1. INTRODUCTION, PURPOSE AND SCOPE

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1 Solvency Assessment and Management: Pillar I - Sub Committee Technical Provisions Task Group Discussion Document 29 (v 4) Authorisation classes of business under SAM EXECUTIVE SUMMARY SAM is a fundamental review of the solvency regime for South African insurers and reinsurers, planned to take effect from January It aims to establish a revised set of capital requirements, valuation techniques and disclosure and risk management standards that will replace and / or enhance most of the current legislative requirements contained in the Long-term Insurance Act (Act No.52 of 1998) and the Short-term Insurance Act (Act No. 53 of 1998). The new regime is expected to apply to all firms and represents a shift towards risk based regulation for insurers and reinsurers. A comparison of the Solvency II directive authorisation classes with international regulatory standards and approaches in other jurisdictions was completed. The long-term merits of changing the current authorisation classes outweigh the benefits of retaining the current authorisation classes. For non-life the recommendation is to adopt the authorisation classes as set out in the Solvency II directive with a number of changes. It is noteworthy that the practical consequences of this proposed change are not insignificant. For life the recommendation is also to adopt the authorisation classes as set out in the Solvency II directive with a few changes. 1. INTRODUCTION, PURPOSE AND SCOPE The principle of authorisation is one of the first steps of risk management within the industry, whereby the regulator needs to authorise (re)insurers to conduct or re within South Africa. The purpose of this authorisation will be to ensure that current and prospective and re firms are able to meet the minimum requirements as laid down by the Regulator and that the resources available to the (re)insurer are sufficient for the risks it is absorbing. This discussion document considers authorisation classes as set out in the Solvency II Directive and compares international best practice and regulatory guidance in recommending authorisation classes of business (both long-term and short-term) for use within SAM. Entities established through the following legislation in South Africa are excluded from the scope of authorisation classes covered in this discussion document: Financial Services Board Act 97 of 1990 (Except Insurance Prudential entities covered in this Discussion paper). Compensation for Occupational Injuries and Diseases Act 130 of 1993; Road Accident Fund Act 56 of 1996 (RAF);Unemployment Insurance Act 63 of 2001; and

2 Medical Schemes Act 131 of 1998.At this point legislation for micro- is being developed, which is also excluded from the scope of authorisation classes covered in this discussion document. The Solvency II directive states in par 8 of the introduction to the Level 1 text that the taking up of activities shall be subject to prior authorisation and that it is necessary to lay down the conditions and procedures for the granting and the refusal of such authorisation. Other than dealing with authorisation classes, the conditions and procedures referred to above are scoped out. There is a link between the authorisation classes and other elements of SAM, for example: a) Grouping of business for calculating technical provisions; b) Grouping of business for calculating capital requirements; and c) Business classes for reporting and disclosure under Pillar III. Generally the term segmentation is used to refer to the above instances where business is grouped in a homogeneous manner for the purpose at hand. It is sensible for the authorisation classes and segmentation to have similarities, but the authorisation classes / segmentation requirements for these different purposes should not necessarily be the same. The segmentation used for different purposes should depend on what is best for that purpose. This document, however, focuses on authorisation classes of business while segmentation for other purposes will be considered in separate discussion documents. The discussion document contains the research performed by the Technical Provisions task group in terms of the authorisation classes of business. This included a review of the following: Solvency II Directive articles relevant to authorisation together with Annex I and Annex II; CEIOPS guidance and QIS5; IAIS core principles; OSFI authorisation classes; APRA authorisation classes; Current Long-term Insurance Act and Short-term Insurance Act authorisation classes. The recommendations contained in this discussion document will form the basis of other discussion documents being compiled in the Technical Provisions, the Capital Requirements and the Reporting and Disclosures task groups. 2. INTERNATIONAL STANDARDS: IAIS ICPs Since its inception in 1994, the IAIS has developed a number of principles and standards in guidance papers to help promote the global development of well-regulated markets. A further objective of the IAIS is to contribute to broader stability of the financial system. The current Insurance Core Principles ( ICP ) in-force since October 2003 was considered, in particular ICP 6 pertaining to licensing of insurers. The IAIS is currently revising the ICPs with corresponding standards and guidance material to be ready for adoption at the October 2011 General Meeting. The revised draft principles were also considered, in particular ICP4 dealing with licensing. In its revision of the ICPs the IAIS has not materially altered the ICP on licensing. So, the draft ICP 4 is quoted below: Page 2 of 36

