SA long-term valuation bases
Presented to ASSA members
2 November 2004 – Johannesburg
4 November 2004 – Cape Town

Why are we here?

A repeat of sessional meeting held last year, but updated with 2003 statutory returns.

What will we show you?

Some key risks and trends in the insurance sector

Anticipated changes for the future

Information on new Analysis of Surplus in
LT2000

Give you brief overview of the LT Insurance market in 2003.

Review some valuation assumptions in the
LT2000 and compare these with the resulting
AOS.

What will we show you?

Some key risks and trends in the insurance sector

Anticipated changes for the future

Information on new Analysis of Surplus in
LT2000

Give you brief overview of the LT Insurance market in 2003.

Review some valuation assumptions in the
LT2000 and compare these with the resulting
AOS.

Key risks and trends in the insurance sector
 Drivers of change: Financial Sector Charter
& BEE
 Low interest rate environment
 Growing consumerism
 Legislative and regulatory changes
(especially FAIS)
 LT insurers believe marketplace is overcrowded – major readjustments to marketing strategies expected
Source: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

Key risks and trends in the insurance sector (Cont)
 Premium growth 7-14% over next 3 years expected
 Regulation and governance
– King II won’t address concerns raised in Fedsure investigation
– Governance rests on integrity of directors and management
– Only minority LT insurers feel that commission should be de-regulated
– Likely that regulatory pressure will increase in future
Source: Emerging Trends and Strategic Issues in South African Insurance (2004) - PWC

International Key risks and trends in the insurance sector
 Data based on 2003 reporting data in key
IAIS member jurisdictions
 Solvency positions and profitability of life insurers healthy
 Concerns to supervisors:
–
–
Sustained low interest rate environments
Risk of sudden interest rate hikes
 Insurers are moving away from equities to debt securities
Source: IAIS

International Key risks and trends (Cont)
 Supervisors use stress test methodologies to monitor sensitivity of sector’s financial strength to changes in market variables.
 Stress tests show that life insurance sector can withstand significant shocks in the near term.
 Trend to adopt are more realistic and risksensitive valuation and capital adequacy regimes.
Source: IAIS

International Key risks and trends (Cont)
 Several supervisors reported initiatives aimed at addressing insurers’ exposure to reputation risk.
 EU: financial conglomerate directives – more emphasis by supervisors on group-wide supervision is expected.
Source: IAIS

International Key risks and trends (Cont)
 Reinsurance:
– Since Sep 11 a major hardening of market conditions
–
–
Many reinsurers showed a significant improvement in underwriting performance in 2002/3
Lloyd’s also benefited from hardening market bouncing back to profits after the
WTC-driven losses.
Source: IAIS

What will we show you?

Some key risks and trends in the insurance sector

Anticipated changes for the future

Information on new Analysis of Surplus in
LT2000

Give you brief overview of the LT Insurance market in 2003.

Review some valuation assumptions in the
LT2000 and compare these with the resulting
AOS.

Anticipated changes
 Some “small” Act changes e.g.
– Replace Unit Trust Control Act with CIS
Control Act
– Some discrepancies between ST and LT
Acts
 Definitions of linked, market related business etc
 Types of assets in Schedule 1

Anticipated changes
 Hybrid capital
 Cell business
 Reinsurance
 Segregation between policyholders’ and shareholders’ assets
 Control levels

What will we show you?

Some key risks and trends in the insurance sector

Anticipated changes for the future

Information on new Analysis of Surplus in
LT2000

Give you brief overview of the LT Insurance market in 2003.

Review some valuation assumptions in the
LT2000 and compare these with the resulting
AOS.

Analysis of Surplus
(Statement C7)
 Confidential statement
 Split between individual life, group business and shareholders
 Supplementary statement
– Clarification of “other” (As small as possible please)
– Space for significant items
 Info in total only – but anticipate a split in future per business class

Analysis of Surplus
(Continued)
 Free-floating columns for info per business class/product. (But please – complete total column as well)
 Some freedom – please state all assumptions in the section at the bottom of the statement
 Guidance manual on FSB website
– Info on what should be included in the different items
 Please do not change the format!
– In fact, do not change the format of any of the statements in the return

What will we show you?

Some key risks and trends in the insurance sector

Anticipated changes for the future

Information on new Analysis of Surplus in
LT2000

Give you brief overview of the LT Insurance market in 2003.

Review some valuation assumptions in the
LT2000 and compare these with the resulting
AOS.

