Case Study Millennium Underwriting Limited

Case Study Millennium Underwriting Limited

TABLE OF CONTENTS 1. Case study Application for licensing of an insurance company 2. Legal constraints and regulations applying to the licensing of an insurance company 3. Questions to the reader 2

1. CASE STUDY - APPLICATION FOR LICENSING OF AN INSURANCE COMPANY (This Case Study is based on an actual application) An application for a license to conduct short-term (non-life) insurance business was received from Millennium Underwriting Managers (Pty) Limited ("Millennium"). Background Millennium was launched five years ago to administer, on behalf of a licensed insurer, a book of business. An agreement was entered into between Millennium and the licensed insurer whereby Millennium may receive premiums and settle claims on behalf of the insurer. The agreement was only for heavy commercial vehicles business including fire, cargo and goods in transit. Millennium has a network of 989 brokers and has 25 000 insured vehicles on their books which generates a premium income of 136 million of the national currency per annum. Millennium is owned by Millennium Holding Company Limited ("the Holding Company"). Application Millennium now wishes to acquire an insurance licence to underwrite the above-mentioned business. Shareholding and Shareholding Structure The proposed insurer, Millennium Insurance Company Limited, will be a 100 % subsidiary of Millennium Holding Company Limited. The Shareholding in the Millennium Holding Company Limited will be as follows: CT Trust 32 % ACE Brothers 9 % ABC Insurance Company 4 % R Transport (Pty) Limited 35 % Executive Directors/Staff 20 % 3

One of the beneficiaries of CT Trust - Mr Jones was the Managing Director of an insurance company that was placed in liquidation some seven years ago. Assets of the CT Trust consist of- - Listed equity - 3 million of national currency; - Property equity - 1,7 million of national currency. The latest financial statements of C T Trust demonstrates that it does not have sufficient liquid assets. ACE Brothers (Pty) Limited is a chain store trading in furniture. ABC Insurance Company is a licenced insurance company. R Transport Limited s shares are listed on a stock exchange and its main business is that of transportation of goods. The net asset value of R Transport is 55 million of national currency. The assets of the company consist only out of property; trucks; and debtors. See shareholding structure attached hereto (Annex). Directors and Management Millennium Insurance Company Limited will have a board of s to be called the "Management Board" and the Holding Company will have a board of s to be called the "Main Board" (see Annex ). 4

The board of s of Millennium Insurance Company Limited will consist of the following persons: Name Qualification Current Position M June Attorney Senior partner 51 in law firm P Nel Matric 1 Claims 45 at Millennium G Miles 51 P Lam 36 Matric B Comm degree (3 years post matric financial qualification) D Smith Std 9 Management program at University E Shaw FCII (3 year insurance qualification) Admin at Millennium Finance in Millennium Managing at Millennium Underwriting at Millennium Position in new Insurer Chairman non-executive Claims Executive Admin Executive Finance Executive Managing Underwriting Executive Insurance Experience none. 18 years work experience at various insurance companies. 11 years work experience at various insurance companies. 11 years work experience in insurance. 29 years work experience at various insurers. 20 years experience at insurance companies. The board of s of Millennium Insurance Company Limited will report to Millennium Holding Company Limited. The holding company will appoint the s of Millennium Insurance Company Limited. Mr Smith the Managing Director and Mr Lam the financial will also be s of the holding company (the main board). All the above-mentioned s of the management board are fit and proper persons. 1 Means a matriculation which is the highest qualification to be obtained in the schooling system (12 years). High school graduate. 5

The s of the holding company are as follows: Mr Jones (Chairman) He has more than 30 years working experience in an insurance environment. He was managing of an insurance company that was placed under liquidation seven years ago. He is also the beneficiary of CT Trust that will hold 32 % of the shares in the holding company. Mr Jones as of an insurance company acted as investment manager/portfolio manager for a pension fund (G A Retirement Plan). Mr Jones used the money of the pension fund to invest in companies in which Mr Jones had an interest. Mr Smith See table above. Mr Lam See table above. Ms Roos Matric with practical experience in insurance. Mr Steyn No insurance experience. He is a at the transportation company. One of the ACE brothers No insurance experience. Experience mainly relates to furniture trading. 6