3 ICP 4 Licensing A legal entity which intends to engage in activities must be licensed before it can operate within a jurisdiction. The requirements and procedures for licensing must be clear, objective and public, and be consistently applied. This ICP is based on principle and primarily describes the licensing process from a regulatory point of view. As a result, there is no prescription or recommendation to assist with the authorisation classes of business. In particular, the Regulator has liberty to specify its authorisation classes provided the licensing requirements and procedures are clear, objective, publicly available and consistently applied. IAIS guidance is therefore aimed at the principle of the licensing process and does not provide guidance on the authorisation classes to be used under SAM. 3. EU DIRECTIVE ON SOLVENCY II: PRINCIPLES (LEVEL 1) The following articles are the main sources and guidance on authorisation classes in the Solvency II Directive: Article 14: Principle of authorisation o o 14.1: The taking up of the business of direct or of re covered by this Directive shall be subject to prior authorisation. 14.2: The authorisation referred to in paragraph 1 shall be sought from the supervisory authorities of the home Member State by the following: a) any undertaking which is establishing its head office within the territory of that State; b) any undertaking which, having received an authorisation pursuant to paragraph 1, wishes to extend its business to an entire class or to classes other than those already authorised. Article 15: Scope of authorisation o o o o 15.2: Subject to article 14 (Principle of authorisation), authorisation shall be granted for a particular class of direct as listed in Part A of Annex I or in Annex II. It shall cover the entire class, unless the applicant wishes to cover only some of the risks pertaining to that class. The risks included in a class shall not be included in any other class except in the cases referred to in article 16 (Ancillary risks). Authorisation may be granted for two or more of the classes, where the national law of a Member State permits such classes to be pursed simultaneously. 15.3: In regard to non-life, Member States may grant authorisation for the groups of classes listed in Part B of Annex I. The supervisory authorities may limit authorisation requested for one of the classes to the operations set out in the scheme of operations referred to in article 23 (Scheme of operations). 15.4: Undertakings subject to this Directive may engage in the assistance activity referred to in article 6 (Assistance) only if they have received authorisation for class 18 of Part A of Annex I, without prejudice to Article In that event this Directive shall apply to the operations in question. 15.5: In regard to re, authorisation shall be granted for non-life re activity, life re activity or all kinds of re activity. The application for authorisation shall be considered in the light of the scheme of operations to be submitted pursuant to Article 18(1)(c) (Conditions for authorisation) and the fulfilment of the conditions laid down for authorisation by the Member State from which the authorisation is sought. Page 3 of 36

4 Article 16: Ancillary risks o o 16.1: An undertaking which has obtained an authorisation for a principal risk belonging to one class or group of classes as set out in Annex I may also insure risks included in another class without the need to obtain authorisation in respect of such risks provided that the risks fulfil all the following conditions: a) They are connected with the principal risk b) They concern the object which is covered against the principal risks and c) They are covered by the contract insuring principal risk. 16.2: By way of derogation from paragraph 16.1, the risks included in classes 14, 15 and 17 of Part A of Annexure I shall not be regarded as risks ancillary to other classes. However, legal expenses as set out in Class 17 may be regarded as a risk ancillary to class 18, where the conditions laid down in paragraph 1 and either of the following conditions are fulfilled: a) The main risks relates solely to the assistance provided for persons who fall into difficulties while travelling, while away from their home or their habitual residence; or b) The concerns disputes or risks arising out of, or in connection with, the use of sea-going vessels. Other articles in the Solvency II Directive relevant either directly or indirectly to authorisation classes include: Article 18: Conditions for authorisation Article 25: Refusal of authorisation Article 73: Pursuit of life and non-life activity The following article in the Solvency II Directive relates to the segmentation of classes in the calculation of technical provisions (and not authorisation), but has also been considered in this discussion document. Article 80: Segmentation Annex I of the Directive: CLASSES OF NON-LIFE INSURANCE : Part A: Annex I of Directive 2009/138/EC (Solvency II), part A of Annex I have classified risks according to the following classes and has provided accompanying descriptions and detail: Number and Class 1. Accident Including industrial injury and occupational diseases Fixed pecuniary benefits Benefits in the nature of indemnity Combinations of the two Injury to passengers 2. Sickness Fixed pecuniary benefits Benefits in the nature of indemnity Combinations of the two Page 4 of 36

5 Number and Class 3. Land vehicles Other than railway rolling stock All damage to or loss of: o Land motor vehicles o Land vehicles other than motor vehicles 4. Railway rolling stock All damage to or loss of railway rolling stock 5. Aircraft All damage to or loss of aircraft 6. Ships Sea, lake and river and canal vessels 7. Goods in transit Including merchandise, baggage, and all other goods 8. Fire and natural forces 9. Other damage to property All damage to or loss of: o River and canal vessels o Lake vessels o Sea vessels All damage to or loss of goods in transit or baggage, irrespective of the form of transport. All damage to or loss of property (other than property included in classes 3, 4, 5, 6, and 7) due to: o Fire o Explosion o Storm o Natural forces other than storm o Nuclear energy All damage to or loss of property (other than property included in classes 3, 4, 5, 6 and 7) due to hail or frost, and any event such as theft, other than that included in class Motor vehicle liability All liability arising out of the use of motor vehicle operating on the land (including carrier s liability). 11. Aircraft liability All liability arising out of the use of aircraft (including carrier s liability). 12. Liability for ships Sea, lake and river and canal vessels All liability arising out of the use of ships, vessels or boats on the sea, lakes, rivers of canals (including carrier s liability). 13. General liability All liability other than those referred to in classes 10, 11 and Credit Insolvency (general) Export credit Instalment credit Mortgages Agricultural credit 15. Suretyship Suretyship (direct) Suretyship (indirect) Page 5 of 36

