SA Quantitative Impact Study 2 (SA QIS2)

1 SA Quantitative Impact Study 2 (SA QIS2)

Questionnaire for Solo Insurers1

Insurer Name:

Insurer number2:

1 Questions relating to groups are in a separate questionnaire.

2 Please use the Ixxx number which is part of the reference number 10/10/Ixxx/8 in Statement A1 of the annual statutory return.

2/55 Contents

3/55 1. Section 1 General

Overall views

G.1. Any views other than those which are put forward in your responses to other questions you wish to express:

Preparedness for SAM

G.2. EXCEL QUESTION: Please describe and assess your company’s overall preparedness for SAM with regard to the calculation of the various elements:

□ Fully prepared, all data available and no problems with methodologies.

□ No problems with data, but problems with methodologies.

□ No problems with methodologies, but problems with data.

□ Do not feel prepared at all.

If you have additional comments to the answers provided in the excel file, please describe them below.

a) technical provisions

b) SCR

c) MCR

d) own funds

4/55 G.3. EXCEL QUESTION: How prepared is your company for Pillar I of the SAM regime with regard to data and methodologies?

□ Fully prepared, all data available and no problems with methodologies.

□ No problems with data, but problems with methodologies.

□ No problems with methodologies, but problems with data.

□ Do not feel prepared at all.

G.4. If you do not feel fully prepared for Pillar I of the SAM regime with regard to data and methodologies, what are the most important measures you have to take to be fully prepared? Please rank your answers starting with Measure 1. Please describe 1 measure per box, with a maximum of 5 measures.

Measure 1:

Measure 2:

Measure 3:

Measure 4:

Measure 5:

5/55 G.5. EXCEL QUESTION: Please provide an estimate on the number of resources (in skilled person months), required …

…to complete SA QIS2. … for implementation of SAM.

Actuarial

G.6. EXCEL QUESTION: Please indicate what you envisage the incremental implementation and annual on-going costs (in R’000) of the SAM framework will be, as set out in the following table:

Pillar 1 Pillar 2 Pillar 3 Incremental Incremental Incremental Incremental Incremental Incremental implementatio annual on- implementation annual on- implementat annual on- n costs going costs costs going costs ion costs going costs Staff Systems Other Total

When completing the table above, please note that

1. Incremental implementation costs refer to those costs that have already been incurred and will be incurred before 31 December 2014. This should only include costs that would not have been incurred if SAM were not introduced.

2. Annual on-going costs refer to the average level of costs which are envisaged to be incurred on an annual basis for the first 5 years after implementation. This should only include costs that would not have been incurred if SAM were not introduced.

3. The costs should only include the direct costs incurred and should not include indirect costs, for example due to raising capital, changing reinsurance agreements, investment agreements, etc.

G.7. Please indicate how you intend to fund the costs set out in EXCEL QUESTION: Please indicate what you envisage the incremental implementation and annual on-going costs (in R’000) of the SAM framework will be, as set out in the following table:.

6/55 G.8. Any other comment you might want to share on your company’s preparedness for SAM:

Quality-assessment of inputs and results:

G.9. EXCEL QUESTION: Please provide an assessment of the quality of data and results (1 – poor; 2 – fair; 3 – good; 4 – excellent)

Results Input data

Appropriatenes Completenes Accurac Reliability s s y

Technical provisions

Best Estimate

Risk Margin

Valuation of assets and liabilities other than technical provisions

User specific parameters

SCR standard formula market risk

SCR standard formula life underwriting risk

SCR standard formula non-life underwriting risk

SCR standard formula overall

7/55 Own funds

Major practical difficulties when completing SA QIS2

G.10. What were your company’s most important practical difficulties when completing SA QIS2? Please rank your answers starting with Difficulty 1. Please describe one difficulty per box, 5 difficulties max. If you would like to provide additional information, please use the general comment box below (Any other information on practical difficulties you might want to share:).

Difficulty 1:

Difficulty 2:

Difficulty 3:

Difficulty 4:

Difficulty 5:

G.11. Any other information on practical difficulties you might want to share:

8/55 Assessment of the SA QIS2 methodology

G.12. EXCEL QUESTION: Please provide your assessment of the SA QIS2 methodology (1 – poor; 2 – fair; 3 –good; 4 – excellent)

Do you consider the SA QIS2 implementation of the standard formula to be an appropriate reflection of your solvency and risk position?

Do you consider the SA QIS2 correlation matrices in the standard formula appropriate for the measurement of your solvency and risk position?

Do you consider the SA QIS2 standard formula’s segmentation and design appropriate for the measurement of your solvency and risk position?

Do you consider the SA QIS2 standard formula’s calibration appropriate for the measurement of your solvency and risk position?

Do you consider the SA QIS2 implementation of the calculation of technical provisions to be a market-consistent assessment of the value of liabilities of your company?

Do you consider the SA QIS2 categorisation of own funds and own funds tiering delivers own funds of an appropriate quality?

G.13. If you are not convinced by the SA QIS2 methodology, what are your most important points of discrepancy? Please rank your answers starting with Discrepancy 1, 5 discrepancies max.

