APN116 was recently issued and is effective for reporting periods starting on or after 31 March 2024. This therefore applies to all South Africa life insurers’ quarterly QRT for March and all annual QRTs for those with a March year end.

It outlines the requirement to stress life IBNR provisions using the standard life underwriting module. I was integral in the authoring of the APN, so I thought it might be helpful to create this FAQ as a reference.

Frequently Asked Questions

Question: Is there a regulatory requirement to comply with the APN?

This is actuarial guidance issued by the Actuarial Society of South Africa. It is not regulation issued by the Prudential Authority (PA). The PA is the only one that can create regulations.

The APN is an Advisory Practice Note and is therefore recommended practice. It applies to actuaries rather than insurers. Departure from an APN requires motivation by the actuary. Since a large part of the reason for issuing the APN is to ensure consistency of application of the regulations by actuaries, I don’t expect there to be valid reasons to not comply.

The APN is consistent with the Financial Soundness Standards for Insurers (FSIs), although it does provide more specific guidance in areas where the FSIs are not clear.

Question: Will this require me to change what I have been doing in the past?

That depends on whether you were stressing life IBNR provisions when determining your Solvency Capital Requirement (SCR) in the past. Many insurers were already doing this. Some were not, and actuaries calculating or reviewing the SCR for these insurers will need to change their practices in order to comply with the APN.

Question: Will this have a large impact?

For many insurers, the financial impact will be small. For some, it may change your SCR cover ratio by enough to change decisions such as dividend payments, or the cost of capital used in pricing and performance measurement. Insurers more likely to be affected include those with:

• Significant retrenchment risk exposure. The retrenchment stress (50%) is large and IBNRs for these lines can be meaningful. If there is already significant retrenchment exposure, the impact of diversification may be modest.
• Those with significant IBNR provisions relative to overall provisions. This includes group risk, risk premium reinsurance, and sometimes short contract boundary funeral. (Credit life usually has fairly short claim delays, aside from retrenchment, but can also generate significant IBNR provisions depending on business model and reporting processes.)

The operational process to include a stress for the provisions is not onerous, although valuation processes and documentation may need to be updated to reflect the changes.

Question: Is this the correct stress? Surely IBNR provisions are exposed to different uncertainties than future claims?

The SCR standard formula is an approximate formula intended to be risk-based and broadly proportionate to the risks. It is a fair comment that the risk inherent in IBNR reporting delays and claim amounts is different from the risk of future claim events. However, it is clear that there is uncertainty within the IBNR and in line with the principles of holding capital against potential future change in Basic Own Funds (BOF) some stress is required.

There can be some potential double counting of risk for policies that have incurred a claim, but since it has not yet been reported it is also included in the prospective Best Estimate Liability (BEL) and SCR stresses on that. However, there is no evidence that this will reflect the correct stress either. It is easy to show that with high lapses, or a closed book, the uncertainty inherent in the IBNR is understated (or assumed to be zero) when the risk remains.

Overall, stressing the life IBNR in line with the standard formula life underwriting stresses is appropriate and in line with the FSIs.

If your risk is meaningfully different, it may be appropriate to consider an internal model. It seems incredibly unlikely that differences on life IBNR SCR alone with be enough to justify this complex and expensive decision.

Question: Non-life IBNRs are stressed and have a whole methodology to stress them. Why don’t we follow that approach?

Correct. Non-life IBNRs are stressed as part of the claim reserve risk. This also demonstrates the necessity of stressing IBNRs as a general principle. There are differences in the nature of the uncertainty between life and non-life. In general, non-life has additional uncertainty around the final claim settlement amount (including claim, allocated loss adjustment expenses, and legal expense), whereas many life insurance claims are for a defined amount. However, some life insurance claims (e.g. disability or retrenchment) can have an uncertain claim amount, and all life insurance claims have a probability of being repudiated. Both life and non-life have uncertainty in the number of claims that have occurred, with estimation uncertainty linked to variable reporting delays.

The FSIs for life underwriting risk do not allow for a non-life claim reserve SCR approach. ASSA cannot issue guidance to create new regulations. A dedicated claim reserve module would also require additional calibration, which has not been performed.

I do not expect changes to the FSIs to require a non-life style approach to life IBNRs.

Question: Should reporting claims provisions also be stressed?

Life insurers hold provisions for reported claims that haven’t been settled yet. For the most part, reported claims are assessed and settled promptly. However, there is still residual uncertainty around repudiation rates.

• If your practice is to raise the full provision for reported claims, the risk is only of over-provisioning. In this case, it is likely not appropriate to hold additional capital anyway.

• If your provisioning process already allows for the probability of repudiating claims, there is some downside risk possible. However, APN116 does not require you to stress this provision. You may want to consider whether the risk is meaningful.

Some claim provisions such as retrenchment claims in payment are exposed to uncertainty, yet there is no claim termination stress for these claims. This likely represents a separate limitation of the standard formula. This issue is also not covered by the Information Note on retrenchment risk. If retrenchment risk is significant for you, it may be appropriate to assess this when you assess the appropriateness of the standard formula and when conducting your Own Risk and Solvency Assessment (ORSA).

APN116 for reference