6 Number and Class 16. Miscellaneous financial loss Employment risk Insufficiency of income (general) Bad weather Loss of benefits Continuing general expenses Unforeseen trading expenses Loss of market value Loss of rennet or revenue Other indirect trading loss Other non-trading financial loss Other forms of financial loss 17. Legal expenses Legal expenses and costs of litigation. 18. Assistance Assistance for persons who get info difficulties while travelling, while away from their home or their habitual residence. Part B: The Solvency II Directive, part B of Annex I indicates further that the following names shall be given to authorisations which simultaneously cover the following non-life classes: Name 1. Accident and Health Insurance Class 1: Accident and Class 2: Sickness Classes combined 2. Motor Insurance Class 1: Accident: Fourth indent: Injury to passengers Class 3: Land vehicles Class 7: Goods in transit Class 10: Motor vehicle liability 3. Marine and Transport Insurance Class 1: Accident: Fourth indent: Injury to passengers Class 4: Railway rolling stock Class 6: Marine and Transport Insurance Class 7: Goods in transit Class 12: Liability for ships (sea, lake and river and canal vessels) 4. Aviation Insurance Class 1: Accident: Fourth indent: Injury to passengers Class 5: Aircraft Class 7: Goods in transit Class 11: Aircraft liability 5. Insurance against fire and other damage to property Class 8:Fire and Natural forces Class 9: Other damage to property Page 6 of 36

7 Name Classes combined 6. Liability Insurance Class 10: Motor vehicle liability Class 11: Aircraft liability Class 12: Liability for ships (sea, lake and river and canal vessels) Class 13: General liability 7. Credit and Suretyship Insurance Class 14: Credit Class 15: Suretyship Annex II of the Directive: CLASSES OF LIFE INSURANCE : Annexure II of Directive 2009/138/EC (Solvency II) has classified life into the following classes: Number and Class 1. Life Insurance (non-linked) 2. Marriage, birth 3. Investment Linked 4. Permanent Health Insurance a) Assurance o on survival to stipulated age only o on death only o on survival to stipulated or earlier death o with return of premiums b) Annuities c) Supplementary underwritten in addition to life, in particular, against personal injury including incapacity for employment, against death resulting from an accident and against disability resulting from an accident or sickness Insurance referred to in 1a) and 1b) above, which are linked to investment funds. Insurance providing specified benefits against risks of persons becoming incapacitated in consequence of sustaining injury as a result of an accident or of an accident of a specified class or of sickness or infirmity. 5. Tontines Whereby associations of subscribers are set up with a view to jointly capitalizing their contributions and subsequently distributing the assets thus accumulated among the survivors or among the beneficiaries of the deceased. 6. Capital redemption operations 7. Management of group pension funds Based on actuarial calculations whereby, in return for single or periodic payments agreed in advance, commitments of specific duration and amount are undertaken. Comprising the management of investments, and in particular the assets representing the reserves of bodies that effect payments on death or survival or in the event of discontinuance or curtailment of activity. Page 7 of 36

8 Number and Class 8. Collective Insurance Insurance where the assets and rights are isolated from other insured. 9. Social Insurance Operations relating to the length of human life which are prescribed by or provided for in social legislation, in so far as they are effected or managed by life undertakings at their own risk in accordance with the laws of a Member State. 4. MAPPING ANY PRINCIPLE (LEVEL 1) DIFFERENCES BETWEEN IAIS ICP & EU DIRECTIVE The IAIS ICP on licensing (both the current in-force and the proposed new draft for adoption in October 2011) is a principle based standard with no guidance on the authorisation classes. At best, the associated guidance on the ICP indicates that the supervisors should at least distinguish between life and non-life. Therefore the authorisation classes noted in Annex I and Annex II of the EU directive does not contradict the IAIS ICP on licensing in any way. 5. STANDARDS AND GUIDANCE 5.1 CEIOPS Consultation Papers and Quantitative Impact Studies (QIS) CEIOPS has only issued CP 27 aimed at segmentation for the purpose of calculating technical provisions but not at the authorisation of classes. Similarly the QIS5 specifications have included segmentation requirements with regards to the calculation of technical provisions, but do not address authorisation classes. For completeness, the QIS5 classes of business for calculating technical provisions are tabled below: Non-life Insurance: Contract Type 1. Non-life direct and proportional re Class Medical expense Income protection Workers' compensation Motor vehicle liability Other motor Marine, aviation and transport Fire and other damage to property General liability Page 8 of 36

9 Contract Type 2. Non-life nonproportional re Class Credit and suretyship Legal expenses Assistance Miscellaneous financial loss Non-proportional health re Non-proportional property re Non-proportional casualty re Non-proportional marine, aviation and transport re Life Insurance: Contract Type 1. Life Insurance with profit participation 2. Index-linked and unit-linked 1. Death 2. Survival Class (Contract type and Main risk driver) 3. Disability / morbidity 4. Saving 5. Death 6. Survival 7. Disability / morbidity 8. Saving 3. Other life 9. Death 4. Accepted re 10. Survival 11. Disability / morbidity 12. Saving 13. Death 14. Survival 15. Disability / morbidity 16. Saving A 17th business class is dedicated to annuities stemming from non-life contracts. Page 9 of 36

