Keir I09

2001 Life Convention: 

abcd 2001 Life Convention 18 - 20 November 2001 Hilton Birmingham Metropole

South Africa: Some topical issues: 

South Africa: Some topical issues Douglas Keir Swiss Re Z

South African Life Insurance Issues: 2001: 

South African Life Insurance Issues: 2001 HIV / AIDS Preferred life underwriting Discrimination, underwriting and access Market conduct legislation Medical schemes legislation Consolidation Capital Gains tax ‘Brain drain’ / local training

South African Issues: 

South African Issues but first…………..

South African Issues: 

South African Issues but first……….. Some general background information

South Africa: background: 

South Africa: background Size (Km²) Population GDP ($ million) GDP Growth GDP/Capita Inflation (excl. Interest on mortgages) 10 year gilt rates Unemployment S.A. U.K. 1 223 201 Km² 44 million $117 425 2.5% US $2 600 5.8% 10.35% 26.4% 244 111 Km² 60 million $1 374 148 2.2% US $21 200 2.3% 4.50% 3.1%

South African Issues: 

South African Issues but first………….. Some general background information Relative importance of SA Life Insurance industry

South Africa in an international perspectiveLife insurers’ share of economic activity (1999): 

South Africa in an international perspective Life insurers’ share of economic activity (1999) Developed countries Premiums / GDP USA 4% Japan 9% UK 10% France 6% Germany 3% Source: Sigma (Swiss Re)

South Africa in an international perspectiveLife insurers’ share of economic activity (1999): 

South Africa in an international perspective Life insurers’ share of economic activity (1999) Developing countries Premiums/GDP India 1% Brazil 0% (0.4%) Chile 3% World average 5% South Africa 14%

South Africa: background: 

South Africa: background 60 registered life offices ~20 active to public Largest 2 have 47% market share Largest 4 have 74%

South African Life Insurance Issues: 2001: 

South African Life Insurance Issues: 2001 HIV / AIDS Preferred life underwriting Discrimination, underwriting and access Market conduct legislation Medical schemes legislation

HIV in SA: Population projections: 

HIV in SA: Population projections

Expected population mortality: SA Males: 

Expected population mortality: SA Males

SA population mortality trend: 2001 - 2006 (males): 

SA population mortality trend: 2001 - 2006 (males)

Expected population mortality: SA Females: 

Expected population mortality: SA Females

SA population: expected 45q15 : 

SA population: expected 45q15

SA: HIV prevalence (%) by province: 

SA: HIV prevalence (%) by province

ASSA2000 - 2001 Mortality All races, Both sexes, By region & age: 

ASSA2000 - 2001 Mortality All races, Both sexes, By region & age Can this be ignored in underwriting and pricing?

HIV Testing Statistics - 10 InsurersSource: Swiss Re HIV Testing Statistics Survey 2000: 

HIV Testing Statistics - 10 Insurers Source: Swiss Re HIV Testing Statistics Survey 2000

Individual Life HIV testing and pricingSource: SHIPS 2001: 

All companies perform some HIV tests at inception 37% test all policies If there are variable testing limits, they vary by factors in chart Almost all have explicit pricing for HIV/AIDS using ASSA or Doyle models Individual Life HIV testing and pricing Source: SHIPS 2001

South African Life Insurance Issues: 2001: 

South African Life Insurance Issues: 2001 HIV / AIDS Preferred life underwriting Discrimination, underwriting and access Market conduct legislation Medical schemes legislation

South Africa: Preferred life underwriting: 

South Africa: Preferred life underwriting SA has seen preferred life underwriting / rating for about 15 years, but on socio-economic rather than medical criteria Salary and education usually used as a proxy for socio-economic class Typically 5 or 6 classes Currently important because of increasing mortality differences and ‘bracket creep’

SA:Typical preferred u/w table: 

SA:Typical preferred u/w table NB: R14 = £1

Mortality rates of different classes of insured lives: 

Mortality rates of different classes of insured lives Age qx per mille

South African Life Insurance Issues: 2001: 

South African Life Insurance Issues: 2001 HIV / AIDS Preferred life underwriting Discrimination, underwriting and access Market conduct legislation Medical schemes legislation

South Africa: Equality Act: 

South Africa: Equality Act SA Constitution & Equality Act prohibit unfair discrimination (‘unfair’ not defined) No exception for insurance Act passed by parliament, regulations now awaited Onus of proof on defendant

South Africa: Equality Act: 

South Africa: Equality Act Complaint with SA Human Rights Commission: mortgage-linked life insurance declined on HIV+ status Ongoing debate between industry and government to allow evidence-based underwriting / pricing Search for solution for ‘uninsurable’ lives

South African Life Insurance Issues: 2001: 

South African Life Insurance Issues: 2001 HIV / AIDS Preferred life underwriting Discrimination, underwriting and access Market conduct legislation Medical schemes legislation

South Africa: Market conduct regulation: 

South Africa: Market conduct regulation Increased emphasis on disclosure Debate on wisdom of deregulating commissions Licensing of intermediaries Level playing fields between insurers and banks? More stringent policyholder protection regulations coming

South African Life Insurance Issues: 2001: 

South African Life Insurance Issues: 2001 HIV / AIDS Preferred life underwriting Discrimination, underwriting and access Market conduct legislation Medical schemes legislation

South Africa: Medical schemes legislation: 

South Africa: Medical schemes legislation Insurance companies are regulated within Dept. of Finance Medical schemes are regulated within Dept. of Health Major differences in attitudes to relative importance of social obligations and financial management (e.g. community rating) Major demarkation debate (no overlap)

South Africa: Medical schemes legislation: 

South Africa: Medical schemes legislation Not of direct relevance to life insurance but very important to critical illness policy design some benefits deemed to be medical benefits (e.g. open heart surgery) Some life insurers are also reinsuring medical covers.