Discrepancy 1:

Choose a general area of the discrepancy: TP, OF, MCR, SCR-Market, SCR- Life, SCR-Non-Life, SCR-aggregation, USP, RFF, Other

Description of the discrepancy:

Discrepancy 2:

9/55 Choose a general area of the discrepancy: TP, OF, MCR, SCR-Market, SCR- Life, SCR-Non-Life, SCR-aggregation, USP, RFF, Other

Discrepancy 3:

Discrepancy 4:

Discrepancy 5:

10/55 Description of the discrepancy:

G.14. Please elaborate, which parts of the standard formula you find most difficult to use. Please rank your answers starting with Difficulty 1. 5 difficulties max.

Difficulty 1:

Choose a general area of the difficulty: TP, OF, MCR, SCR-Market, SCR-Life, SCR-Non-Life, SCR-aggregation, Other

Description of the difficulty:

Difficulty 2:

Difficulty 3:

11/55 Description of the difficulty:

Difficulty 4:

Difficulty 5:

G.15. Any other views on the SA QIS2 methodology you might want to share.

Other SA QIS2 questions

12/55 Targeted capital coverage ratio

G.16. What is your targeted capital coverage ratio (Eligible Own Funds / Solvency Capital Requirement)?

Volatility of Market Consistent position

G.17. Under the Market Consistent valuation approach, do you envisage that your regulatory capital position will be volatile?

G.18. If your answer to Under the Market Consistent valuation approach, do you envisage that your regulatory capital position will be volatile? is yes, what steps do you envisage taking in order to manage this volatility?

Risk mitigation behaviour

G.19. Can you please give details of any changes that you anticipate in your reinsurance arrangements as a result of the SAM proposals set out in SA QIS2? In the case of a reinsurer, please consider both the supply of and demand for reinsurance

G.20. Can you please give details of any changes that you anticipate in your investment strategies as a result of the SAM proposals set out in SA QIS2? Can you please split out your answer in the following categories:

a) Investment of assets backing policyholder liabilities

13/55 b) Investment of assets backing the capital requirement

c) Investment of assets backing the surplus

Pricing/product design

G.21. Can you please give details about how you envisage the design of your products changing under SAM based on the technical specifications set out in SA QIS2?

G.22. Can you please give details of how:

a) you envisage your pricing to change under SAM based on the technical specifications set out in SA QIS2

b) your capital requirement under SAM compares to your economic view of capital requirements.

Can you please provide the above detail by completing the table below:

Product Type Pricing under SAM capital SAM compared compared to to current economic pricing capital Non-life Direct business LoB 1(a) Motor - Personal Lines LoB 1(b) Motor - Commercial Lines LoB 2 Engineering LoB 3 Marine, aviation and transport LoB 4(a) Property - Personal Lines LoB 4(b) Property - Commercial Lines LoB 5(a) Liability - Personal Lines

14/55 Product Type Pricing under SAM capital SAM compared compared to to current economic pricing capital LoB 5(b) Liability - Commercial Lines LoB 6(a) Trade Credit, Suretyship & Guarantee - Retail LoB 6(b) Trade Credit, Suretyship & Guarantee - Commercial LoB 7(a) Miscellaneous - crop LoB 7(b) Miscellaneous - terrorism LoB 7(c) Miscellaneous - legal expenses LoB 7(d) Miscellaneous - travel LoB 7(e) Miscellaneous - health LoB 7(f) Miscellaneous - warranty LoB 7(g) Miscellaneous - other Non-life Inwards proportional reinsurance (treaty only)

LoB 8(a) Motor - Personal Lines LoB 8(b) Motor - Commercial Lines LoB 9 Engineering LoB 10 Marine, aviation and transport LoB 11a) Property - Personal Lines LoB 11b) Property - Commercial Lines LoB 12(a) Liability - Personal Lines LoB 12b) Liability - Commercial Lines LoB 13(a) Trade Credit, Suretyship & Guarantee - Retail LoB 13(b) Trade Credit, Suretyship & Guarantee - Commercial LoB 14(a) Miscellaneous - crop LoB 14(b) Miscellaneous - terrorism LoB 14(c) Miscellaneous - legal expenses LoB 14(d) Miscellaneous - travel LoB 14(e) Miscellaneous - health LoB 14(f) Miscellaneous - warranty LoB 14(g) Miscellaneous - other Non-life Inwards facultative and non-proportional reinsurance

LoB 15 Marine, aviation and transport LoB 16 Property (excluding terrorism) LoB 17 Terrorism LoB 18 Liability Life Insurance

LoB 19 Risk only LoB 20 Insurance with discretionary participation LoB 21 Universal life LoB 22 Linked policies LoB 23 Investment related insurance LoB 24 Other life insurance

15/55 Product Type Pricing under SAM capital SAM compared compared to to current economic pricing capital Accepted Life Reinsurance

LoB 25 Risk reinsurance LoB 26 Other reinsurance

When completing the above table, please exclude the direct costs of implementing SAM from the pricing basis.

The pricing column is a drop down box with the following options:

a) Increase greater than 30%

b) Increase between 10% and 30%

c) Increase smaller than 10%

d) No change

e) Decrease smaller than 10%

f) Decrease between 10% and 30%

g) Decrease greater than 30%

h) Not Applicable

The SAM capital compared to economic capital column is a drop down box with the following options:

i) SAM capital more than 50% higher than economic capital

j) SAM capital between 25% and 50% higher than economic capital

k) SAM capital between 0% and 25% higher than economic capital

l) SAM capital equal to economic capital

m) SAM capital between 0% and 25% lower than economic capital

n) SAM capital between 25% and 50% lower than economic capital

o) SAM capital more than 50% lower than economic capital

p) Not Applicable

16/55 2. Section 2 Valuation

V.1. In paragraph V.8 of the SA QIS2 technical specifications a concept of materiality is stipulated. Please explain your approach to the application of the concept of materiality for the valuation of assets and liabilities (other than technical provisions). How significant are the accumulated effects of your materiality decisions on the final SA QIS2 balance sheet?

