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Annexure C

Additional information on insurance businesses


Accounting policies

Insurance and investment contracts

Long-term insurance operations

The long-term insurance operations issue contracts that transfer insurance risk or financial risk or both. Insurance contracts are those contracts that transfer significant insurance risk. Such contracts may also transfer financial risk. Investment contracts are those contracts that transfer financial risk with no significant insurance risk.

Insurance contracts are classified into individual credit life contracts, individual life contracts, annuity contracts, group funeral, group life and group credit life contracts. This classification applies consistently across all long-term insurers within Regent Life group (being Regent South Africa, Lesotho National Life Assurance and Regent Life Botswana).

All policyholder contracts that transfer significant insurance risk are classified as insurance contracts. These contracts are valued in terms of the Financial Soundness Valuation (FSV) basis contained in PGN 104 issued by the Actuarial Society of South Africa.

The statutory actuary reviews the calculation of the liabilities under long-term insurance contracts and investment contracts annually at the statement of financial position date in accordance with prevailing legislation, Generally Accepted Actuarial Standards in South Africa and International Financial Reporting Standards as appropriate. The transfers to or from insurance liabilities are accounted for in the statement of comprehensive income and represent the increase or decrease in contract liabilities, including all necessary provisions and reserves.

The liabilities for investment contracts are set equal to the accumulated fair value of the underlying assets plus a non-unit reserve calculated in accordance with PGN 104. Any deficiency is immediately charged to profit and loss and a provision is raised for losses from the liability adequacy tests.

Investment contracts are initially and thereafter recognised at fair value, with changes in fair value being accounted for in the statement of comprehensive income. The premiums, benefit payments and investment earnings relating to these investment contracts have been excluded from the statement of comprehensive income and accounted for directly as movements in the liability.

Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the insurance risk reduces significantly during this period, unless all rights and obligations are extinguished or expire. Investment contracts can however be reclassified as insurance contracts after inception, if insurance risk becomes significant although this generally does not occur with the current investment contracts being written.

Short-term insurance operations

Contracts under which the short-term insurance operations accept significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder, or other beneficiary, are classified as insurance contracts. Insurance risk is risk other than financial risk, transferred from the holder of the contract to the issuer. Financial risk is the risk of a possible future change in one or more of a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index or other variable. Insurance contracts may also transfer some financial risk.

Reinsurance of long-term and short-term insurance operations

Contracts entered into with reinsurers by the long-term and short-term operations, under which the group is compensated for losses on one or more contracts, and which meet the classification requirements for insurance contracts, are classified as reinsurance contracts held.

The benefits to which the long-term and short-term operations are entitled under their reinsurance contracts held are recognised as reinsurance assets, consisting of short-term and long-term balances due from reinsurers that are dependent on the expected claims and benefits. Reinsurance liabilities are primarily premiums payable and are recognised as an expense when due. Reinsurance assets are assessed for impairment on an annual basis, reducing the carrying amount of the reinsurance asset to its recoverable amount through the statement of comprehensive income.

Insurance results

Long-term insurance operations

Profits or losses are determined in accordance with the guidance note on Financial Soundness Valuations (PGN 104) and International Financial Reporting Standards. The underlying philosophy of the Financial Soundness Valuation is to recognise profits over the term of each insurance contract. In the valuation of liabilities, provision is made for:

The best estimate of future experience;
Compulsory margins prescribed in PGN 104; and
Discretionary margins determined to release profits to shareholders consistent with policy design and company policy.

Short-term insurance operations

The underwriting results are determined after making provisions for unearned premiums, outstanding claims, incurred but not reported claims, unexpired risk provision and such additional provisions as are considered necessary. The methods used to determine these provisions are as follows:

Unearned premiums

Premiums are earned from the date the risk attaches, over the indemnity period, based on the pattern of the risk underwritten. Unearned premiums, which represent the proportion of premiums written in the current year which relate to risks that have not expired by the end of the financial year, are calculated on the 365th basis for even risk business and other bases that best represent the unearned risk profile for uneven risk business.


Claims incurred consist of claims and claims handling expenses paid during the financial year together with the movement in the provision for outstanding claims. Claims outstanding comprise provisions for the estimate of the ultimate cost of settling all claims incurred but unpaid at the statement of financial position date whether reported or not, and an appropriate risk margin. Related anticipated reinsurance recoveries are disclosed separately as assets. These estimated reinsurance and other recoveries are assessed in a manner similar to the assessment of claims outstanding.