Overview of LT Insurance market in 2003

FSB classification:

G – General insurers (27 active in 2003) e.g. Old Mutual, Liberty, Regent Life
 L – Linked insurers (12 active in 2003) e.g. Investment Solutions, MCubed, Citadel
 R – Reinsurers (6 active in 2003) e.g. Munich Re, Swiss Re

Overview of LT Insurance market in 2003

FSB classification:

A – Assistance insurers (7 active in 2003) e.g. Safrican, Lion of Africa, HTG, KGA
 N – Niche insurers (11 active in 2003) e.g. Bonben, Relyant, Medscheme Life
 C – Cell captive insurers (4 active in 2003) e.g. Guardrisk, Nova Life

Overview of LT Insurance market in 2003

Distribution of insurers per year-end month
6%
27%
47%
16%
3% 1%
2 3 6 8 9 12

Overview of LT Insurance market in 2003

Who went where? Ranking according to total assets
Insurer
Old Mutual
Sanlam
Momentum
Liberty
Investment Solutions
Metropolitan Life
Investec Employee Benefits
Capital Alliance Life
M Cubed Investment Life
Investec
Industry g g g g g g l g l l
Ranking according to
Total Assets
2003 2002
3
4
1
2
5
6
7
8
9
10
3
4
1
2
5
6
7
9
8
10

Number of active insurers
Net premiums received
Net benefits paid
Total expenses incurred
Investment yield
Overview - some key indicators g l r a n c
Total
R’b
2003
Total
R’b
2002
27 12 6 7
68% 29% 1% 0%
69% 30% 1% 0%
93% 3% 2% 1%
11 4
0% 1%
0% 0%
1% 1%
67 64
165 177
157 134
20 19
9.7% -3.1% 11.2% 3.2% 16.1% 5.0% 8.0% 0.8%

Overview – where are the assets invested?
As % of Rows
Cash and deposits g l r a n c
75% 21% 2% 0% 0% 1%
Total
(R'b)
2003
Total
(R'b)
2002
60 67
Fixed interest
Equities and convertible debentures
Property
Collective investment schemes
Other
90% 6% 3% 0%
90% 9% 0% 0%
99% 1% 0% 0%
66% 34% 0% 0%
77% 21% 1% 0%
1%
1%
0%
0%
0%
0%
0%
0%
0%
1%
179 168
348 334
36 34
96 98
98 42
Total assets 85% 13% 1% 0% 1% 0% 817 783

Overview – where are the assets invested?
As % of Columns g
Cash and deposits
Fixed interest
Equities and convertible debentures
Property
Collective investment schemes
Other
Total assets
7%
23% 10%
45% 29%
5%
9%
11% 19%
695 l
12%
0%
30%
108 r
17%
67%
5%
0%
0%
11%
7 a
31%
11%
4%
3%
33%
19%
0 n
5%
32%
61%
0%
0%
2%
4 c
19%
22%
10%
0%
2%
46%
3

Distribution of assets - 2003
Linked General Insurers
Cash and deposits
Fixed interest
Equities and convertible debentures
Property
Collective investment schemes
Other
Reinsurers
Assistance Niche Cell

Overview - the liabilities and
CAR… g l r a n c
Total
(R'b)
2003
Total
(R'b)
2002
Linked liabilities 57% 42% 0% 0% 0% 1% 253 265
Non-linked liabilities 98% 0% 1% 0% 1% 0% 454 409
Total liabilities 84% 15% 1% 0% 1% 0% 736 706
Excess assets 97% 1% 1% 0% 0% 0%
CAR before management action
CAR after management action
99% 0% 0% 0% 0% 0%
98% 0% 1% 0% 0% 0%
81 77
73 82
32 35

Overview – remarks

Industry funding factor (excluding
CAR) unchanged from 2002 at 1,11.

Industry funding factor (including
CAR) unchanged from 2002 at 1,06.

Industry CAR cover slight improvement from 2,18 (2002) to 2,56
(2003).

What will we show you?

Some key risks and trends in the insurance sector

Anticipated changes for the future

Information on new Analysis of Surplus in
LT2000

Give you brief overview of the LT Insurance market in 2003.

Review some valuation assumptions in the
LT2000 and compare these with the resulting
AOS.

Valuation assumptions in the
LT2000

The results we are about to show represent a mix of greatly different insurers.

The dangers of interpreting industry results should be kept in mind.

We suggest the results to be an orientation exercise and nothing more.

What were the hurdles?

