Annexure C

1. 

Accounting policies

Insurance and investment contracts

Long-term insurance operations

2.

Other investments and loans

3.

Insurance assets and liabilities

Process used to decide on long-term insurance assumptions

The business was divided up into homogeneous groupings and then each grouping was analysed. Best estimate assumptions were then derived based on these experience investigations. Where data was limited, market statistics were used. Recent trends evident in the data were allowed for.

The value of insurance liabilities is based on best estimate assumptions of future experience plus compulsory margins as required in terms of PGN 104, plus additional discretionary margins determined by the statutory actuary.

a)

Mortality

b)

Morbidity

c)

Medical and retrenchment

d)

Withdrawal

e)

Investment returns

f)

Renewal expenses and inflation

g)

Tax

Change in assumptions

The following changes were made to the Published Reporting valuation basis. All assumptions include compulsory margins.

For South Africa, the economic assumptions were reviewed to reflect the current economic environment, as follows:

• The discount rate for credit life business was reduced from 10,65% to 8,62%. The discount rate for individual life and mortgage business was reduced from 10,65% to 8,40%. The discount rate for the disability annuitant business was reduced from 10,25% to 8,91%.
• The loan interest rate for credit life and mortgage business was reduced from 17,75% to 13,75% per annum.
• Expense inflation for all business was reduced from 9,46% to 6,99%.
• The assumed rate of pension increases for the disability annuity business was reduced from 8,78% to 6,51% per annum.

As a result of these economic changes, the actuarial liabilities reduced by R15,8 million.

The non-economic assumptions were also reviewed as follows:

• The death, permanent disability, temporary disability, retrenchment and AIDS assumptions were adjusted to reflect the recent claims experience. The combined effect resulted in a R14,8 million release in actuarial liabilities.
• Per policy expenses were amended to reflect the current and expected future experience. This resulted in a release in actuarial liabilities of R15,8 million.
• The withdrawal assumptions were adjusted to reflect the recent lapse experience. This resulted in a release in actuarial liabilities of R6,6 million.

As a result of these non-economic changes, the actuarial liabilities reduced by R37,2 million.

The overall impact of all the above changes was a reduction in the actuarial liabilities of R53 million.

Regarding Botswana, the value of liabilities as at 30 June 2009 reduced by P2,7 million as a result of changes to valuation assumptions.

The main assumption changes causing this release were as follows:

• The renewal expense assumptions were amended in the light of the most recent expense investigation. This resulted in a release of P2,1 million.
• The economic assumptions were amended to reflect the current economic environment. This resulted in a strain of P0,5 million.
• The withdrawal assumptions were amended to reflect the recent withdrawal experience. This resulted in a weakening of P0,2 million.
• The permanent disability, dread disease, temporary disability and mortality (including AIDS) assumptions were adjusted to reflect the recent claims experience. This resulted in a release of P0,9 million.

Sensitivity analysis

4.

Revenue

5.

Management of insurance-specific risks

Insurance risk

Long-term insurance operations

Insurance risk is the risk that future claims and expenses will exceed the premiums received to take on this risk.
It occurs due to the uncertainty of the timing and amount of future cash flows arising under insurance contracts. This could also occur because of the frequency or severity of claims and benefits being greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year from the estimate using statistical techniques.

The long-term insurance operations use appropriate base tables of standard mortality according to the type of contract being written and the territory in which the insured person resides. An investigation into the actual experience of the group over the last three years is carried out, and statistical methods are used to adjust the crude mortality rates to produce a best estimate of expected mortality for the future. Termination statistics to investigate the deviation of actual termination experience against assumptions are used. Statistical methods are used to determine appropriate termination rates. An allowance is then made for any trends in the data to arrive at the best estimate of future termination rates.

Short-term operations

The group underwrites risks that natural persons, corporates or other entities wish to transfer to an insurer. Such risks may relate to property, accident, personal accident, motor, engineering, marine, liability and aviation. As such the operation is exposed to uncertainty surrounding the timing, frequency and severity of claims under insurance contracts. The principal risk is that the frequency and/or severity of claims are greater than expected. Insurance events are by their nature random and the actual size and number of events in any one year may vary from those estimated and experienced in prior periods.

The group underwrites primarily short-tailed risks, that is, insurance under which claims are typically settled within one year of the occurrence of the events giving rise to the claims. Risks that are long-tailed in nature represent an insignificant portion of the group’s insurance portfolio. Therefore the group’s exposure at any time to insurance contracts issued more than one year before is limited.

Capital adequacy and solvency risk

Long-term operations

The capital adequacy requirement is determined according to generally accepted actuarial principles in terms of the guidelines issued by the Actuarial Society of South Africa. It is an estimate of the minimum capital that will be required to meet fairly substantial deviations from the main assumptions affecting the group’s business. At 30 June 2009 the capital adequacy requirement is R72 million and the ratio of excess assets to capital adequacy requirements is 3,9 (2008: R120 million, capital adequacy ratio 2,9).