V.2. For the valuation of which assets and liabilities (other than technical provisions) have you used a mark to model approach? Why was it not possible to apply a mark to market approach? If an existing market value is not considered appropriate following V12, and a mark to model has been applied, please indicate the quantitative impact of the differences. How do you assess the uncertainty included in the valuation?

V.3. According to the SA QIS2 technical specifications (re)insurers are required to recognise contingent liabilities for the solvency valuation. Please provide a description of the contingent liabilities that were recognised in SA QIS2 and any practical difficulties encountered in their valuation.

V.4. Intangible assets should be valued as set out in the table in section V.1.4 of the SA QIS2 technical specifications. Please describe the intangible assets that were recognised in SA QIS2 with a market value and provide input on the valuation basis used and on the compliance with the requirements set in the IAS38.

V.5. According to the table in section V.1.4 of the SA QIS2 technical specifications, deferred tax assets should only be set up to the extent that future taxable profits are probable and where the realisation of the deferred tax asset is

17/55 probable within a reasonable timeframe. Please indicate whether these provisions had an influence on the valuation of deferred tax assets in SA QIS2 and report on the quantitative impact.

V.6. Please indicate the methodology used to determine the initial recognition of financial liabilities (including own credit risk) as well as the impact of the adjustment on the fair value (spread and amount) on the subsequent measurement (no adjustment for own credit risk) for each category of financial liabilities.

V.7. As per V.18 of the SA QIS2 technical specifications, can you please highlight any particular problem areas in the application of IFRS valuation requirements for SAM purposes, and in particular comment on any material effects on capital figures/calculations of using the IFRS valuation requirements?

18/55 3. Section 3 Technical provisions

Questions on the matching premium

TP.1. Please provide any comment on the appropriateness of the conditions for the use of a matching premium as set out in section TP3.7A of the SA QIS2 technical specifications.

TP.2. Please provide any comment on the appropriateness of the calculation of the matching premium as set out in section TP3.7B of the SA QIS2 technical specifications.

TP.3. If you have a portfolio of business that complies with the conditions set out in section TP3.7A of the SA QIS2 technical specifications and you have used a matching premium, please specify the size of the matching premium in basis points.

basis points

TP.4. If you have an internal view on the appropriate matching adjustment, please describe your methodology for assessing the matching adjustment and the result for the same portfolios as in If you have a portfolio of business that complies with the conditions set out in section TP3.7A of the SA QIS2 technical specifications and you have used a matching premium, please specify the size of the matching premium in basis points..

Questions on Contract Boundaries

19/55 TP.5. Provide comment on the suitability of the definition of contract recognition (TP2.13) for your business. Provide specific examples where it results in inappropriate treatment and explain why.

TP.6. Provide comment on the suitability of the definition of contract boundaries (TP2.15) for your business. Provide details of product types where the definition results in an inappropriate contract boundary. Suggest and motivate a more appropriate boundary for such product types.

TP.7. Provide specific examples where you consider the current definition of contract boundaries (TP2.15) to be ambiguous and where it may result in inconsistent application.

TP.8. For contracts where the contract boundary is set shorter than the contract term provide justification for the use of the shorter boundary.

TP.9. For whole of life risk contracts provide details of the contract boundary used.

TP.10. For open-ended investment contracts provide details of the contract boundaries used. Provide details for each class of investment contract if different boundaries are used for different classes of investment contract. Also provide justification for the use of these boundaries in terms of the requirements of TP2.15.

TP.11. Where policies allow investment to be split over multiple funds, including with and without guarantees, please describe your approach to splitting this and what impact this has on the contract boundary. Please also describe any difficulties in splitting this, either from a practical / system perspective or from a theoretical perspective.

TP.12. If you have investment contracts without guarantees, please indicate how the contract boundary for these contracts would have been different if a strict interpretation of the principles in TP2.15 and TP2.16 were followed, instead of the clarification given in TP2.18.e(iv).

TP.13. Loyalty schemes/bonuses and other benefits contingent of certain events/conditions:

(a) How is the contract boundary interpreted for such benefits?

(b) Provide feedback where the guidance provided in TP2.18 (e) (x) and (xi) resulted in inappropriate results.

TP.14. For future cash flows, such as sliding scale commissions / profit commissions for reinsurance, or sliding scale fees or profit shares to UMAs, how have these been incorporated into the best estimate technical provisions? If these arrangements exist and have not been valued, please explain why.

TP.15. Confirm whether reinsurance arrangements were allowed for as per the guidance provided in TP2.18 (e) (xiv) and (xv). If not, how were they allowed for? If the price of reinsurance was adjusted at the point where the reinsurer has the ability to unconditionally re-price, how was this done?

TP.16. Confirm whether the risk mitigation provided by reinsurance in the SCR calculation was appropriately adjusted, where the reinsurer has the ability to re-price or to cancel the reinsurance contract, to reflect the likely availability and price of reinsurance cover. For each major reinsurance contract, please indicate how this was done.

TP.17. Provide feedback on the appropriateness of the contract boundary definition for reinsurers, and include specific examples to illustrate.