To consolidate two very different versions of the LT2000 (38 insurers on version 2.3 and 32 insurers on version 3)

Valution basis (G11 – old; G10 – new) proved to be especially difficult
 Next year we’ll have a problem with the AOS
(C7)

Therefore – had to make assumptions to derive an industry representative basis

Discount rates
(LT2000 version 2.3)

Observed rates from 5% to 13% (2002: 6% to
18%) between the classes of business.

Observed inflation assumption between 5% and 9% (2002: 2% and 11%).

Weighted average inflation assumption of 7.2%
(2002: 9.6%).

Discount rates – 2002
(LT2000 version 2.3)
% pa 13.5%
13.0% Retirement Fund
Business
12.5%
12.0%
Annuities
Untaxed
Business
11.5%
Taxed
Business
11.0%

Discount rates – 2003
(LT2000 version 2.3)
% pa 11.4%
11.2%
11.0%
10.8%
10.6%
10.4%
10.2%
10.0%
9.8%
9.6%
Annuities
Retirement
Fund business
Untaxed
Business
Taxed
Business

Discount rates
2003 (LT2000 version 3)

Individual business:

Around 38% of insurers entered a representative assumption

Observed rates between 9% and 12.5% between the classes of business.

Average central discount rate (CDR) 10.5%

Highest discount rates for linked and market-related classes.

Lowest discount rates for without-profit annuities.
 Observed inflation assumption between 5.4% and
6.5% (Average of 6%)

Discount rates
2003 (LT2000 version 3)

Group business:

Not a lot of data

Around 16% of insurers entered a representative assumption

Observed rates between 7.8% and 10.5% between the classes of business (lower than individual)

Average central discount rate 9.1%

Average inflation assumption of 5.8%

Variable
Discount rates
2003: LT2000 version 3
Individual Business - Averages
Class of business
Withprofit
Bus
10.5%
Annuities
Withprofit
12.5%
Withoutprofit
9.3%
Linked Market
Perform
10.3% 10.8%
Other
9.6% CDR
IPF
UPF
Expense
Inflation
CDR – Exp Infl
10.2%
10.4%
CPF 9.7%
Corporate Fund 11.0%
5.7%
4.9%
-
10.4%
-
-
5.4%
7.1%
9.4%
9.1%
9.4%
9.4%
6.0%
3.3%
10.0% 10.2%
10.7% 10.8%
9.9% 9.8%
12.2% 11.8%
6.2% 6.1%
4.1% 4.7% 3.2%
9.5%
9.9%
9.5%
9.9%
6.4%
Total
10.5%
9.8%
10.2%
9.7%
10.9%
6.0%
4.5%

Variable
Central
Discount Rate
IPF
UPF
CPF
Corporate Fund
Expense
Inflation
Discount rates
2003: LT2000 version 3
Group Business - Averages
Class of business
Withprofit
Bus
Annuities
Withprofit
9.1%
Withoutprofit
8.4%
Linked Market
Perform
Other
9.5%
-
10.5%
-
-
-
7.8%
10.5%
-
-
5.8%
-
-
-
-
-
-
-
-
-
-
9.5%
-
10.5%
-
-
-
8.8%
8.8%
8.7%
8.4%
8.4%
5.8%
Total
9.1%
8.3%
10.0%
8.4%
8.4%
5.8%

Discount rates – 2003
Per business class (Individual)
(LT2000 version 3)
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
With-profit business With-profit annuities Without-profit annuities
Class of business
Expense inflation Central discount rate Central discount rate - expense inflation

Discount rates – 2003
Per business class (Individual)
(LT2000 version 3)
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Linked Market performance
Other
Class of business
Average
Expense inflation Central discount rate Central discount rate - expense inflation

Spread between discount rate and inflation assumption - 2003
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% 9.0%
Difference between discount rate and expense inflation

(Comparison between 2002 and 2003)
120.0%
100.0%
80.0%
60.0%
40.0%
Moving left suggesting more valuators using lower differential.
20.0%
0.0%
0.0% 2.5% 4.5% 6.5% 8.5% 10.5% 12.5%
Difference between discount rate and expense inflation
2002
2003

Discount rates
AOS Results

Industry in total made investment profits, compared to losses in 2002

Per industry grouping:
 In aggregate, assistance business and those in run-off made losses (few made profits)
 Most profits made by general insurers

Per year-end month:
 In aggregate, those with March year-ends made losses
(although some did make profits)

Most profits made by insurers with December year-ends

Discount rates – AOS results
Min of profit/loss
Max of profit/loss
Total of profit/loss
Profit/total insurance profit
Average profit/loss
Weighted average of profit/loss
Total (R‘m)
2002
Total (R‘m)
2003
-2,235 -338
517
-1,681
3,799
5,721
-10%
-28
71%
94
-380 1,088

Mortality

In the graphed rates, we tried to determine representative mortality rates for males and females.