While the directors consider that the gross provisions for claims and the related reinsurance recoveries are fairly stated on the basis of the information currently available to them, the ultimate liability will vary as a result of subsequent information and events and may result in significant adjustments to the amounts provided. Adjustments to the amounts of claims provisions established in prior years are reflected in the financial statements for the period in which the adjustments are made, and disclosed separately if material. The methods used to value these provisions, and the estimates made, are reviewed regularly.


For the short-term operations, these are calculated on both a best estimate and 75th percentile to be consistent with past reserving practices as well as the expected requirements under Solvency Assessment and Management (SAM). For the long-term operations, these are calculated on the 90th percentile.

Unexpired risk provision

Provision is made for unexpired risks arising to the extent that the expected value of claims and claims handling expenses attributable to the unexpired periods of contracts in force at the statement of financial position date exceeds the unearned premiums provision in relation to such contracts after the deduction of any deferred acquisition costs.

Deferred acquisition costs

The costs of acquiring new and renewal insurance business, that is commission and other acquisition costs, primarily related to the term products of that business, are deferred. Deferred acquisition costs are amortised on a pro-rata basis over the contract term. Similarly, any reinsurance commissions received are deferred and recognised as income over the term of the reinsurance contract.

Revenue recognition

Long-term insurance operations

Premiums and annuity considerations on insurance contracts are recognised when due in terms of the contract, other than group schemes. Premiums receivable in respect of group schemes that are due after the year-end date, are ignored. However where the operating ratios exceeds 100%, a deficiency reserve is established to offset any expected losses up until the next renewal date. Premium income on insurance contracts is shown gross of reinsurance. Premiums are shown before deduction of commission. Premium income received in advance is included in trade and other payables. Amounts received under investment contracts, such as premiums, are recorded as deposits to investment contract liabilities.

Short-term insurance operations

Gross written premiums comprise the premiums on insurance contracts entered into during the year, irrespective of whether they relate in whole or in part to a later accounting period. Premiums are disclosed gross of commission to intermediaries and exclude Value Added Tax. Premiums written include adjustments to premiums written in the prior accounting periods. The earned portion of the premium received is recognised as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period, based on the pattern of risks underwritten.

Cell captives

The group operates cell captives on behalf of entities that wish to participate in the insurance result of a particular category of insured risk. Preferences shares are issued to those participants giving them the right to share profits on an agreed basis. To reflect the substance of the transaction it is consolidated and the participant’s share of profits is treated as a non-controlling interest.

2 Other investments and loans          
  (note 10 to the consolidated annual financial statements)          
  2.1 Financial assets held at fair value          
    Balance at beginning of the year   2 032   1 907  
    Additions   1 733   2 956  
    Disposals   (1 633)   (2 904)  
    Fair value adjustment   83   76  
    Currency adjustments   3   (3)  
    Balance at end of year   2 218   2 032  
  2.2 Reconciliation to consolidated annual financial statements          
    Financial assets at fair value – insurance businesses   2 218   2 032  
    Financial assets at fair value – other operations   11   14  
        2 229   2 046  
3. Insurance assets and liabilities          
  3.1 Liabilities under insurance contracts          
    Short-term operations          
    Outstanding claims, including claims incurred but not reported          
    Balance at beginning of year   623   583  
    Claims settled in the year   (1 161)   (995)  
    Claims incurred during the year   1 171   1 035  
    Balance at end of year   633   623  
    Outstanding claims*   485   473  
    Incurred but not reported   148   150  
    Balance at end of year   633   623  
    * This amount is reflected in trade and other payables.          
  3.2 Unearned premium provision          
    Balance at beginning of year   479   534  
    Premiums written during the year   2 194   2 038  
    Premiums earned during the year   (2 192)   (2 093)  
    Balance at end of year   481   479  
  3.3 Long-term operations          
    Balance at beginning of the year   453   465  
    Transfer to statement of comprehensive income   18   (9)  
    Currency adjustments   (6)   (3)  
    Balance at end of year   465   453  


Process used to decide on long-term insurance assumptions

The business was divided up into homogenous groupings and then each grouping was analysed. Best estimate assumptions were then derived based on these experience investigations. Where data was limited, industry information was 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.

The compulsory margins are summarised as follows:

Assumption Compulsory margin
Investment earnings Investment earnings assumption was increased or decreased by 0,25% depending on which gives the higher liability
Expense inflation 10% loading on the expense inflation assumption
Mortality Assumption was decreased by 7,5% for annuities and increased for all other classes
Morbidity Assumption was increased by 10%. For dread disease the margin is 15%
Retrenchment Assumption was increased by 20%
Lapses Lapse rate assumptions were increased or decreased by 25% depending on which gives the higher liability
Surrenders Surrender rate assumptions were increased or decreased by 10% depending on which gives the higher liability
Expenses 10% loading on the expense assumption

In addition to the above compulsory margins the following additional discretionary margins were incorporated:

Retrenchment For credit life an additional 30% margin was added
Expenses Individual Life business has an additional 10% discretionary margin
Extended lives mortality An additional 7,5% margin was added
All other decrements For credit life an additional 10% margin was added

Negative reserves were eliminated on a policy-by-policy basis for all policies that had three or more premiums in arrears. For some of the cell captive arrangements, all negative reserves were eliminated.