10 5.2 The Australian Prudential Regulatory Authority (APRA) Life Insurance: The Life Insurance Act (Act No. 4 of 1995 as amended) of Australia prescribes the conditions for registration of life companies in Australia. These conditions do not classify business into different classes for the purpose of authorisation. The Act does distinguish between ordinary business and superannuation business. Ordinary business refers to all life business excluding superannuation business. Superannuation business refers to life policies: that are maintained for the purposes of a superannuation or retirement scheme and owned by the trustee under the scheme; or of a kind prescribed by the regulations for the purposes of this paragraph. The following is a list of the classes of life business used for reporting purposes by APRA: 1. Conventional participating 2. Participating Investment Account 3. Annuity with Longevity Risk 4. Individual Lump Sum Risk 5. Individual Disability Income Insurance 6. Group Lump Sum Risk 7. Group Disability Income Insurance 8. Non-par Investment Policy 9. Annuity without Longevity Risk 10. Other Details of each of the above classes are described in section 1 of Appendix A Non-life Insurance: The Insurance Act (Act No. 76 of 1973 as amended) of Australia prescribes the conditions for registration of general (non-life) companies in Australia. These conditions do not classify business into different classes for the purpose of authorisation. The following classes of non-life business are defined in APRA s General Insurance Prudential Standards for valuation and reporting purposes: 1. Fire and Industrial Special Risks (ISR) 2. Houseowners / Householders (H&H) 3. Compulsory Third Party Motor Vehicle (CTP) 4. Commercial Motor Vehicle 5. Domestic Motor Vehicle 6. Travel 7. Marine and Aviation 8. Mortgage 9. Consumer Credit (CCI) 10. Other Accident 11. Other 12. Public and Product Liability Page 10 of 36

11 13. Professional Indemnity (PI) 14. Employers' Liability (EL) Details of each of the above classes are described in section 2 of Appendix A. 5.3 The Office of the Superintendent of Financial Institutions Canada (OSFI) The Canadian Insurance Companies Act (S.C. 1991, c. 47) specifies authorisation classes as set out in the list below. Note that Life Insurance is seen as a single class. 1. Accident and sickness 2. Aircraft 3. Automobile 4. Boiler and machinery 5. Credit 6. Credit protection 7. Fidelity 8. Hail 9. Legal Expenses 10. Liability 11. Life 12. Marine 13. Mortgage 14. Other approved products 15. Property 16. Surety 17. Title Details of each of the above classes are described in Appendix B. Page 11 of 36

12 6. ASSESSMENT OF AVAILABLE APPROACHES GIVEN THE SOUTH AFRICAN CONTEXT 6.1 The classes currently allowed within South Africa Life Insurance The classes of life for which the FSB may authorize a company in terms of the Long Term Insurance Act (Act No. 52 of 1998) are: 1. Assistance 2. Disability 3. Fund 4. Health 5. Life 6. Sinking fund Details of each of the above classes are described in section 1 of Appendix C Non-life Insurance In terms of the Short-Term Insurance Act, (Act No. 53 of 1998) the following short-term classes are allowed: 1. Accident and Health 2. Engineering 3. Guarantee 4. Liability 5. Miscellaneous 6. Motor 7. Property 8. Transportation Details of each of the above classes are described in section 2 of Appendix C. 6.2 Comparison of the different approaches with the prevailing legislative framework The classes above have been mapped to the Solvency II Directive classes taking into account the information provided within the descriptions, and is included in Appendix D. 6.3 Principles to consider when setting authorisation classes Risk-based approach: Having a risk based authorisation classification will assist the FSB in assessing whether the insurer applying for a licence has the necessary resources to ensure the risks it is taking on are commensurate with its resources, leading to a regime where policyholders are better protected. Page 12 of 36

13 Relevance: Many jurisdictions have authorisation classes tailored to their particular environments. Examples include the ISR policies in Australia and the Title policies in Canada. When adopting any authorisation class used anywhere, the relevance of specific classes in the South African market needs to be considered. Third country equivalence: CEIOPS CP 78 on the technical criteria for assessing 3 rd country equivalence with principle 2 dealing with authorisation requirements is relevant. It indicates no prescription on the authorisation classes but places emphasis on the authorisation process. Practical consequences: Although the practical consequences of a proposed set of authorisation classes should not be the main focus when deciding on such a proposal, it should never the less be considered. When assessing international practice regarding authorisation classes it is therefore important to consider the local relevance. 6.4 Discussion of inherent advantages and disadvantages of various approaches The following possible different approaches exist for setting authorisation classes under the SAM regime: Retain or adapt existing FSB authorisation classes; Develop new authorisation classes; Adopt APRA / OSFI authorisation classes (perhaps with modification); Adopt Solvency II directive authorisation classes (perhaps with modification) Life Retain or adapt existing: The key advantage of maintaining the current authorisation classes are the practical implications. However, the aim of the authorisation classes under SAM would be to enhance the ability of the FSB to perform risk-based supervision. The authorisation classes should therefore reflect the underlying risk characteristics. The current authorisation classes, however, includes smaller classes such as Assistance business, which are really a subset of a larger class ( Life business ). The option to retain the existing authorisation classes is therefore not recommended. The recommended approach (see section 7) is based on the Solvency II classes, but is also fairly similar to the current authorisation classes in South Africa. Develop new authorisation classes: Developing a new set of authorisation classes is akin to reinventing the wheel. Instead the option to adapt other authorisation classes seems more sensible. This option is therefore not recommended. Page 13 of 36

