capital in equity instruments, a strategy that will show
2% year on year. However, there is significant volatility in these results from volatility in the short-term, but should show positive results over the long-term.
Asset allocation for Reinsurers
Other assets
Outstanding premiums and debtors
Fixed assets
Cash and deposits
Debuntures and mortgages
Government & Semi government Short term

Long term
Shares Both
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
What is playing on the minds of the reinsurers? What are the governance and solvency requirements for reinsurers?
Should we become a branch? By now, there is a high level of awareness around
Determining the most appropriate approach in regulating Lloyds.
the FSBs proposals on reinsurance regulation, for inclusion under SAM. These
proposals aim to address the following aspects: One of these proposals is to allow foreign reinsurers to operate in South Africa
through a branch, where previously only incorporated entities were permitted.
Who may conduct reinsurance business in South Africa?
Considering the presence of foreign reinsurers in the South African reinsurance
What limitations will apply to reinsurance business? market, this proposal will shape and influence the regulatory reinsurance
landscape significantly.
How will reinsurance be treated for solvency of (re)insurers?
Currently, foreign reinsurers participate in the local market by

either establishing a subsidiary in South Africa or by way of
providing cross-border reinsurance directly.
The allowance for reinsurance branches is expected to

increase the supply of reinsurance capacity in the South
African market. Many of these multinational reinsurers will
prefer the branch structure, as it:
allows easier movement of capital;
centralises multiple processes and functions;
reduces regulatory burden to some extent; and
reduces audit requirements
However, the aforementioned benefits come with certain

limitations related to which investments should be held to
WHATEVER YOU DO,
meet technical provisions, and how these assets can be
utilised and/or transferred. BE DIFFERENT...
In addition, the direct and indirect taxation consequences
of the decision by an existing reinsurer to restructure its
business and operate using a branch structure are complex
IF YOU ARE DIFFERENT,
and require detailed consideration. In this regard, a restructure
of this nature highlights the differences in the interpretation
of the corporate rule (section 41 to 47 of the Income Tax Act)
YOU WILL STAND OUT.
provisions within the context of the insurance industry.
Overall, an exciting, but challenging time to be operating a Anita Roddick

reinsurance business in South Africa.
REINSURERS | Statement of Financial Position | R000

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 15 month period ended
Dec-13
Mar-15
Group/Company African Reinsurance Emeritus Reinsurance General Reinsurance GIC Re South
Corporation (South Company (South Africa) Africa Limited Africa Limited
Africa) Limited Limited
Share capital and share premium 80300 80300 73888 73888 4000 4000 111500 11500
Retained earnings/(deficit) 524 408 489801 (59077) (56254) 1301167 1039591 (26252) 22969
Reserves including contingency reserve 51702 51702 - - (142816) 15384 1393 (9104)
Total shareholders' funds 656410 621803 14811 17634 1162351 1058975 86640 25365
Gross outstanding claims 1020031 992067 2247 2742 1366362 1350796 42817 16822
Gross unearned premium reserve 151467 156612 6112 4785 173603 180863 87613 -
Provision for profit commission - - - - - - - -
Policyholder liabilities under insurance contracts - - - - 1864642 1766526 20357 25338
Liabilities in respect of investment contracts - - - - - - - -
Deferred reinsurance commission revenue 28 361 28679 770 389 - - 16839 -
Deferred tax liabilities/(assets) 21153 33786 - - (6607) (867) - -
Funds withheld 1247697 1241975 - - 732 459 80392 -
Other liabilities 222458 148984 6502 3399 198286 206057 18675 16032
Total liabilities 2691167 2602103 15631 11315 3597018 3503834 266693 58192
Total investments 2223467 2174975 6005 5000 3824358 3084546 73725 51803
Funds withheld 378 141 - - - - - -

PPE and intangible assets 4006 5083 212 495 4811 4926 1585 739
Retrocessionaires' share of outstanding claims 714960 695651 627 967 93233 89243 26207 2192
Retrocessionaires' share of unearned premium reserve 106027 109629 2054 1297 14868 16976 78852 -
Retrocessionaires' share of profit commissions - - - - - - - -
Retrocessionaires' share of liabilities under life insurance contracts - - - - - 1128 5265 6259
Deferred acquisition cost 35217 35500 1904 1436 - - 14329 -
Cash and cash equivalents 4447 3061 10268 12431 242644 1000975 33284 15089
Other assets 259075 199866 9372 7323 579455 365015 120086 7475
Total assets 3347577 3223906 30442 28949 4759369 4562809 353 333 83 557
CAR ratio N/A N/A N/A N/A 5,9 5,5 2,13 1,8
Return on equity 5% 12% (19%) (13%) 23% 22% 4% (30%)
Total assets/total liabilities 124% 124% 195% 256% 132% 130% 132% 144%
Change in shareholders' funds 6% (16%) 10% 242%