The assumptions used for insurance contracts are as follows: All the assumptions below are based on the most recent experience investigations in each country modified for expected trends. Generally experience investigations are carried out for all assumptions every year:

(a) Mortality

Adjusted standard assured lives and annuity tables were used to reflect the Regent Life Group’s recent claims experience. The adjustments allow for the expected increase in Aids related claims. The allowance for Aids is based on the relevant actuarial guidance notes as provided by Actuarial Society of South Africa.

(b) Morbidity

Disability and dread rates are based on standard morbidity tables and critical illness tables and where appropriate, adjusted to reflect the Regent Life Group’s recent claims experience.

(c) Medical and retrenchment

The incidence of medical and retrenchment claims is derived from the risk premium rates determined from annual investigations. The adjusted rates are intended to reflect future expected experience.

(d) Withdrawal

The withdrawal assumptions are based on the most recent withdrawal investigations taking into account past as well as expected future trends. The withdrawal rates are calculated every year for each company/country, and by class and policy duration. Typically the rates are higher at early durations.

(e) Investment returns

Separate investment returns were derived for the annuity and non-annuity business. Furthermore, for the non-annuity business, separate interest rates were determined for the individual life and credit life classes of business since they have a different liability profile and discounted mean term. The returns were based on the current bond yields of appropriate term and long-term differentials between bonds, cash and equities. The assumptions were based on the long-term rates and notional matching portfolio of assets. Allowance was made for mismatches. In cases where bond yield information was not available (for example in Lesotho), approximate methods were used based on the market information available.

The long term investment returns (before compulsory margins) are as follows:
South Africa Credit life: 4,29% (2011: 5,87%)
Individual life: 5,99% (2011: 7,68%)
Disabled annuity business: 7.17% (2011: 8,7%)
With profit annuity business: 7,27% (2011: 8,8%)
Botswana: 4,28% (2011: 5,65%)
Lesotho: 6,83% (2011: 8,37%)
Lesotho future reversionary bonus: 5% (2011: 5%)

(f) For with-profits business a Bonus Smoothing Reserve was established, being surplus assets that belong to policyholders and are available to smooth future bonuses. From time to time, the BSR may go negative if asset values fall below the value of the underlying liabilities. This implies that there is an expectation that future bonuses will be less than what future investment earnings alone will justify.
(g) Renewal expenses and inflation

A detailed expense investigation for each company/country was undertaken and the expenses were split by line of business and between new business and maintenance expenses.

The maintenance expenses were adjusted for expected inflation in the future and spread over the anticipated volumes of business over the next year to derive a per policy expense for each class. The expenses allocated to new business are expected to be covered by future new business written.

(h) Tax

The interest and expense assumptions are net of any taxation payable based on the tax environment for each country and the tax position of the company.

Change in assumptions

The following changes were made to the valuation basis for Regent South Africa. All assumptions include compulsory margins.

The economic assumptions were reviewed in the light of the recent level of interest and inflation rates. Generally interest, inflation and future bonus (where relevant) assumptions were reduced.

As a result of these economic changes, the actuarial liabilities reduced by R21,9 million.

The non-economic assumptions were also reviewed as follows:

Per policy expenses were amended to reflect the current and expected future experience. This resulted in an increase in actuarial liabilities of R28 million.
The withdrawal assumptions were adjusted to reflect the recent lapse experience. This resulted in a decrease in actuarial liabilities of R0,042 million.
Decrement assumptions were adjusted to reflect the current and expected future experience. This resulted in a decrease to actuarial liabilities of R9,2 million.

As a result of these non-economic changes, the actuarial liabilities increased by R18,8 million.

Methodology changes to the modelling of expenses and commission resulted in an increase to actuarial liabilities of R11,8 million.

The provision of R2,8 million held for the LOA minimum surrender was released in compliance with the prescribed time period.

The overall impact of all the above changes was an increase in the actuarial liabilities of R5,9 million.

Regarding Botswana, the value of liabilities as at 30 June 2012 increased by P3,12 million as a result of changes to valuation assumptions.

The renewal expense assumptions were amended in the light of the most recent expense investigation. This resulted in an increase of P2,5 million.
The economic assumptions were amended to reflect the current economic environment. This resulted in an increase of reserves of P0,8 million.