14 Adopt APRA / OSFI authorisation classes (perhaps with modification): OSFI includes Life Insurance as a single class without further segmentation. The Technical Provisions Task Group is however of the opinion that there should be at least a small number of different authorisation classes, in order to be able to license companies with limited resources to operate in less complex and capital intensive classes. Using the OSFI guidance as a base is therefore not recommended. The APRA approach on the other hand is more granular than Solvency II, in that it separates different contract types in addition to different risk classes. It is the view of the Technical Provisions Task Group that the authorisation classes should reflect the main risk drivers only and not be overly granular. For this reason and because of the stated goal to develop SAM to meet Solvency II s third country equivalence requirements, the option to adapt APRA authorisation classes is seen as inferior to the option of adapting the Solvency II directive authorisation classes. Adopt Solvency II directive authorisation classes (with modification): Adopting Solvency II directive requirements for the authorisation classes with some adjustments has the advantage of making future comparisons easier when assessing third country equivalence. The Solvency II requirements are also based on broad risk categories, which is in line with the views of the Technical Provisions Task Group. This option is therefore recommended with some adjustments, mainly relating to classes that are not prevalent in South Africa Non-life Retain or adapt existing: The key advantage of maintaining the current authorisation classes are the practical implications. Apart from industry players being familiar with these, licenses are already issued in terms of these classes, policies are structured into these classes and systems and processes in place are already sculpted around these classes. As the local authorisation classes are not very granular, it is possible for authorisation in one class to correspond to authorisation in multiple classes under the Solvency II directive authorisation classes. For example, being authorised locally for liability could potentially correspond to authorisation in classes 10, 11, 12 and 13 under Solvency II. This might be a factor to consider for the third country equivalence assessment of South Africa. Adapting the existing authorisation classes should be aimed at addressing the granularity and strictness of authorisation that is currently lacking. In the long-run, choosing to adopt stricter and more granular authorisation classes now should stand us in good stead once a third country equivalence assessment is undertaken on South Africa. Any expansion in the granularity of the current authorisation requirements will be a move towards the Solvency II directive requirements and improved risk management and policyholder protection in any event. The option to retain or adapt the existing authorisation classes is therefore not recommended. Page 14 of 36

15 Develop new authorisation classes: Developing a new set of authorisation classes is akin to reinventing the wheel. Instead the option to adapt other authorisation classes seems more sensible. This option is therefore not recommended. Adopt APRA / OSFI authorisation classes (perhaps with modification): Both the OSFI and APRA authorisation classes are more granular than the current local authorisation classes. It is clear that both OSFI and APRA have adapted their authorisation classes to their local environments. Examples include the ISR policies in APRA and the Title policies in OSFI. Neither of OSFI or APRA should be used as is for local authorisation classes without some adaptation. It is useful to note that the OSFI and APRA authorisation classes can be considered subsets of the more granular Solvency II directive requirements for authorisation classes. Because of the stated goal to develop SAM to meet third country equivalence requirements, the option to adapt OSFI or APRA authorisation classes is seen as inferior to the option of adapting the Solvency II directive authorisation classes. This option is therefore not recommended. Adopt Solvency II directive authorisation classes: Adopting Solvency II directive requirements allows for assessment and granting of licences to insurers that have the knowledge and capacity to underwrite potentially volatile classes of business, for example Marine liability. Use of the granular Solvency II directive authorisation classes could potentially lead to similar segmentation between reporting of technical provisions and capital requirements under the standard model. This has a number of advantages around the exchanging of information between regulators, for local insurers reporting to an international parent subject to Solvency II and leveraging results from QIS exercises already done in the EU. As noted in a number of instances in this discussion paper, the practical consequences of expanding the current authorisation classes are not insignificant. Considering the options available and the stated goal of third country equivalence as well as improved risk management and policyholder protection, this option is recommended but with minor adjustments as reflected under the final recommendation. 7. Recommendation Section 7.1 and 7.2 below shows the recommended authorisation classes for SAM as adapted 1 from the Solvency II directive. Furthermore, the recommendation with regards to re is that the same authorisation classes apply as that of direct as set out below. This is in line with the current authorisation framework of the FSB but differs from the Solvency II directive as set out in Article The motivation for this deviation from Solvency II is that this has been the practice in South Africa to date and that the underlying risk taken on by the reinsurer are similar to that of the direct insurer, even though the treaty wording may alter the exposure profile to an extent. 1 Deletions from the Solvency II directive is formatted as strikethrough and additions are underlined. Page 15 of 36