TP.18. Provide comment on the suitability of the product specific guidance provided in TP.2.18 (e) of the technical specifications.

TP.19. Please describe which guarantees have been factored into the contract boundary determination and which have NOT been factored into the calculation. Please explain the reasons for not including these latter guarantees.

22/55 General Questions on Technical Provisions

TP.20. Reinsurance that can be repriced at the reinsurers discretion (or not renewed by the reinsurer) poses risks when underlying rates to direct policyholders have been guaranteed. Do you believe this risk should be explicitly factored into the SCR as a capital requirement or through a reduced (possibly nil) allowance in technical provisions and SCR for the risk-mitigating benefit of reinsurance beyond the guarantee point?

TP.21. Please comment on simplifications you have used for the calculation of technical provisions for SA QIS2, your rationale for using the simplification and the appropriateness of the simplification selected.

TP.22. SA QIS2 requires a 6% cost of capital as for European QIS5. If you view a different cost of capital as more appropriate, what is your preferred rate and why is it more appropriate than 6%?

TP.23. Please comment on the practicality of identifying all guarantees (investment and other). If it was not practical to identify all guarantees for SA QIS2, how did you gain comfort that the guarantees not identified are not material from a risk perspective. How do you ensure policy benefits paid reflect all guarantees?

23/55 Questions regarding assumptions and methods

NON LIFE INSURANCE

TP.24. Please explain the main methods used to calculate the best estimate of non-life premiums and claims provisions. Place particular emphasis on whether “actuarial methods” have been used or not and whether SAM interim measures are being used for IBNR estimation.

TP.25. Did you discount claims liabilities or not? If so, please describe your approach.

TP.26. Have you obtained negative best estimates? If this is the case, please describe the products leading to these estimates.

24/55 LIFE INSURANCE

TP.27. Have you obtained negative best estimates? If this is the case, please describe the products leading to these estimates.

TP.28. EXCEL QUESTION: Future management actions.

(a) What management actions were assumed when calculating best estimate liabilities?

 Future management actions have no material impact  None, although they might have some material impact  Exceptional reductions to profit participation payouts3 linked to the overall financial strength of the company / fund  Amending discretionary benefits  Changing the investment mix for assets backing liabilities  Increasing the charges levied on policies in adverse circumstances;  Other (please describe)

(b) Please estimate the extent to which the use of management actions have reduced the total best estimate that would otherwise be derived?

 less than 2%;  between 2% to 5%; or  more than 5%

(c) Please estimate the extent to which the use of management actions have reduced the best estimate corresponding future discretionary benefits or options and guarantees that would otherwise be derived?

 less than 2%;  between 2% to 5%; or  more than 5%

3 Reductions in addition to normal reductions in bonuses following adverse experience, e.g. triggered by the solvency of the company and / or fund being seriously threatened

25/55 Other questions on technical provisions

TP.29. Segmentation. Please describe any material problem or uncertainty in the application of SA QIS2 criteria on segmentation for the purposes of calculating technical provisions.

TP.30. EXCEL QUESTION: Risk margin. SA QIS2 specifications allow for five possibilities to calculate the risk margin (NB: simplifications are only applicable under the principle of proportionality). Please, provide approximate percentages about the use of each option (five percentages should complete 100 per cent)

Option Percentag e Full calculation for all future SCR values without using approximations Calculation of future SCR values using approximate methods for individual risks or sub-risks Approximate method for whole SCR for future years (proportional approach) Estimate all future SCRs “at once” (duration approach) Calculating risk margin as a fixed % of the best estimate

TP.31. Risk margin. Regarding the calculation of ‘unavoidable market risk’, please provide information on

a) Quantitative importance (SCR unavoidable market risk compared to total SCR used for risk margin calculations)

b) Method used to calculate SCR unavoidable market risk

TP.32. Simplifications. Do you consider that any other simplified method should be developed in the future on a standardised basis? Please describe such method.

TP.33. Treatment of taxes. Please comment on whether you have had problems to appropriately consider taxes in the calculation of technical provisions in the following areas:

a) I-E policyholder taxes

b) Shareholder income tax

c) Impact of deferred tax on the risk margin

TP.34. Please comment on any other topic not mentioned above, that you consider relevant for the calculation of technical provisions.

27/55 4. Section 4 Solvency Capital Requirement

Structure of the SCR

SCR.1. EXCEL QUESTION: Paragraph SCR1.3 of the SA QIS2 technical specifications allows the SCR to be calculated taking into account the risk margin when considering the change in basic own funds. In your SA QIS2 submission, did you include the change in risk margin in the calculation of

 SCR

 SCR used to project the risk margin

SCR.2. If applicable, based on the answer to EXCEL QUESTION: Paragraph SCR1.3 of the SA QIS2 technical specifications allows the SCR to be calculated taking into account the risk margin when considering the change in basic own funds. In your SA QIS2 submission, did you include the change in risk margin in the calculation of, did you make use of the approach set out in Annexure 1 to the SA QIS2 technical specifications? If you used a different approach, please provide more detail of the approach used.

SCR.3. EXCEL QUESTION: If applicable, based on the answer to EXCEL QUESTION: Paragraph SCR1.3 of the SA QIS2 technical specifications allows the SCR to be calculated taking into account the risk margin when considering the change in basic own funds. In your SA QIS2 submission, did you include the change in risk margin in the calculation of, how many iterations of the calculation was required before the SCR stabilised sufficiently?