Where possible, we used weighted rates, but simplifying assumptions were needed to consolidate the different versions of the
LT2000.

For assurance we use SA85/90 ultimate 100% heavy to place weighted rates in perspective.

For annuities we use a(55) to put weighted average rates in perspective.

Mortality – Assurance tables

Most popular tables are SA85/90 and SA56/62.

Bigger insurers resort to internal tables.

Specialized classes revert to special tables like
A24-29 and ELT8…

Encouraging to see some insurers implementing the ASSA2000 model (where products justify it).

Still significant number that fail to complete
G10.1 and G10.2 (usually say – refer to attached valuation report…)

Mortality – Assurance table adjustments

Proportional adjustments with or without constant additions are popular with the level of complexity varying. Examples include:
 Proportion vary across age (model accident hump)
 Or over time (model temporary initial selection)
 With risk factors (popular for smoking status, sex and health?)

Age adjustments used mainly for sex differential.

Mortality – Assurance males
(Linear scale)
0.1200
0.1000
0.0800
0.0600
0.0400
0.0200
0.0000
20 30 40 r
50 n c
60 a
70 80
SA85/90 g l

Mortality – Assurance females
(Linear scale)
0.1200
0.1000
0.0800
0.0600
0.0400
0.0200
0.0000
20 g
30 l
40 r
50 n c
60 a
70 80
SA85/90

Mortality – Assurance males
(Log scale)
1.0000
0.1000
0.0100
0.0010
0.0001
20 g
30 l
40 r
50 n c
60 a
70 80
SA85/90

Mortality – Assurance females
(Log scale)
1.0000
0.1000
0.0100
0.0010
0.0001
20 g
30 l
40 r
50 n c
60 a
70 80
SA85/90

Mortality – Annuity tables and adjustments

Most commonly used include a(55), internal table, a(90) and PA(90)

Adjustments mostly combination of proportional and age adjustment.

Many include improvement in mortality over time to cater for improving longevity:

0.5%, 1% and 1.5% improvement per annum seen.
 Also a ‘CMI Improvement’

Mortality – Annuities males
(Linear scale)
0.1200
0.1000
0.0800
0.0600
0.0400
0.0200
0.0000
20 30 g
40 l
50 r n
60 70 a(55)
80

Mortality – Annuities females
(Linear scale)
0.0900
0.0800
0.0700
0.0600
0.0500
0.0400
0.0300
0.0200
0.0100
0.0000
20 30 g
40 l
50 r n
60 70 a(55)
80

Mortality – Annuities males
(Log scale)
1.0000
0.1000
0.0100
0.0010
0.0001
20 30 g
40 l
50 r n
60 70 a(55)
80

Mortality – Annuities females
(Log scale)
1.0000
0.1000
0.0100
0.0010
0.0001
20 30 g
40 l
50 r n
60 70 a(55)
80

Mortality – AOS results g l r a n c
Total
(R‘m)
2003
Total
(R‘m)
2002
-14 -36 Min of profit/loss
Max of profit/loss
-4 0 0 -7 -14 0
266 0 24 2 18 17 266 200
Total of profit/loss 1,473 0 68 -6 33 19 1,588 1,125
Profit/total insurance profit
20% 0% 31% 73% 27% 20% 7%
Average profit/loss 64 0 11 -1 5 6 35 24
Weighted average of profit/loss
159 0 10 -3 17 6 156 133

AIDS
 Encouraging to see more widespread use of ASSA2000 model.

Representative idea of tables used:

Pattern I: 90%+ proportions of R6B with 50%+ multiplier.

Pattern II: 20% proportions of HA1 with 90% multiplier.

Refer members to PGN102 and PGN105.
 For LT2000 version 3, please answer the AIDS question in statement G10 and attach the electronic copy requested!

Mortality - AIDS adjustments
(Assurance products)
Type of AIDS Adjustment
No information
No adjustment disclosed
Adjust for gender
Proportion for individual life
74%
5%
6%
Proportion for group life
97%
0%
3%
Adjust for gender and smoker
Total
15%
100%
0%
100%

Mortality – Weighted AIDS
Adjustments (Assurance)
0.0014
0.0012
0.001
0.0008
0.0006
0.0004
0.0002
0
20 25 30 35
Male
40 45
Female
50 55 60

Morbidity – Income disability

Many use GLTD (some make no adjustments to
GLTD).

