According to Moody’s Investor Service, South Africa’s new prudential regulatory standard for insurers, known as Solvency Assessment and Management (SAM), brings the country’s insurance regulation into line with international best practice.
“We expect the new regime to improve insurers’ risk management, making them more resilient. This is particularly true for diversified financial groups, which will be subject to comprehensive group supervision. While capital requirements will be more onerous than under the previous regime, we expect the larger insurance groups to remain well-capitalised, but variations in capital levels and quality of capital will remain key differentiators between these groups.
“In addition, we expect some insurance groups to tweak their capital structures to optimise for the new capital standards,” Moody’s said in a research report this week.
SAM will strengthen risk management
The SAM regime, which took effect on 1 July 2018, will make insurers’ risk management more sophisticated, just as Solvency II did in the European Union (EU).
“In particular, we expect SAM’s market consistent economic capital framework to provide a more accurate reflection of risk for individual insurers, and for the sector as a whole. At the same time, enhanced group and financial conglomerate supervision will capture a more holistic view of risks and concentrations within diversified insurance and financial services groups.”
Capital quality and coverage ratios will continue to differentiate insurers
“Most of the large diversified insurers are currently well capitalized on a SAM basis. However capital quality will continue to vary across the sector, as will solvency capital coverage levels, and therefore resilience to specific stress tests. Capital levels at large South African insurance groups compares well to European insurance groups,” Moody’s noted.
Capital structures could change
“We expect at least some of the large diversified groups to tweak their capital structures over time, particularly as their current stock of subordinated debt securities matures, and more stringent limits on capital fungibility within groups take effect,” Moody’s said.
“Increased clarity and flexibility regarding the types of capital available to insurers, and regarding where capital can be held within the group, is likely to prompt additional optimization of capital structures.”