SCR.4. In relation to If applicable, based on the answer to EXCEL QUESTION: Paragraph SCR1.3 of the SA QIS2 technical specifications allows the SCR to be calculated taking into account the risk margin when considering the change in basic own funds. In your SA QIS2 submission, did you include the change in risk margin in the calculation of, how many iterations of the calculation was required before the SCR stabilised sufficiently? please specify if the number of iterations required for stabilisation varied by risk type.

SCR.5. EXCEL QUESTION: If applicable, based on the answer to EXCEL QUESTION: Paragraph SCR1.3 of the SA QIS2 technical specifications allows the SCR to be calculated taking into account the risk margin when considering the change in basic own funds. In your SA QIS2 submission, did you include the change in risk margin in the calculation of, please provide the ratio of the 28/55 SCR used in your first iteration (i.e. the equivalent to the SCR calculated ignoring the risk margin) to your final SCR (i.e. SCR1st iteration / SCRfinal).

SCR.6. EXCEL QUESTION: Please supply the following information per with-profit fund (as per the PPFM classification) for the “company specific approach” as set out in section SCR.2.1B of the SA QIS2 technical specifications.

Amending Changing the Increasing the discretionary investment mix for charges levied on benefits assets backing policies in adverse liabilities circumstances Fund 1 Fund 2 Fund 3 . . . Fund n

SCR.7. EXCEL QUESTION: Please supply the following information per with-profit fund (as per the PPFM classification) for both the “company specific approach” and the “standardised approach” as set out in sections SCR.2.1B and SCR.2.1C of the SA QIS2 technical specifications.

Company Number of Is BER of Description of Description of Specific years where future fund how how PUP Approach bonus flows surrender rates have earning impacted? rates have changed capacity is changed following impacted following event for event for year 1,2 and year 1,2 and 3 (years post 3 (years post event) event) onwards onwards Fund 1 Fund 2 Fund 3 . . . Fund n

Standardis Number of Is BER of Description of Description of ed years where future fund how how PUP Approach bonus flows surrender rates have earning impacted? rates have changed capacity is changed following impacted following event for event for year 1,2 and year 1,2 and 3 (years post 3 (years post event)

29/55 event) onwards onwards Fund 1 Fund 2 Fund 3 . . . Fund n

SCR.8. How did the change to the base case tax assumption affect the loss-absorbing capacity of deferred taxes?

SCR.9. By what factor would your result have been different had you made the same assumptions as for SA QIS1?

SCR.10. How did your assumptions around the loss-absorbing capacity of deferred taxes differ from that employed in SA QIS1?

SCR.11. What proportion of the life underwriting and non-life underwriting risks are assumed to be passed on to policyholders? E.g. if by assuming some ability to reprice, the SCR is 60% of what it would be had no such assumption been made, the answer would be 40%.

Loss absorbing capacity of discretionary benefits

SCR.12. Please note any specific difficulties or recommendations with regards to the calculation of the adjustment related to the allowance for the loss absorbing capacity of discretionary benefits.

SCR.13. Please note any specific difficulties or recommendations with regards to the calculation of the alternative standardised adjustment related to the allowance for the loss absorbing capacity of discretionary benefits.

Market Risk

SCR.14. (Re)insurers are requested to indicate whether they are

(a) externally rated; and

(b) where available, their ratings.

SCR.15. EXCEL QUESTION: What is the composition of the assets in the ‘other equity’ category for your company?

Risk Approximate proportion (%)

Hedge funds

Private Equity

Commodity

Infrastructure

SCR.16. Please expand on the nature of the assets in the ‘Other Equity’ when it has been classified in the table in EXCEL QUESTION: What is the composition of the assets in the ‘other equity’ category for your company? as ‘Other’. Please also provide

31/55 information where it is not entirely clear whether an asset should be classified in the “Other Equity’ category

SCR.17. In your opinion, should the Global and Local equity categories be combined, or their shock set equal to each other (apart from the symmetric adjustment mechanism)?

SCR.18. Please state your view on how best to allow for changes to assumed future policyholder behaviour in the standard formulae SCR calculations.

SCR.19. In your view, is it necessary to have distinct stresses for nominal vs. real interest rates, and furthermore principle component stresses under the nominal interest rate sub-module? Please explain.

SCR.20. Please give detail on whether or not you agree with the treatment of participations in the SCR and if not, how do you think it should be treated?

SCR.21. What are the criteria that you followed to consider a participation as strategic?

SCR.22. Spread/Credit default: Please provide feedback on whether there should be different treatment of liquid vs. illiquid instruments suitable to their characteristics?

SCR.23. Spread/Credit default: If the answer to Spread/Credit default: Please provide feedback on whether there should be different treatment of liquid vs. illiquid instruments suitable to their characteristics? is yes, further feedback is requested as to the appropriate methodology to follow on liquid and illiquid instruments, and to what extent this is achieved in the SA QIS2 specification.

SCR.24. Spread/Credit default: If the answer to Spread/Credit default: Please provide feedback on whether there should be different treatment of liquid vs. illiquid instruments suitable to their characteristics? is yes, we invite comments on how to classify an instrument as either liquid or illiquid

SCR.25. If the answer to Spread/Credit default: Please provide feedback on whether there should be different treatment of liquid vs. illiquid instruments suitable to their characteristics? is no, please provide details/suggestions of an alternative approach.