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14
Group/Company Hannover Life Hannover Reinsurance Munich Reinsurance RGA Reinsurance
Reassurance Africa Africa Limited Company of Africa Company of South Africa
Limited Limited (Group) Limited
Share capital and share premium 112500 112500 72778 72778 34915 34915 51982 51982
Retained earnings/(deficit) 541219 507147 542552 539862 2546866 2292556 196872 101346
Reserves including contingency reserve (64973) (8366) 126139 139420 572947 429456 (45152) 3592
Total shareholders' funds 588746 611281 741469 752060 3154728 2756927 203702 156920
Gross outstanding claims 290398 267093 1771508 1623220 3736262 3621254 710049 715532
Gross unearned premium reserve 20776 27219 933544 1230404 847783 701058 - -
Provision for profit commission 276216 295976 363999 360829 - - - -
Policyholder liabilities under insurance contracts 2229021 1957129 - - 1016570 954235 1055475 1219298
Liabilities in respect of investment contracts - - - - - - - -
Deferred reinsurance commission revenue 39241 44881 94792 83900 229067 201771 - -
Deferred tax liabilities/(assets) (10223) (8046) (25333) (10832) 101184 123511 (897 ) (684)
Funds withheld 872010 589158 924353 793030 22618 19738 626417 724436
Other liabilities 307258 191551 433293 312880 1157832 1041008 53283 32724
Total liabilities 4024697 3364961 4496156 4393431 7111316 6662575 2444327 2691306
Total investments 2644570 2506184 1622231 1634465 3785576 3849326 1403183 1497921
Funds withheld 344291 85580 562179 507504 99558 113613 - -

PPE and intangible assets - - 9848 8287 1310021 1044662 13461 7280
Retrocessionaires' share of outstanding claims 102067 117824 963343 695043 1957440 1899183 - -
Retrocessionaires' share of unearned premium reserve - - 311211 300067 674346 556974 - -
Retrocessionaires' share of profit commissions 12683 164 256757 280853 - - - -
Retrocessionaires' share of liabilities under life insurance contracts 562221 471197 - - 26 9919 626417 724436
Deferred acquisition cost 205662 261986 220038 290029 255082 226363 - -
Cash and cash equivalents 190111 157444 203099 193123 562857 572472 65974 54656
Other assets 551838 375863 1088919 1236120 1621138 1146990 538993 563933
Total assets 4613443 3976242 5237625 5145491 10 266 044 9 419 502 2648028 2848226
CAR ratio 2,3 2,7 N/A N/A 2,7 2,9 4,6 4,0
Return on equity 23% 13% 15% 1% 8% 11% 47% 13%
Total assets/total liabilities 115% 118% 116% 117% 144% 141% 108% 106%
Change in shareholders' funds (4%) (1%) 14% 30%

Accounting year end Dec-15 Dec-14
Group/Company Scor Africa
Limited
Share capital and share premium 150000 150000

Retained earnings/(deficit) 65642 81981
Reserves including contingency reserve (14459) 6966
Total shareholders' funds 201183 238947
Gross outstanding claims 1118208 626722

Gross unearned premium reserve 250654 233771
Provision for profit commission - -
Policyholder liabilities under insurance contracts 64896 38601
Liabilities in respect of investment contracts - -
Deferred reinsurance commission revenue 63360 53371
Deferred tax liabilities/(assets) (12187) (825)
Funds withheld 769631 535579
Other liabilities 256563 205054
Total liabilities 2511125 1692273
Total investments 845036 818064
Funds withheld - -
PPE and intangible assets 299 318
Retrocessionaires' share of outstanding claims 693733 423931
Retrocessionaires' share of unearned premium reserve 157513 148117
Retrocessionaires' share of profit commissions - -
Retrocessionaires' share of liabilities under life insurance contracts 34230 16546
Deferred acquisition cost 99668 82900
Cash and cash equivalents 206210 193822
Other assets 675619 247522
Total assets 2712308 1931220
CAR ratio 3,3 2,3

Return on equity (8%) 8%
Total assets/total liabilities 108% 114%
Change in shareholders' funds (16%)
REINSURERS | Statement of Comprehensive Income | R000

