Investigation into the appropriateness of the South African microinsurance solvency capital regulation

Melville, William George (2019-04)

Thesis (MCom)--Stellenbosch University, 2019.

Thesis

ENGLISH ABSTRACT : In South Africa, there are two different regulatory capital requirement options for insurers selling microinsurance products. The first is the capital requirement for traditional insurers under the SAM framework. The second is a simplified requirement that would be applicable to registered microinsurers. This thesis provides a systematic comparison of these two requirements. The nominal value of each requirement is compared using a model microinsurer that has been calibrated using industry data. It was found that the simplified microinsurance requirement resulted in less capital required than the SAM requirement for traditional insurers. The comparison was extended by comparing the change in requirements if the risk profile of the microinsurer changed. It was found, as would be expected, that the simplified microinsurance requirement was not as sensitive to changes in the risk profile. The level of protection under each requirement was also assessed. This was done using various deterministic and stochastic tests. The deterministic tests involved stressing variables individually and collectively. The stochastic tests involved calculating the probability of insolvency for the model microinsurer over a one-year period. This showed that both capital requirements resulted, for the model microinsurer, in an insolvency probability of less than 0.5%, as required by SAM. However, it also showed that the lack of risk sensitivity of the simplified microinsurance capital requirement could result in significantly higher insolvency rates if the risk profile of the microinsurer changed. The results of the tests performed also showed that it may, under certain circumstances, be acceptable to reduce the absolute minimum capital requirement under the specialised microinsurance licence. This should assist with lowering barriers to entry for small microinsurers. However, the reduction may not be sufficient to encourage informal funeral insurance providers to register with the regulator which was one of the goals of the microinsurance licence. Thus, it is concluded that the simplified requirement could be adjusted to be more risk sensitive. This could result in a lower absolute minimum and encourage formalisation.

AFRIKAANSE OPSOMMING : Versekeraars In Suid Afrika wat mikroversekerings produkte verkoop het twee verskillende opsies vir die hoeveelheid kapitaal wat gehou moet word vir regulasie doeleindes – ook bekend as ‘kapitaal vereistes’. Die eerste is die kapitaal vereiste vir tradisionele versekeraars onder die SAM raamwerk. Die tweede is 'n vereenvoudigde vereiste wat op geregistreerde mikroversekeraars van toepassing is. Hierdie proefskrif bied 'n sistematiese vergelyking van hierdie twee vereistes. Die nominale waarde onder elke vereiste is vergelyk deur geburik te maak van 'n model mikroversekeraar wat gekalibreer is met behulp van bedryfsdata. Daar is bevind dat die vereenvoudigde mikroversekeringsvereiste tot minder kapitaal as die SAM vereiste vir tradisionele versekeraars gelei het. Die vergelyking is uitgebrei deur die verandering in vereistes te vergelyk indien die risiko profiel van die mikroversekeraar verander. Daar is gevind dat die vereenvoudigde mikroversekerings vereiste nie so sensitief is vir veranderinge in die risiko profile is nie. Die vlak van beskerming onder elke vereiste is ook geassesseer. Dit is gedoen met behulp van verskeie deterministiese en stogastiese toetse. Die deterministiese toetse het die veranderlikes individueel en gesamentlik gestres. Die stogastiese toetse het onder andere die berekening van die waarskynlikheid van insolvensie vir die model mikroversekeraar oor 'n tydperk van een jaar ingesluit. Dit het getoon dat beide kapitaal vereistes – vir die model mikroversekeraar – tot 'n insolvensie waarskynlikheid van minder as 0,5% gelei het, soos vereis deur SAM. Dit het egter ook getoon dat die gebrek aan risiko sensitiwiteit van die vereenvoudigde vereiste tot aansienlik hoër insolvensietariewe kan lei indien die risiko profiel van die mikroversekeraar verander het. Die resultate van die toetse het ook getoon dat dit onder sekere omstandighede aanvaarbaar kan wees om die absolute minimum kapitaal vereiste onder die gespesialiseerde mikroversekerings lisensie te verminder. Dit behoort te help met die verlaging van toegangsgrense vir klein mikroversekeraars. Die verlaging mag egter nie voldoende wees om informele begrafnis versekerings verskaffers aan te moedig om by die reguleerder te registreer nie, wat een van die mikpunte van die mikroversekerings lisensie was. Gevolglik moet die vereenvoudigde vereiste aangepas word om meer risikosensitief te wees. Dit kan tot 'n laer absolute minimum lei en formalisering aanmoedig.

Please refer to this item in SUNScholar by using the following persistent URL: http://hdl.handle.net/10019.1/105817
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