SCR.26. Please provide feedback on the treatment of the SA government in the SA QIS2 specification, in the context of what is defined as the risk-free rate to be used and whether or not the South African government should attract certain capital charges (including e.g. spread risk on South African government bonds)

Life underwriting risk Lapse risk (Life Underwriting Risk)

SCR.27. What difficulties did you experience in calculating the various lapse shocks needed for the lapse module.

SCR.28. Is it appropriate, going forward, to allow for unchanged expenses after a mass lapse shock as in the alternative Mass Lapse Scenario?

SCR.29. Please describe how you have grouped your contracts into homogenous risk groups for the calculations performed for the lapse risk calculations.

Longevity risk (Life Underwriting Risk)

SCR.30. Have you allowed for future mortality improvements in calculating technical provisions for longevity-exposed business?

SCR.31. If your answer to Have you allowed for future mortality improvements in calculating technical provisions for longevity-exposed business? is yes, what rate of mortality improvement have you assumed (weighted average)? If relevant, please differentiate between annuity and endowment products.

SCR.32. In your view, is the risk arising from longevity-exposed business best estimated by stressing underlying mortality, future mortality improvements, or a combination of the two?

Disability risk (Life Underwriting Risk)

SCR.33. Do you have any business that provides payment of medical aid contributions during illness or disability? If so, please indicate the size of the annual 34/55 premium in force, annual sum assured and technical provision both in absolute terms as well as relative to the rest of the disability book, along with the contract boundary for this business.

Catastrophe Risk (life underwriting risk)

SCR.34. Please include here the average mortality rate used in the calculation of the Mort CAT shock.

SCR.35. Please include here the average morbidity rate / expected annual frequency used in the calculation of the Morb CAT shock.

SCR.36. EXCEL QUESTION: Please indicate into which of the following ranges the Mort CAT shock fell before the application of the minimum.

1.1. lower than 0.002

1.2. higher than or equal to 0.002 but lower than 0.0025

1.6. higher than or equal to 0.005

SCR.37. Please indicate into which of the following ranges the Morb CAT shock fell before the application of the minimum.

1.1. lower than 0.002

35/55 1.6. higher than or equal to 0.005

SCR.38. Please explain any practical difficulties you experienced in the calculation of Morb CAT shock.

SCR.39. In your view, is the catastrophe risk arising from health underwriting risk best estimated by calculating various different catastrophe scenarios or by stressing underlying morbidity rates?

Disability and non SLT health underwriting risk

SCR.40. EXCEL QUESTION: How many individuals were covered by your organisation (as at the reporting date used for SA QIS2) for the following risks/product types?

Risk/Product Type Sum Numbe assure r d

Medical expenses insurance, including Hospital Cash etc.

Medical expenses insurance, reimbursement only

Long term care

Standalone critical illness

Personal accident

Standalone capital disability (excluding disability claims in payment)

Non-life underwriting risk

SCR.41. Please explain what practical issues you faced in determining the adjustments for non-proportional reinsurance in the premium risk factors, including availability of data, any data adjustments and any key assumptions you made.

SCR.42. Do you have any practical suggestions for improvements that could be made?

SCR.43. Do you have any practical suggestions for allowing for proportional surplus reinsurance?

SCR.44. Do you have stop loss or similar reinsurance in place? If so, does the standard formula make adequate allowance for this?

SCR.45. If applicable, how did you derive the loss ratio assumption for the stop loss reinsurance allowance? Do you have comments about the appropriateness of this calculation and/or any practical suggestions for improvements that could be made?

SCR.46. If applicable, did you make allowance in your technical provisions for sliding scale and/or profit commissions in your outward reinsurance?

SCR.47. If applicable, did you make allowance in your technical provisions for sliding scale and/or profit commissions in your inward reinsurance?

37/55 SCR.48. If applicable, did you make allowance in your technical provisions for sliding scale fees and/or profit commissions payable to UMAs or other intermediaries?

SCR.49. If applicable, please specify to which items defined in SCR9.12 of the SA QIS2 technical specifications, the items described in questions If applicable, did you make allowance in your technical provisions for sliding scale and/or profit commissions in your outward reinsurance? to If applicable, did you make allowance in your technical provisions for sliding scale fees and/or profit commissions payable to UMAs or other intermediaries? were allocated to.

SCR.50. Do the helper tabs make adequate allowance for your reinsurance structure? If not, please explain where they are lacking. Do you have practical suggestions for allowing for those?

SCR.51. What percentage of your business is monthly?

SCR.52. For monthly business, did you allow for one additional month’s business in your premium provisions?

SCR.53. For non-monthly business, did you allow for expected renewals the day after the valuation date in your premium provisions?

38/55 SCR.54. Please comment on the appropriateness of the segmentation for non-life underwriting risks.

SCR.55. Please explain the difficulties experienced in separating data into various segments, including possible unclear segment definitions.

SCR.56. Do you think the standard formula adequately allows for the risk in the expected premium provision to be held at the valuation date?

SCR.57. Does the standard formula adequately allow for possible distortions that might result from contract recognition/boundary definitions? If not, please explain.

Lapse risk (Non-Life Underwriting Risk)

SCR.58. What difficulties did you experience in calculating the various lapse shocks needed for the lapse module?

Catastrophe Risk (Non-life underwriting risk)

SCR.59. Please explain to what extent you have made use of approximations when estimating total insured values by zone for natural catastrophe scenarios, including the extent to which actual data was available.