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 15 month period ended
Dec-13
Mar-15
Group/Company African Reinsurance Emeritus Reinsurance General Reinsurance GIC Re South
Corporation (South Company (South Africa) Africa Limited Africa Limited
Africa) Limited Limited
Gross premiums written 2163137 2146143 17130 13185 2230452 2116230 155878 16282
Net premiums written 624491 622780 10680 9730 2153821 2041458 25901 10502
Earned premiums 628034 630232 10110 7463 2158973 2036317 17140 10502
Total net investment income 88698 152747 979 1004 293676 265447 4740 (6555)
Reinsurance commission revenue 462178 449488 2095 1071 19671 22696 11849 669
Other income - - - - 28295 - - -
Total income 1178910 1232467 13184 9538 2500615 2324460 33729 4616
Policyholder benefits and entitlements 457446 489189 2225 2230 1943498 1821673 8729 (242)
Acquisition expense 584439 565197 5072 3236 58353 89575 10788 320
Management and other expenses 95670 79809 8710 6423 107406 94769 10915 12229
Total expenses 1137555 1134195 16007 11889 2109257 2006017 30432 12307
Net profit/(loss) before tax 41355 98272 (2823) (2351) 391358 318443 3297 (7691)
Tax 6748 21668 - - 129784 80401 - -
Net profit/(loss) after tax 34607 76604 (2823) (2351) 261574 238042 3297 (7691)
Other comprehensive income/(loss) - - - - (158200) (4182) - -
Total comprehensive income/(loss) for the year 34607 76604 (2823) (2351) 103374 233860 3297 (7691)
Transfer to/(from) retained earnings - - - - - - (10496) 8053
Dividends - - - - - - 42022 -
Change in retained earnings 34607 76604 (2823) (2351) 261574 238042 (49221) 362
Net premiums to gross premiums 29% 29% 62% 74% 97% 96% 17% 65%
Policyholder benefits and entitlements to earned premium 73% 78% 22% 30% 90% 89% 51% (2%)
Management and other expenses to earned premium 15% 13% 86% 86% 5% 5% 64% 116%
Comments Company Company Composite company Composite company

Accounting year end Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14 Dec-15 Dec-14
Group/Company Hannover Life Hannover Reinsurance Munich Reinsurance RGA Reinsurance
Reassurance Africa Africa Limited Company of Africa Company of South
Limited Limited (Group) Africa Limited
Gross premiums written 2411274 2137612 2395855 3078265 5981755 5633727 1509810 1455554
Net premiums written 1818376 1604223 601578 1673331 3056530 2884082 484739 463639
Earned premiums 1824746 1593681 902452 1207144 3032652 2888783 534167 466913
Total net investment income 132117 119277 93244 79702 243768 254363 112160 94987
Reinsurance commission revenue 46962 55591 625744 519465 961890 775281 70702 148362
Other income 24943 2584 15130 1348 - - 23571 75992
Total income 2028768 1771133 1636570 1807659 4238310 3918427 740600 786254
Policyholder benefits and entitlements 1421846 1297236 556707 843948 2271348 2093886 401879 417815
Acquisition expense 291234 260304 861304 886961 1069451 1138439 101046 183621
Management and other expenses 118217 102655 75638 65959 600381 305954 126377 157561
Total expenses 1831297 1660195 1493649 1796868 3941180 3538279 629302 758997
Net profit/(loss) before tax 197471 110938 142921 10791 297130 380148 111298 27257
Tax 63399 32318 33816 (302) 48759 79330 15772 6478
Net profit/(loss) after tax 134072 78620 109105 11093 248371 300818 95526 20779
Other comprehensive income/(loss) (56607) 2043 (13281) 4986 149430 114487 (50519) 12483
Total comprehensive income/(loss) for the year 77465 80663 95824 16079 397801 415305 45007 33262
Transfer to/(from) retained earnings - - - - 5939 (3942) 50519 (12483)
Dividends 100000 - 106415 - - - - -
Change in retained earnings 34072 78620 2690 11093 254310 296876 95526 20779
Net premiums to gross premiums 75% 75% 25% 54% 51% 51% 32% 32%
Policyholder benefits and entitlements to earned premium 78% 81% 62% 70% 75% 72% 75% 89%
Management and other expenses to earned premium 6% 6% 8% 5% 20% 11% 24% 34%
Comments Company Company Composite company Company