HIV in SA: health service implications: 

HIV in SA: health service implications

Slide34: 

The Daily Telegraph, Tuesday, September 18, 2001.

Australia: Some topical issues: 

Australia: Some topical issues Mark Gallagher Swiss Re Z

Aus: 

Aus Financial Services Reform Bill Genetics International Accounting Standards Financial Services entities: Risk management and appraisal values Australia: Some topical issues

Slide37: 

Aims new retail financial product disclosure and complaints resolution regime Consolidate regulation Financial Services Reform Bill

Slide38: 

Major outcomes all financial service providers licensed providers responsible for conduct of distributors disclosure product-based not entity-based Financial Services Reform Bill

Slide39: 

Regulatory process law passed August 2001, effective from March 2002 two year transition period detailed regulations yet to come Financial Services Reform Bill

Slide40: 

Strategic impacts “more level” playing field fewer barriers to convergence will uniform fiduciary regulation be next? major changes in the means and ownership of distribution Financial Services Reform Bill

Slide41: 

Impact on profession IAA formed two task forces members of “declared professional bodies” are exempt from licensing under the act initial discussions with the Australian Securities and Investment Commission indicate infrastructure necessary for exemption too onerous for a small professional body Institute to provide training and education should individual licensing be required final resolution awaits the completion of release of regulations Financial Services Reform Bill

Slide42: 

Wide public debate Genetics IAA sought to position itself as a disinterested professional body with skills necessary to estimate, project and quantify outcomes

Slide43: 

Measures undertaken by the Institute: “Genetics in Society, 2001” - well reviewed primer on the technical and ethical issues taskforce on genetics research and its impact on Australia preparation of a submission to the federal government inquiry Genetics

Slide44: 

Initial impacts: Life insurance where immediate impact expected Industry association agreed voluntary code of practice similar to U.S. code of practice due to be reviewed November 2002 legislation after Government inquiry due to be presented on 30 June 2002 major pricing implications for annuities and critical illness anticipated. Genetics

Slide45: 

Longer term: significant impacts in areas of public sector financial services funding actuaries becoming increasingly involved in health financing Genetics

Slide46: 

General points of exposure draft Assets & liabilities measured at “fair value” Reporting has a balance sheet focus Profit = difference between start and end balance sheets IAA favours use of market value of assets Fair value liabilities = best estimate liability + allowance for uncertainty International Accounting Standards

Slide47: 

Calculation of liabilities: direct method or indirect method: International Accounting Standards

Slide48: 

Profit issues Fair value framework leads to volatile and complex profit Profit heavily influenced by changes in future expectations New business: profits and losses fully recognised at inception DAC: acquisition costs not deferred as an asset but amortised implicitly in liability International Accounting Standards

Slide49: 

Profit and loss account = statement of movement in net value International Accounting Standards

Slide50: 

Changes in liability assumptions International Accounting Standards Spread effect of change over future term Prospective No changes in assumptions made Lock-in Recognise full impact of change in current period Fresh start Three methods:

Slide51: 

International Accounting Standards Attribution of estate unattributed estate should be treated as a liability not an issue in Australia due to 1995 Life Insurance Act changes

Slide52: 

Comparison of MOS and IASC proposal Scope Accounting model Allowance for risk in liabilities Planned profit Discount rate Changes in assumptions New business profit Treatment of goodwill Life insurance enterprises Deferral and matching Use of profit margins, implicit Release of profit margin Based on assets held Impact spread, except for investments Not allowed at inception Value of subs includes goodwill Insurance contracts Asset and liability Market related allowance for risk Release of allowance for uncertainty Independent of assets held Impact capitalised into current period Permitted Value of subs excludes goodwill Issue MoS Reporting IASC Proposal

Slide53: 

International Accounting Standards Final comments Differences exist between Australian MOS and IASC proposal MOS methodology could be adapted to calculate fair value liabilities replace profit carrier with risk carrier set risk margins at market levels, not at new business margin recognise impact of assumption changes immediately

Slide54: 

International Accounting Standards Use of modified MOS methodology means: integrated approach to fair value, “realised profit” and solvency minimal departure from existing MOS systems consistency with existing EV calculations New STD gives more volatile profit results Significant other issues to be resolved (e.g. unbundling, use of accumulation methods)

Slide55: 

Financial services entities: Risk management and appraisal values IAAust Guidance Note - valuation of financial services entities Bank’s perspective on life company risk management From valuation to management reporting for funds management companies

Australia: Some topical issues: 

Australia: Some topical issues Mark Gallagher Swiss Re Z