39/55 SCR.60. Please comment on the appropriateness of the proposed structure of the natural catastrophe risk sub-module (particularly under Method 1), in general and compared with SA QIS1, Solvency II and APRA approaches.

SCR.61. Please describe any practical difficulties you experienced in calculating the various different man-made catastrophe scenarios, including the extent to which actual data was available or assumptions needed to be made.

SCR.62. Please compare your results from the standardised scenario / factor method with results from your partial internal model where relevant.

SCR.63. Please comment on the appropriateness of the man-made catastrophe scenarios defined for SA QIS 2. Please supply possible alternative scenarios that would apply to the South African insurance market, in respect of one or more of the following man-made catastrophes. The scenario described in respect of any man-made catastrophe should be set at a 1 in 200 year level:

(a) Motor Third Party Liability

(b) Fire – Agri

(c) Fire – Other

(d) Marine

(e) Aviation

(f) Liability

(g) Credit & Suretyship

(h) Terrorism

SCR.64. Please describe the business for which method 2 was used instead of method 1 to determine the catastrophe risk charge.

SCR.65. Please list any significant catastrophe perils that are not currently adequately allowed for in your opinion.

41/55 Undertaking specific parameters

SCR.66. (Re)insurers are requested to indicate parameters of the standard formula that could be replaced by (re)insurer specific parameters.

SCR.67. (Re)insurers are requested to provide a description of other methods that could be used to determine the (re)insurer specific parameter in addition to those set out in the SA QIS2 technical specifications.

SCR.68. Please explain which methods you used to calculate (re)insurer specific parameters, and why.

SCR.69. Please also explain the sources of data used for the calculations, including any adjustments / assumptions that were made.

SCR.70. Please describe (with examples where possible) any practical issues you experienced in getting the data for the calculations.

SCR.71. What practical issues would you anticipate in meeting the data requirements once SAM is implemented?

42/55 SCR.72. Please describe the approach taken to adjust data for inflation where the inflationary experience implicitly included in time series used is not representative of the inflation that might occur in the future, where this is considered to have a material impact.

Simplifications

SCR.73. Please comment on simplifications you have used for the calculation of the SCR, your rationale for using the simplification and the appropriateness of the simplification selected.

SCR.74. Please provide any other suggestions that you have for further simplifications that can be used for the calculation of the SCR.

43/55 5. Section 5 Ring fenced funds

With-Profit Funds

RFF.1. Please provide details of any practical difficulties you experienced in providing the information required for the with-profit section of the ring-fenced fund calculation.

RFF.2. Excel question: Please describe any restrictions on the use of own funds within each with-profit fund, e.g. due to the conditions of a merger, transfer of business or demutualisation.

Fund Restriction on use of own funds

RFF.3. In your view, how should with-profit funds be treated in relation to ring-fenced funds?

Cell Arrangements

RFF.4. Please provide details of any practical difficulties you experienced in providing the information required for the cells section of the ring-fenced fund calculation.

RFF.5. In your view, please describe whether your cell arrangements should be treated as ring-fenced funds using the principles described in SCR.11.5 of the SA QIS2 technical specification.

RFF.6. For your cell arrangements, please describe what limitations there are from using the surplus in one cell to meet losses made in a different cell on a going concern basis. Please describe any specific trigger events that will lead to cross-subsidization between cells on a going concern basis? Has there been any cross-subsidization between cells in the past in your company?

RFF.7. For your cell arrangements, please describe what limitations there are from using the surplus in one cell to meet losses made in a different cell on a winding-up basis.

RFF.8. In your view, should there be any difference in the treatment between first party cells, third party cells or contingency policies in relation to ring-fenced funds. Please explain why you think there should or should not be any difference in treatment.

Other ring-fenced fund considerations

RFF.9. Apart from any with-profit funds or cell arrangements, do you have any other ring-fenced funds? If yes, please provide further detail of the nature of the arrangement giving rise to ring fenced funds and the nature of the restrictions which apply.

RFF.10. Paragraph SCR.11.6 of the technical specification proposes adjustments to be made for RFFs on two different approaches. In the first approach, the SCR of the insurer is calculated as the sum of the SCRs for each of the ring fenced

45/55 funds and the SCR for the remaining part of the insurer. This assumes that there is no diversification of risks between the ring fenced funds. In the second approach, the SCR of the insurer allows for diversification between the ring fenced funds, but only to the extent that there are own funds available outside the ring fenced funds to meet losses experienced by the ring fenced fund. Please state which approach you view as being more appropriate and motivate your choice.

46/55 6. Section 6 Own funds

Features of other paid in capital instruments

Where (re)insurers have other paid in capital instruments (as described in OF.4.1.g and OF.38.1.c(ii) of the SA QIS2 technical specifications), they are asked to respond to the following questions:

OF.1. If the instrument has a write-down mechanism, please explain how it works. If the write-down only occurs at a trigger point, please explain the methodology and the basis for any future write-ups.

OF.2. If the instrument has a conversion feature/option, please explain how it works.

OF.3. If the instrument utilises an alternative coupon satisfaction mechanism (ACSM), please explain how this works

Restricted reserves

Where (re)insurers have reported restricted reserves, they are asked to respond to the following questions:

OF.4. A description of the nature of the restricted reserves

OF.5. Details of the legal or regulatory requirement that give rises to the restriction on the reserve

47/55 OF.6. Details of the risks that the reserve is available to cover and the risks that the reserve is not available to cover

OF.7. The amount of the reserve that was not included in Tier 1

Paid-up value gap and surrender value gap

OF.8. Does the approach set out in OF.2.4 provide sufficient clarity as to the nature and scope of the calculations required?