Short-term operations

The group submits quarterly and annual returns to the Financial Services Board that show the solvency position of its insurance operations. The group is required to maintain, at all times, a statutory surplus asset ratio and free assets after spreading limitations as defined in the Short-term Insurance Act, 1998 (the Act). The returns submitted by the company to the regulator showed that the company met the minimum capital requirements at the year-end date.

Underwriting risk

Long-term insurance operations

The Statutory Actuary reports annually on the actuarial soundness of the premium rates in use and the profitability of the business taking into consideration the reasonable benefit expectation of policyholders. All new rate tables are approved and authorised by the Statutory Actuary prior to being issued. Annual investigations into mortality and morbidity experience are conducted. All applications for risk cover in excess of specified limits are reviewed by experienced underwriters and evaluated against established standards. All risk-related liabilities in excess of specified monetary or impairment limits are reinsured.

Short-term insurance operations

The operation limits its exposure to insurance risk through setting a clearly defined underwriting strategy and limits, adopting appropriate risk assessment techniques and the reinsurance of risks that exceed its risk appetite. The underwriting strategy ensures diversification of insurance risk in terms of type and amount of risk covered, geographical location and type of industry covered. The strategy also aims to develop a sufficiently large population of risks to reduce the variability of the expected outcome. Ongoing review and analysis of underwriting information enables the group to monitor its risks and take timely corrective action.

Regulatory risks

Continuous legislation changes in the long-term and short-term environment may impact severely on the operational and financial structures within these businesses. The group has sufficient resources to address the impact of legislation timeously and efficiently.

During the development stage of any new product, rights and obligations of all parties are clearly defined in the contracts and documentation.

Financial risk

Long-term insurance operations

The group is exposed to financial risk through its financial assets, financial liabilities, reinsurance assets and insurance liabilities. In particular, the key financial risk is that the proceeds from its financial assets are not sufficient to fund the obligations arising from its insurance and investment contracts. Components of this financial risk are interest rate risk, equity price risk, currency risk and credit risk. An investment committee sets policies and receives monthly and quarterly reports on compliance with investment policies.

The long-term insurance operations manage these positions within an asset liability management (ALM) framework that has been developed to achieve long-term investment returns in excess of its obligations under insurance and investment contracts. The principal technique of the ALM framework is to match assets to the liabilities arising from insurance and investment contracts by reference to the type of benefits payable to policyholders.

Short-term insurance operations

The short-term operations are exposed to daily calls on its available cash resources from claims arising. Liabilities are matched by appropriate assets and the operations have significant liquid resources to cover its obligations.

Catastrophic risk

Short-term insurance operations

The operation sets out the total aggregate exposure that it is prepared to accept in certain territories to a range of events such as natural catastrophes. The aggregate position is reviewed annually. The group uses a number of modelling tools to monitor aggregation and to simulate catastrophe losses in order to measure the effectiveness of the reinsurance programmes and the net exposure of the operations.

Credit risk

Fair values of financial assets may be affected by the creditworthiness of the issuer. Limits of exposure are set by the investment committee and are continuously monitored. Sales of products and services are made to customers with an appropriate credit history. The group has policies in place that limit the credit exposure to any institution and reputable reinsurers are used for the group’s reinsurance treaties.

Currency risk

The operations have limited collective investment schemes invested offshore which is denominated in foreign currencies. The currency risk is not hedged as the investments are mainly made on behalf of shareholders for the purpose of obtaining a desirable international exposure in foreign currencies.

6.

Significant accounting judgments and estimates

Long-term insurance operations

Insurance liabilities in respect of long-term insurance contracts and investment contracts

Valuation assumptions represent a best estimate. Compulsory margins are applied as required by the Long-term Insurance Act and discretionary margins may be applied as required by the valuation methodology or if the Statutory Actuary considers such margins necessary to cover the risks inherent in the contracts. The valuation of investment contracts is linked to the fair value of the supporting assets.

Short-term insurance operations

The estimation of the liability arising from claims under short-term insurance contracts is impacted on by several sources of uncertainty. The environment can change unexpectedly and the group is therefore constantly refining its short-term insurance risk management tools in order to assess risk appropriately.

A large proportion of the premium for warranty policies is used to fund up-front costs such as commissions and fees. The remainder of the premium needs to be deferred and recognised as income in line with the expiring risk profile of the policies. These multi-year policies often only become effective once a defined event has occurred, for example, after the motor manufacturers’ warranty has expired.

The company uses a stochastic model to calculate the IBNR at 75% level of sufficiency. The methodology for the allocation of reserves is consistent with Regent’s internal capital allocation model. Reserves are set at the 75th percentile level to be consistent with the proposed Financial Condition Reporting requirements.