The bigger players resort to internal tables.
 CMIR12, CDT and SA85-90 used by minority.

A proportional adjustment to all ages in the table is often used.
 The minority apply an age adjustment or set the reserve as a % of office premium.

Observed rates identical for both sexes.

Morbidity – Income disability both sexes (Linear scale)
0.50000
0.45000
0.40000
0.35000
0.30000
0.25000
0.20000
0.15000
0.10000
0.05000
0.00000
20 30 40 g
50 r
60 n
70 80

Morbidity – Income disability both sexes (Log scale)
1.00000
0.10000
0.01000
0.00100
0.00010
20 30 40 g
50 r
60 n
70 80

Morbidity – Lump sum disability

Most use internal tables or SA85-90.

Some use CSI table or move to set the reserve as a % of office premium.

Most apply a proportional adjustment that varies by age: x% at age 20 increasing by y% every age until termination .

The minority apply an age adjustment.

Morbidity – Lump sum disability males (Linear scale)
0.14000
0.12000
0.10000
0.08000
0.06000
0.04000
0.02000
0.00000
20 30 40 g r
50 n
60 c
70 80

Morbidity – Lump sum disability females (Linear scale)
0.09000
0.08000
0.07000
0.06000
0.05000
0.04000
0.03000
0.02000
0.01000
0.00000
20 30 40 g r
50 n
60 c
70 80

Morbidity – Lump sum disability males (Log scale)
1.00000
0.10000
0.01000
0.00100
0.00010
20 30 40 g r
50 n
60 c
70 80

Morbidity – Lump sum disability females (Log scale)
1.00000
0.10000
0.01000
0.00100
0.00010
20 30 40 g r
50 n
60 c
70 80

Morbidity – AOS results
Min of profit/loss g r n c Other
Total
(R‘m)
2003
Total
(R‘m)
2002
-10 -10 -7 0 0 -10 -22
Max of profit/loss 289 62 2 4 0 289 214
Total of profit/loss
Profit/total insurance profit
Average profit/loss
Weighted average of profit/loss
615 52 -5 4 0 667 642
8%
44
24%
13 -3
6% 0%
4 0
8% 4%
30 31
117 52 -5 4 0 117 58

400
350
300
250
200
150
100
50
0
450
Expenses – Fixed costs
(2002)
Disability income in payment
Regular premium
Single premium
Annuities in payment
Paid-up policies

Expenses – Fixed costs
(Version 2.3 - 2003)
900
800
700
600
500
400
300
200
100
0
Disability income in payment
Regular premium
Single premium
Annuities in payment
Paid-up policies

Expenses – Fixed costs
(Version 3 - 2003)
 Very poorly completed.
 Understandable though - insurers differ significantly and charge differently.
 Where multiple product ranges exist with different expense assumptions per class, please disclose a representative expense assumption.
 Completed statements suggests a representative fixed cost per policy of R170 per annum with significant variation.

Expenses – Variable costs and inflation
 For regular premium policies observed insurers charging between 3% and 5% of regular premium (ignoring one reinsurer’s information…).
 For regular/single premium policies observed insurers charging between 0.4% and 1.5% of fund value.
 Observed expense inflation rates between 5% and 9% with a representative average of approximately 6%.

Expenses – AOS results
Min of profit/loss
Max of profit/loss
Total of profit/loss
Profit/total insurance profit
Average profit/loss
Weighted average of profit/loss
Total
(R‘m)
2003
-106
123
-68
-3.4%
-1
-16
Total
(R‘m)
2002
-137
264
71
0.4%
1
48

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Lapse rates – Recurring premium (2002) g l r n
First year Second year Third year Fourth year and later a

40%
35%
30%
25%
20%
15%
10%
5%
0%
Lapse rates – Recurring premium (2003) g l r n
First year Second year Third year a

Lapse and surrender rates – comments
 No AOS item in “old” C7 to analyse profits from surrenders. “New” C7 should provide some insights next year…
 Many EV sensitivity testing indicate significant sensitivity to withdrawals.
 Many insurers have withdrawal assumptions that vary by months in force and between products - hard to consolidate.
 Data of poor quality, hope to give better summary next year.

Questions?
Thank you for your time
Contact details:
Hantie van Heerden
(012) 422 2801 hantiev@fsb.co.za
André Jansen van Vuuren
(012) 428 8103 andrej@fsb.co.za