Manner in which insurance risk will be selected Millennium will acquire business from existing brokers as it presently does and will also deal directly with clients. Business presently underwritten on behalf of the licensed insurer is profitable and the manner of underwriting will be maintained. Proposed reinsurance arrangements Quota share reinsurance arrangements will be in place with net retention in the first year of 10% to increase to 30 % in year 5. Millennium will also arrange catastrophe excess of loss reinsurance. Share Capital Issued- ordinary shares plus share premium 10 000 000-00 of national currency - preference shares 10 000 000-00 of national currency - debentures 1 5 000 000-00 of national currency (Capital required in terms of business plan is 18 million of national currency) Administration cost and commission Millennium anticipates that it will maintain a 10,5 % of GPI (Gross Premium Income (before commission and reinsurance)) as administration cost due to existing systems that are already in place. Basis of premium rates The basis of premium rates follows generally accepted but competitive market rates. Auditors Millennium have appointed a well established auditing firm with international backing. 1 A form of loan capital. Long-term instruments with a fixed interest payment 7

2. LEGAL CONSTRAINTS AND REGULATIONS APPLYING TO THE LICENSING OF AN INSURANCE COMPANY (a) A company who wishes to carry on non-life insurance business must apply to the supervisory authority for registration as a non-life insurer. (b) The supervisory authority must be satisfied of the following requirements before approval will be granted: the applicant must have the financial, organisation and management resources that are necessary and adequate for the carrying on of the business concerned; any person who wishes to carry on non-life insurance business shall apply to the supervisory authority for registration as a non-life insurer. The supervisory authority must be satisfied of the following requirements before approval will be granted: - any person who is, or will, from the date of the proposed registration, be a or managing executive of the applicant must be fit and proper to hold the office concerned; - the direct or indirect control of the applicant by another person, whether by virtue of shareholder, voting power, the power to appoint s, or in any other manner, may not be contrary to the interest of policyholders; - the applicant is, or will be, able to comply with the legislation; - the proposed registration must not be contrary to the public interest. 8

(c) An applicant for registration must be: a public company; or incorporated without a share capital under a law providing specifically for the consultation of a person to carry on non-life business as its main objection. (d) The following requirements for Public Officer, Directors and Executive Management. Public Officer (Compliance Officer) A non-life insurer must appoint a natural person who is permanently resident in the country as its Public Officer. The Public Officer shall be the compliance officer of the non-life insurer and it is expected of such person to be knowledgeable about the provisions of the legislation. The Public Officer must be fit and proper to hold office and the supervisory authority may terminate the appointment of the Public Officer. It is required of the Public Officer to complete the Personal Questionnaire Form. All correspondence from the supervisory authority s office will be addressed to the Public Officer. The Public Officer should preferably be one of the executive management of the company. Directors and Managing Executive The composition of the board of s of a company must comply with the following guidelines as set for non-life insurance companies: - minimum of 4 s; - executive s must be resident in the country; - non-executive s must be independent and should constitute at least 50 % of the board; 9

- at least two executive s or senior members of management should attend board meetings with a duty to inform members on issues for which enlightment is sought; - the chairman should preferably be non-executive and need not be resident in the country. There must be sufficient insurance, legal and accounting experience and expertise amongst the board of s and executive management. All s and managing executive must be fit and proper people and will be requested to complete the Personal Questionnaire Form to be accompanied by a full curriculum vitae. The supervisory authority must be informed of any changes in s and executive management within 30 days of such change and must also be furnished with the reasons for the change. The supervisory authority may remove the s or a member of the managing executive who is not fit and proper to hold the office concerned. A minimum paid-up capital requirement for registration is currently set at 5 million of the national currency for one or more kinds of non-life insurance policies. Capital must be of a permanent nature and may only consist of ordinary shares. Secondary capital i.e. debentures, loans and preference shares may only be issued with the approval of the supervisory authority and only as a temporary measure. A five year business plan must be submitted with the application containing the following: - an underwriting revenue account; - a profit and loss account; - a balance sheet; - a statement of insurance assets; - a statement of insurance liabilities; and - an asset cover statement including solvency margin. 10

7. QUESTIONS TO THE READER Kindly give your comments on: 1. Suitability of s and management. 2. Suitability of shareholders/owners. 3. Capital adequacy. 4. Whether you will grant the license or not - give reasons? 11

Annex CT TRUST ACE BROTHERS ABC INSURANCE R TRANSPORT DIRECTORS/ STAFF 32 % 9 % 4 % 35 % 20 % 100 % MILLENNIUM HOLDING COMPANY (MAIN BOARD) 100 % MILLENNIUM INSURANCE COMPANY (MANAGEMENT BOARD) 12