Accounting year end Dec-15 Dec-14
Group/Company Scor Africa
Limited
Gross premiums written 1114111 944370

Net premiums written 407092 378345
Earned premiums 406340 363845
Total net investment income 39441 19621

Reinsurance commission revenue
Other income
157134
19320
154084
7343 AND THE ONLY WAY TO BE
TRULY SATISFIED IS TO DO
Total income 622235 544893
Policyholder benefits and entitlements 345144 224136

Acquisition expense
Management and other expenses
Total expenses
250989
48957
645090
252856
42914
519906
WHAT YOU BELIEVE IS GREAT
Net profit/(loss) before tax
Tax
(22855)
(6516)
24987
5754
WORK. AND THE ONLY WAY
TO DO GREAT WORK IS TO
Net profit/(loss) after tax (16339) 19233
Other comprehensive income/(loss) (21207) (2205)
Total comprehensive income/(loss) for the year (37546) 17028
Transfer to/(from) retained earnings
Dividends
Change in retained earnings (16339)
-
-
19233
-
- LOVE WHAT YOU DO.
Net premiums to gross premiums 37% 40%
Policyholder benefits and entitlements to earned premium 85% 62% Steve Jobs
Management and other expenses to earned premium 12% 12%
Comments Composite company
KPMG Actuarial Services
Our team of over 30 actuarial specialists, has Our actuarial expertise spans the following disciplines:
a breadth of experience across all of the core
ERM and wider fields
actuarial practices as well as wider fields.
Life assurance
We are part of the KPMG Financial Risk
General insurance
Management division, which allows us to bring
together multidisciplinary teams. We foster a Healthcare
culture of collaboration with colleagues in other Employee benefits
disciplines within KPMG, such as data and
Our financial and risk solutions include:
analytics, which enables us to develop holistic
solutions. Statutory Actuary/ Head of Actuarial Function Roles
Risk, Capital and Balance Sheet Management
With the ability to leverage the knowledge of
our international network of professionals we Data Analytics and Pricing
are well positioned to think globally and act Actuarial valuations and Financial Reporting
locally. We are able to provide actuarial and risk
services across continents and markets. Regulation and Compliance Support
Independent Reviews For more information contact:
Strategy and Transactions Malcolm Jewell
Partner
Actuarial Modelling
T: +27 (0)82 683 5505
kpmg.co.za E: malcolm.jewell@kpmg.co.za
Epilogue
A Zulu, a Tsonga, a white woman and an arts convert walk into a bar. The diversity at work empowers this change. This diversity allows us
Well not exactly, but one rainy weekend in March 2016 we came to debate and experience different worldviews.
close. There are few places in South Africa where these people can
However, such experiences are limited in our segregated and unequal
openly argue politics, religion and values until 04:30 in the morning.
society. I found myself questioning how it is that we trusted one
Is your business one of them? However, there was so much more to
another to communicate so openly and honestly. I believe a large
this than simply four people shouting the odds.
part comes down to leadership. Our leaders on the weekend shared
It started out with a group of eleven individuals. Eleven people from their own experiences. They encouraged lively debate. They were not
disparate and diverse backgrounds. Eleven people from various parts scared to have an opinion. By living with integrity, they created a safe
of South Africa and from across our borders. We had a Ghanaian, a environment.
Tanzanian and a white Zimbabwean. We had a Christian, a Muslim and It starts earlier than this. It starts at induction when the leadership talk
a Hindu. Some people drank too much others did not drink at all. the values. However, it is entrenched in the corridors. It is entrenched
We operated by the motto, anything goes as long as it respects the through experience. It is entrenched when a trainee sees a white male
individual. junior chatting comfortably with a black female boss. It is entrenched
As the night wore on the athletes and parents went to bed. The when a new trainee says I disagree and is allowed a voice.
debate got heated. The merriment flowed. This was not a generic It requires a business unusual mind-set.
media debate. This was not the simplistic polarised noise that is We sought the facts and provided insight. My theoretical education
sometimes called journalism. There was openness and honesty. from university was not sufficient to deal with the reality of my
We learned about how one white girl walked to work in her small colleagues experience. The simplicity of capitalism is eroded by the
town after coming home from university every day. We learnt about complexity of poverty and history. I was empowered. I changed. I
how gogos only source of income is the monthly R500 government am struck by a quote from Nelson Mandela, if you want to make
grant she receives. We debated whether the role of the government peace with your enemy, you have to work with your enemy. Then he
extends beyond upholding the law and protecting the people. I learnt becomes your partner.
what Ubuntu really means!
Most importantly, I am confident. I believe that with this kind of
National and cultural change are slow processes. We rely so much on business unusual experience my country can heal. I believe that
our experience to inform our worldviews. Without experiences such as with these small pockets of tolerance, diversity and acceptance the
this our worldviews remain limited and uninformed. injustices of the past can be addressed.
kpmg.com/za/insurancesurvey
This survey is made by KPMG Inc, a South African company and a member firm of the KPMG network of independent firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. The proposal set out herein is not intended to constitute an offer
capable of acceptance by you and is in all respects subject to negotiation, agreement and signing of a specific contract between you and KPMG Inc (KPMG). We will be pleased to discuss our survey and our standard terms and conditions as set out above and attached, further
with the objective of agreeing definitive terms before we commence any work as set out in this survey.
Should our survey be successful, the acceptance of this engagement is subject to:
the successful completion of KPMGs customary client and engagement acceptance procedures
the successful clearance of the engagement by KPMG to ensure that there are no independence issues, conflicts of interest or other restrictions that may impact KPMGs ability to accept this engagement.
On the completion of our negotiations we will be prepared to sign a contract which is based on your terms and conditions, our survey and our standard terms and conditions, provided that these terms and conditions and any other documents to form part of the contract have
been amended to reflect the outcome of our negotiations. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis--vis third parties, nor does KPMG International have any such
authority to obligate or bind any member firm. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative (KPMG International), a Swiss entity.
2016 KPMG Inc, a South African company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. All rights reserved. Printed in South Africa. KPMG and the KPMG logo are
registered trademarks of KPMG International Cooperative (KPMG International), a Swiss entity.
KPMG shall retain copyright and all other intellectual property rights in the content and material used and/or stated in this survey. MC14511.