Regarding Lesotho, the changes detailed below were made to the assumptions. As a result the BSR decreased by approximately M17,4 million.

The renewal expense assumptions were amended in the light of the most recent expense investigation. This resulted in an increase of M1,8 million.
The economic assumptions were amended to reflect the current economic environment. This resulted in an increase of reserves of M15,6 million.

Sensitivity analysis: Life operations

The following table presents the sensitivity of the value of insurance liabilities disclosed in this note to movements in the assumptions used in the estimation of insurance liabilities.

Variable Change in variable   Change in
  Change in
Worsening of mortality 10% worse claims   36,5   32,4  
Lowering of investment returns 15% lower returns   (0,6)   0,3  
Worsening of base renewal expense level 10% higher expenses   24,3   23,7  
Worsening of expense inflation 10% higher expense inflation   3,1   6,4  
Worsening of lapse rate 25% higher withdrawals   35,4   28,8  

The 2012 withdrawal sensitivity has increased relative to last year. This is due to the build up of policies relating to the funeral product within the individual life business class. Due to their long-term nature and large negative reserves, they are relatively more sensitive to a change in lapse assumption.

The above analysis is based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and the changes in some assumptions may be correlated – eg change in interest rate and inflation.

  3.4 Financial liabilities under investment contracts – long-term operations          
    Balance at beginning of year   104   94  
    Deposits   28   17  
    Payments   (9)   (8)  
    Fair value adjustment   (3)   1  
    Balance at end of year   120   104  
  3.5 Reconciliation to consolidated annual financial statements          
    Insurance and investment contracts          
    (note 22 to the consolidated annual financial statements)          
    Short-term operations – unearned premium provisions (see 3.2)   481   479  
    Long-term operations: Liabilities under insurance contracts (see 3.3)   465   453  
    Long-term operations: Liabilities under investment contracts (see 3.4)   120   104  
        1 066   1 036  
  3.6 Reinsurers’ share of liabilities under insurance contracts          
    (note 11 to the consolidated annual financial statements)          
    Balance at beginning of year   244   206  
    Movement in reinsurer’s share of insurance liabilities   (2)   38  
    Balance at end of year   242   244  
  3.7 Insurance claims provisions          
    (note 24 to the consolidated annual financial statements)          
    Short-term operations – IBNR (See 3.1)   148   150  
    Long-term operations – outstanding claims provisions   47   40  
    Other operations – outstanding claims provisions   21   18  
        216   208  

4.   Revenue          
    (note 26 to the consolidated annual financial statements)          
    Premium income          
    Long-term operations          
    Individual and credit life premium income          
         Single premiums   71   60  
         Reinsurance       (1)  
    Net premium income   71   59  
         Recurring premiums   497   410  
         Reinsurance   (22)   (32)  
    Net premium income   475   378  
    Group life premium income          
         Recurring premiums   172   181  
         Reinsurance   (51)   (49)  
    Net life premium income   121   132  
    Net premium income from long-term operations   667   569  
    Short-term operations          
    Gross premiums written   2 135   1 907  
    Reinsurance   (214)   (234)  
    Net premium income from short-term operations   1 921   1 673  
    Total net premium income   2 588   2 242  
    Total gross premium income   2 875   2 558  

Gross premium of R59 million (2011: R137 million) that relates to business within the group has been eliminated from the short-term operations gross premium above.

Short-term insurance results

The short-term insurance operations reported an insurance result excluding investment returns of R97 million in 2012 (2011: R246 million).

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 and morbidity which are modified to reflect 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 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

This operation 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 operation 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 2012 the capital adequacy requirement is R93,7 million and the ratio of excess assets to capital adequacy requirements is 3,6 (2011: R85,4 million, capital adequacy ratio 3,89).

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 including 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 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, liquidity 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 and timing 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.

Catastrophe 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 operation uses a number of modeling 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. The operation 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 operation’s currency risk is limited to foreign claims payable and transactions with the Botswana subsidiaries. The currency risk is not hedged as the exposure is not considered significant.

6.   Significant accounting judgements 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 in terms of the FSV basis and discretionary margins may be added if the statutory actuary and board consider it necessary to cover the risks inherent in the business or to ensure that profits emerge in a prudent manner in line with the original product design. The FSV is also adjusted to reflect any country specific legislative requirements for Botswana and Lesotho. The valuation of investment contracts is linked to the fair value of the supporting assets plus a non-unit reserve.

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 of 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 a 75% level of sufficiency for all business captured on its administration system. Methodology for the allocation of reserves was made consistent with Regent’s internal capital allocation model.

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