16 7.1 Life : The following table shows the recommended authorisation classes under SAM as adapted from the Solvency II directive: Number and Class Description / Comment 1. Life Insurance a) Assurance o on survival to stipulated age only o on death only o on survival to stipulated age or earlier death o with return of premiums b) Annuities (where the insurer bears longevity risk) c) Supplementary life underwritten in addition to life, including for example, against personal injury including incapacity for employment, against death resulting from an accident, birth and retrenchment against disability resulting from an accident or sickness 2. Marriage, birth 3. Investment Related Insurance 4. Disability and Health Insurance 2 Permanent Health Insurance (Not prevalent in South Africa) Comprising policies where benefits are linked to the value of investment funds. a) Insurance providing benefits against risks of injury, accident, sickness or infirmity. b) Supplementary underwritten in addition to Life Insurance, providing benefits as a result of injury, accident, sickness or infirmity. This does not include Medical Aid business that is regulated under the Council of Medical Schemes. 5. Tontines (Not prevalent in South Africa) 6. Capital redemption operations 7. Management of group funds Based on actuarial calculations whereby, in return for single or periodic payments agreed in advance, commitments of specific duration and amount are undertaken. This includes any contract where benefits are defined as fixed amounts, not related to investment funds or life or disability events, e.g. o o Term certain annuities Guarantee plans (for example benefits defined as fixed amounts at predefined maturity dates) Comprising the management of investments, and in particular the assets representing the reserves of bodies that effect payments on death or survival or in the event of discontinuance or curtailment of activity. 8. Collective Insurance (Not prevalent in South Africa) 9. Social Insurance (Not relevant for SAM.) 2 The renaming from Permanent Health Insurance is to prevent confusion with regards to Medical Aid business. Page 16 of 36

17 Comparing the proposed authorisation classes to the current regime, the following should be noted: o o o o o o o Assistance business and credit life business will be included in Life business Health business will be included in Disability business Fund business is renamed to Management of group funds Sinking fund business is included in Investment Related Insurance Under Investment related, where benefits are linked to the value of investment funds, but still include life risks being covered, the insurer would need to be authorised for both class 1 and class 2. One example of this is Universal Life 3 contracts. Another, less obvious, example is participating business where the life risk is shared amongst the participating policyholders. Although the insurer in this case does not bear (all) the life risk directly, there is a burn through possibility where poor life underwriting experience within the participating policyholders could result in the need for shareholders of the insurer to inject capital. Similarly, the insurer may need to be authorised for both class 3 and 4 if the contract includes disability risk as well. Pure (i.e. no risk benefits) Retirement Annuities need to be authorised under Investment Related Insurance. Retirement Annuities with life cover will then also require the authorisation of class 1 and any other risk associate requires the authorisation of the appropriate class. It should be noted that assistance business and credit life business can still be reported on separately. From a risk based point of view, there is no perceived value in authorising those types of life contracts separately. It should also be noted that assistance business may be reviewed in light of pending micro legislation. The main reason behind this proposal is that it enables proper risk management as it is mostly in line with the underlying risk characteristics of the policy contracts Alternative considerations Savings business with guarantees transfers vastly different levels of market risk to the insurer than business without guarantees. An alternative proposal would therefore be to separate authorisation to be given within the Investment Linked Insurance class of business between with and without guarantee business. 7.2 Non-life Insurance: Acknowledging the practical consequences of expanding the current authorisation classes and taking a long-term view on the authorisation classes suitable for SAM, the recommendation is to adapt 4 the authorisation classes as specified in the Solvency II directive requirements as follows: 3 The nature of universal life policies is that at inception they are more akin to life products, but towards maturity more like savings products. 4 Deletions from the Solvency II directive is formatted as strikethrough and additions are underlined. Page 17 of 36

18 Number and Class 1. Accident Including industrial injury and occupational diseases Fixed pecuniary benefits Benefits in the nature of indemnity 5 Combinations of the two 5 Injury to passengers 6 2. Sickness Fixed pecuniary benefits Benefits in the nature of indemnity 5 3. Land vehicles a. Personal Lines b. Commercial Lines Other than railway rolling stock Combinations of the two 5 All damage to or loss of: o Land motor vehicles o Land vehicles other than motor vehicles 4. Railway rolling stock All damage to or loss of railway rolling stock 5. Aircraft All damage to or loss of aircraft 6. Ships Sea, lake and river and canal vessels 7. Goods in transit Including merchandise, baggage, and all other goods All damage to or loss of: o River and canal vessels o Lake vessels o Sea vessels All damage to or loss of goods in transit or baggage, or money, or merchandise, irrespective of the form of transport [The goods and baggage referred here is not the same as the baggage referred to in travel. This refers to items of a commercial nature.] 8. Fire and natural forces Property a. Personal Lines b. Commercial Lines 9. Other damage to property All damage to or loss of property (other than property included in classes 3, 4, 5, 6, 7 and 9) due to: o Fire o Explosion o Storm o Hail o Frost o Natural forces other than storm o Nuclear energy o Any event such as theft Business interruption cover, including o Unforeseen trading expenses o Loss of rent or revenue All damage to or loss of property (other than property included in classes 3, 4, 5, 6 and 7) due to hail or frost, and any event such as theft, other than that included in class 8 5 This would fall under the Medical Schemes Act 131 of This would fall under the Road Accident Fund Act 56 of 1996 Page 18 of 36