2016 Insurance Survey v2

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

2016 Insurance Survey v2

Uploaded by

Copyright:

Available Formats

Business

a new entrant refocuses on customer needs to address 80

ORSA requirements and global insights 11

Is Tax Risk Management important 27

Psychology and behavioural economics of insurance 31

Disruptions in the reinsurance market 41

Takaful same same but different 45

The impact of blockchain on the insurance industry 49

Will IFRS 9 impact insurers 69

The changing face of financial advice (RDR) 75

Privacy and wearable technologies a POPI dilemma? 79

KING IV the new frontier in governance for South Africa 83

Regulatory and reporting requirements Insurance and Banking Sector 87

Short-term Insurance Industry results 94

Long-term Insurance Industry results 116

Reinsurance Industry results 136

ALL FAILURE IS FAILURE

IT IS NOT THE STRONGEST OF

THE SPECIES THAT SURVIVE,

NOR THE MOST INTELLIGENT,

Why is market risk such a significant component

For the investor: the economic impact

The entire balance sheet is now balance sheet, which is potentially a

Governance of the ORSA Progress of ORSA Requirements

ensure that the ORSA is embedded in the business

Paragraphs 1.73 to 1.83 require that insurers

2017 ORSA requirements Guideline 10: the assessment of continuous

2015 Mock ORSA reports - KPMG South Africa assessment results

Lagging Developing Good Leading

Risk management system

Where we expect the top insurers to be positioned

Risk appetite and risk tolerance

Material risk assessment (qualitative

Assessment of solvency (solvency

Stress testing and scenario analysis

Use in decision making

The following rating scale is used:

Moving toward value add

Leading edge sophistication

using ORSA in decision-making;

Below, we outline some of the leading and lagging practices observed:

Group-wide coverage does not focus appropriately on risks

We expect Non-Executive Directors

The FSB has provided high level verbal feedback to some

Feedback from Regulators in other countries can provide

Feedback from UK, Canada and Australia

Country Feedback from regulators Country Feedback from regulators

Country Feedback from regulators

Canada Establish a robust target Leverage Ratio and

Include a timeline or an explanation should

strategic value add to the business.

South Africas weak economy

TO RISK THE UNUSUAL, expenditure growth is expected to slow from 1.6

YOU WILL HAVE TO SETTLE

FOR THE ORDINARY.

Weather-induced economic weakness: A weak economy could result from

For more information contact:

Is Tax Risk Management

Psychology and behavioural

There are a number of factors that account for this

Lack of human capital and expertise 6 Morocco 110 4 800 43 99.9 42

Other factors that may influence insurance penetration

Behavioural aspects such as:

Human irrationality and loss aversion