OF.9. Has an appropriate balance been achieved to ensure that the calculation is sufficiently granular to obtain meaningful results without imposing an undue or unnecessary burden on (re)insurers?

OF.10. Are there any specific technical aspects for which additional clarification is needed e.g. as between life and non-life business?

OF.11. What are your views on the general appropriateness of the methodology? If you consider the methodology to be appropriate, do you have any suggestions as to how the methodology can be developed further for practical application? If not, which alternative methods would you propose?

Ancillary own funds

48/55 OF.12. What existing items do you currently count as own funds to meet the solvency margin that would, subject to supervisory approval, constitute ancillary own funds under SAM?

OF.13. What other items which you do not currently count as own funds to meet the solvency margin do you intend to apply for supervisory approval in order to count that item as ancillary own funds under SAM?

OF.14. To what extent do you envisage entering into new arrangements that would, subject to supervisory approval, constitute ancillary own funds?

49/55 7. Section 7 First party insurance structures

FP.1. Do you believe that the suggested simplification for first party insurance structures as detailed in section SCR.14 is appropriate? Please motivate your answer (and give alternative suggestions if relevant.)

FP.2. Parental guarantees a. EXCEL QUESTION: Where should a parental guarantee between a first party insurance structure and its parent be treated in capital resources?

Tier 1 Yes/No Tier 2 Yes/No Tier 3 Yes/No Not at all Yes/No

b. Please justify your answer using the criteria in the Own Funds section set out in the SA QIS2 technical specification.

FP.3. EXCEL QUESTION: If your answer to the previous question included “Tier 1”, how much of the parental guarantee should be included in tier 1?

Percentage of Percentag e SCR xxx% Total technical provisions xxx% Assets xxx% Other (Please specify) xxx%

50/55 8. Section 8 Internal Models

This section should only be completed by firms who have developed internal models.

IM.1. If you are planning to apply to get your internal model approved in order to calculate the SCR a. are you currently working on the implementation of your internal model for SAM purposes?

b. if no, could you provide the potential date of the beginning of such work?

c. could you provide the planned date of submitting the application?

d. if you consider that your risk profile deviates from the assumptions underlying the standard formula, please provide the main reasons for this (e.g. deviations in terms of risk exposure, deviations in terms of volatility, non-linear dependency of risks, presence of cycles, incompatibilities of your risks with the SCR modular approach, other – please specify).

e. could you please identify risk modules that might lead to inappropriate capital requirements if the standard formula is adopted?

IM.2. If the internal model will be used only for internal risk management, under what circumstances would you reconsider this decision (i.e. to use an internal model rather than the standard formula for the calculation of the regulatory capital)?

Scope of the internal model

IM.3. What is the current scope of the internal model? In particular which risks / major business units / entities are included in your internal model?

IM.4. Please compare the structure of your internal model with that of the standard formula. For instance, which risk modules of the standard formula are a) combined, b) divided in your partial internal model.

Undertakings using or intending to use partial internal models

IM.5. Please justify the scope of your partial internal model highlighting which criteria you used to define major business units (if relevant) and to choose the scope of the partial internal model.

Internal model changes

IM.6. If you already have in place a policy for internal model changes, how do you distinguish between major and minor changes?

IM.7. If you do not have a policy for internal model changes in place, do you have any ideas about criteria which can be applied to distinguish between major and minor changes?

52/55 IM.8. If you expect regular major changes to your internal model due to your yearly planning processes, in which areas or with respect to which circumstances.

Use test

IM.9. How do you plan to demonstrate that the use of your internal model is sufficiently material to result in pressure to improve the quality of the internal model?

IM.10. Please provide some examples as to what extent your internal model is widely used and plays an important role in the system of governance, risk management and decision making.

IM.11. How would you demonstrate that persons who effectively run the undertaking take into account outcomes of the internal model in building and developing the business strategy?

IM.12. If your risk management strategy considers the results produced by your internal model to a small or medium degree, please identify gaps and if to a large degree please provide examples or a justification for such an assessment.

IM.13. How do you ensure that your administrative, management or supervisory body and the persons who effectively run the undertaking understand the internal model and its limitations? How do you plan to improve this understanding?

53/55 Validation of internal models

IM.14. Please set out any concerns that you have in meeting the standards for the validation of the internal model as set out in Position Paper 43.

Model governance

IM.15. Please set out any concerns that you have in meeting the standards for governance of the internal model as set out in Position Paper 54.

Statistical quality and calibration

IM.16. Please set out any concerns that you have in meeting the statistical quality and calibration standards for the internal model as set out in Position Paper 55.

Documentation and data requirements

IM.17. Please set out any concerns that you have in meeting the documentation and data requirements of the internal model as set out in Position Paper 56.

Partial internal models

IM.18. Please provide a detailed description of how you would integrate the partial internal model with the standard formula, if you were allowed to choose the aggregation method.

54/55 IM.19. If the partial internal model includes risks not covered in the standard formula please specify how they are integrated into the standard formula.

IM.20. Please set out any additional concerns that you have in meeting the requirements for partial internal models as set out in Position Paper 57.