19 Number and Class 9. Engineering All damage to or loss of, possession, use or ownership of machinery or equipment, the erection of buildings, or other structure of the undertaking of other works, or the installation of machinery or equipment. This excludes all liabilities arising and it also excludes motor vehicles. 10. Motor vehicle liability a. Personal Lines b. Commercial Lines All liability arising out of the use of motor vehicle operating on the land (including carrier s liability) 11. Aircraft liability All liability arising out of the use of aircraft (including carrier s liability) 12. Liability for ships Sea, lake and river and canal vessels All liability arising out of the use of ships, vessels or boats on the sea, lakes, rivers of canals (including carrier s liability) 13. General liability a. Personal Lines b. Commercial Lines 14. Credit Insolvency (general) Export credit Instalment credit Mortgages Agricultural credit 15. Suretyship Suretyship (direct) Suretyship (indirect) All liability other than those referred to in classes 10, 11 and Miscellaneous Employment risk Insufficiency of income (general) Bad weather Loss of benefits Continuing general expenses Loss of market value Other indirect trading loss Other non-trading financial loss Other forms of financial loss Warranties 17. Legal expenses Legal expenses and costs of litigation 18. Assistance Travel Insurance Assistance for persons who get info difficulties while travelling, while away from their home or their habitual residence Damage and/or losses arising due to cancellation, interruption, loss of property, (including baggage), or other unforeseen events before, while and after travelling. 19. Assistance Assistance for persons who get info difficulties while travelling, while away and at their home / habitual residence. Page 19 of 36

20 Classes 3, 8, 10 and 13 are divided into separate Personal Lines and Commercial authorisation sub-classes. Personal Lines refer to any type of that indemnify nonbusiness type accounts whereby its products are designed for and bought by individuals in their private and personal capacity. Commercial Lines refer to any type of that indemnify any form of businesses, professionals or commercial establishments. The following table maps the current Short Term Insurance Act authorisation classes to these new proposed authorisation classes. Current Short Term Insurance Act Proposed Accident and Health Approved Re Accident Sickness Re Engineering Engineering Guarantee Suretyship Motor vehicle liability Liability Aircraft liability Liability for ships General liability Railway rolling stock Goods in transit Miscellaneous Credit Miscellaneous financial loss Legal expenses Travel Insurance Motor Land Vehicles Page 20 of 36

21 Current Short Term Insurance Act Proposed Railway rolling stock Property Goods in transit Fire and natural forces Other damage to property Land Vehicles Transportation Railway rolling stock Aircraft Ships The proposed assistance business cannot be mapped to any of the current classes Alternative considerations There is an overlap in the above recommended authorisation classes, whereby Accident and Sickness business as defined under Non-life Insurance classes could also fall under the Disability Insurance and Life Insurance classes as defined under the Life Insurance classes. Theoretically it would have been preferable to have mutually exclusive Life and Non-life classes. An alternative proposal would therefore to remove the Accident and Sickness class from the Non-life Insurance authorisation classes. However, the Technical Provisions Task Group is comfortable that there will not be the possibility of regulatory arbitrage (given that life and non-life insurers will be subject to the same requirements) and that it is therefore not necessary to remove this from the Non-life authorisation classes. Page 21 of 36

22 APRA Non-life Insurance - Classes of Business Detail APPENDIX A 1. Life Insurance Class 1. Conventional participating Includes Whole of Life policies and endowment policies 2. Participating Investment Account 3. Annuity with Longevity Risk 4. Individual Lump Sum Risk 5. Individual Disability Income Insurance 6. Group Lump Sum Risk 7. Group Disability Income Insurance 8. Non-par Investment Policy 9. Annuity without Longevity Risk Exclude non-participating investment account policies Annuities providing periodic payments that are dependent on the continuance of human life Lump sum risk policies issued on an individual (retail) basis. Includes non-participating conventional policies Disability Income Insurance policies issued to individuals Lump sum risk policies issued on a group (wholesale) basis Disability Income Insurance policies issued on a group basis Include non-participating investment account and investment linked policies Annuities providing periodic payments that are NOT dependent on the continuance of human life 10. Other Include all other products not specifically categorised above 2. Non-life Insurance Class Page 22 of 36

23 Class 1. Fire and Industrial Special Risks (ISR) 2. Houseowners / Householders (H&H) 3. Compulsory Third Party Motor Vehicle (CTP) 4. Commercial Motor Vehicle 5. Domestic Motor Vehicle Fire: Includes all policies normally classified as 'Fire' and includes: sprinkler leakage; subsidence; windstorm; hailstone; crop; arson; and loss of profits and any extraneous risk normally covered under fire policies, e.g. flood. ISR: Standard policy wordings exist for this type of policy. All policies which contain such standard wordings or where the wording is substantially similar are to be classified as ISR. This class covers the common H & H policies inclusive of: Contents; Personal property; Arson; and Burglary. Public liability normally attached to these policies. Motor vehicle (including third party property damage) other than covering vehicles defined below under Domestic Motor Vehicle. It includes long and medium haul trucks, cranes and special vehicles and policies covering fleets. Motor vehicle (including third party property damage) covering private use motor vehicles including utilities and lorries, motor cycles, private caravans, box and boat trailers and other vehicles not normally covered by business or commercial policies. 6. Travel Insurance against losses associated with travel including loss of baggage and personal effects, losses on flight cancellations and overseas medical costs. 7. Marine and Aviation Includes Marine Hull (including pleasure craft), Marine Cargo (including sea and inland transit ) and Aviation which includes aircraft hull and aircraft liability. 8. Mortgage Insurance against losses arising from the failure of debtors to meet financial obligations to creditors or under which payment of debts is guaranteed. It includes lease guarantee. 9. Consumer Credit (CCI) Insurance to protect a consumer's ability to meet the loan repayments on personal loans and credit card finance in the event of death or loss of income due to injury, illness or unemployment. Page 23 of 36

24 Class 10. Other Accident Includes the following types of : Miscellaneous accident (involving cash in transit, theft, loss of money); All risks (baggage, sporting equipment, guns); Engineering when not part of ISR or Fire policy; Plate glass when not part of packaged policy (e.g. houseowners / householders) 11. Other All other business not specifically mentioned elsewhere. It includes, for example: All guarantees (e.g. fidelity Guarantee) Trade Credit; Extended Warranty; Legal Expense; Kidnap and Ransom; and Contingency. 12. Public and Product Liability 13. Professional Indemnity (PI) 14. Employers' Liability (EL) Public Liability covers legal liability to the public in respect of bodily injury or property damage arising out of the operation of the insured's business. Product Liability includes policies that provide for compensation for loss and or injury caused by, or as a result of, the use of goods and also environmental cleanup caused by pollution spills where not covered by Fire and ISR policies. Includes Directors' and Officers' liability. Includes: Workers' compensation; Seamen's compensation; and Domestic workers compensation. Page 24 of 36

25 OSFI Classes of Business Detail APPENDIX B Class 1. Accident and sickness accident and sickness means (a) against loss resulting from bodily injury to, or the death of, a person caused by an accident; (b) under which an insurer undertakes to pay a sum or sums of money in the event of bodily injury to, or the death of, a person caused by an accident; (c) against loss resulting from the sickness or disability of a person not caused by an accident, but excludes loss resulting from the death of the person as a consequence of sickness; (d) under which an insurer undertakes to pay a sum or sums of money in the event of the sickness or disability of a person not caused by an accident; or (e) under which an insurer undertakes to pay a sum of money in respect of the health care including dental care and preventative care of a person. 2. Aircraft aircraft means against (a) liability arising out of bodily injury to, or the death of, a person, or the loss of, or damage to, property, in each case caused by an aircraft or the use of an aircraft; or (b) the loss of, the loss of use of, or damage to, an aircraft. 3. Automobile automobile means (a) against liability arising out of bodily injury to, or the death of, a person, or the loss of, or damage to, property, in each case caused by an automobile or the use or operation of an automobile; (b) against the loss of, the loss of use of, or damage to, an automobile; or (c) that falls within paragraph (a) or (b) of the class of accident and sickness, if the accident is caused by an automobile or the use or operation of an automobile, whether or not liability exists in respect of the accident, and the policy includes against liability arising out of bodily injury to, or the death of, a person caused by an automobile or the use or operation of an automobile. 4. Boiler and machinery boiler and machinery means (a) against liability arising out of bodily injury to, or the death of, a person, or the loss of, or damage to, property, or against the loss of, or damage to, property, in each case caused by the explosion or rupture of, or accident to, pressure vessels of any kind or pipes, engines and machinery connected to or operated by those pressure vessels; or (b) against liability arising out of bodily injury to, or the death of, a person, or the loss of, or damage to, property, or against the loss of, or damage to, property, in each case caused by a breakdown of machinery. Page 25 of 36

26 Class 5. Credit credit means against loss to a person who has granted credit if the loss is the result of the insolvency or default of the person to whom the credit was given. 6. Credit protection credit protection means under which an insurer undertakes to pay off credit balances or debts of an individual, in whole or in part, in the event of an impairment or potential impairment in the individual s income or ability to earn an income. 7. Fidelity fidelity means (a) against loss caused by the theft, the abuse of trust or the unfaithful performance of duties, by a person in a position of trust; and (b) under which an insurer undertakes to guarantee the proper fulfilment of the duties of an office. 8. Hail hail means against the loss of, or damage to, crops in the field caused by hail. 9. Legal Expenses legal expenses means against the costs incurred by a person or persons for legal services specified in the policy, including any retainer and fees incurred for the services, and other costs incurred in respect of the provision of the services. 10. Liability liability means, other than that falls within another class of, (a) against liability arising out of bodily injury to, or the disability or death of, a person, including an employee; (b) against liability arising out of the loss of, or damage to, property; or (c) if the policy includes the described in paragraph (a), against expenses arising out of bodily injury to a person other than the insured or a member of the insured s family, whether or not liability exists. Page 26 of 36