Annexure C: Additional information on insurance businesses

1.

Accounting policies

Insurance and investment contracts

Long-term insurance operations
Insurance contracts are those contracts when the Regent Life Group (the insurer) has accepted significant insurance risk from another party (the policyholders) by agreeing to compensate the policyholders if a specified uncertain future event (the insured event) adversely affects the policyholders. As a general guideline, the Regent Life Group determines whether it has significant insurance risk, by comparing benefits paid with benefits payable if the insured event did not occur. Insurance contracts can also transfer financial risk.

Investment contracts are those contracts that transfer significant financial risk with no significant insurance risk. 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, a credit rating or credit index or other variable.

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.

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).

These contracts are valued in terms of the Financial Soundness Valuation (FSV) basis contained in SAP 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 represents 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-unitreserve calculated in accordance with SAP 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.

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.

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. Premium receivable in respect of group schemes that is due after the year-end date is ignored. However, where the operating ratios exceed 100%, a deficiency reserve would be 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 less provisions raised for cash-backs.

Insurance results
Long-term insurance operations
Profits or losses are determined in accordance with the guidance note on Financial Soundness Valuations (SAP 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 SAP 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, cash-back provisions 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
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.

Incurred but not reported – IBNR
Provision is made in the policyholders’ liabilities under insurance contracts for the estimated cost at the end of the year for claims IBNR at that date. IBNR provisions are calculated using run-off triangle techniques or as a multiple, based on the average historical reporting delay, of the claims reported in the three weeks following the valuation date but where the claims event occurred prior to valuation date. These liabilities are not discounted due to the short-term nature of outstanding claims. Outstanding claims and benefit payments are stated gross of reinsurance.

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 exceed the unearned premiums provision in relation to such contracts and attributable investment income after the deduction of any deferred acquisition costs.

Cash-back provisions
A provision is made for the accrued expected obligations to policyholders to the extent that the premiums for these benefits are already received and other terms and conditions are met within the period leading up to the expected cash-back.

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.

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.

The value of insurance liabilities is based on best estimate assumptions of future experience plus compulsory margins as required in terms of SAP 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
Extended lives mortality		An additional 7,5% margin was added
Lapses		20% margin in year one and two and 50% thereafter in respect of the Clicks portfolio
All other decrements		For credit life an additional 10% margin was added

Negative reserves arise when the present value of future estimated benefits is less than the present value of future valuation net premiums. Negative reserves are eliminated on a policy-by-policy basis for all policies that have three or more premiums in arrears. For some of the cell captive arrangements, as well as for business written via new distribution channels where limited experience has been observed, all negative reserves are 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 the 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 Investment return assumptions are derived by country, then by product groups with homogeneous discounted mean terms. In Botswana, and similarly for Lesotho, one investment return assumption was applied across all products, due to the homogeneity of the discounted mean term across the policy book in each country. For South Africa specifically, 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: 4,86% (2012: 4,29%) Individual Life: 6,58% (2012: 5,99%) Disabled Annuity business: 7,58% (2012: 7,17%) With-profit Annuity business: 7,68% (2012: 7,27%) Botswana: 4,32% (2012: 4,28%) Lesotho: 6,81% (2012: 6,83%) Lesotho future reversionary bonus: 5,00% (2012: 5,00%)
(f)	For with-profits business a Bonus Smoothing Reserve (BSR) 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 Life South Africa. All assumptions include compulsory margins. The economic assumptions were reviewed in light of recent level of interest and inflation rates. Generally interest, inflation and future bonus (where relevant) assumptions were increased. As a result of these economic changes, the actuarial liabilities increased by R28,1 million. The non-economic assumptions were also reviewed as follows — As the expense experience has stabilised, the discretionary margin on the individual life per policy expenses was released. This resulted in a decrease in actuarial liabilities of R20,3 million. — The withdrawal assumptions were adjusted within the individual life portfolio to reflect the recent lapse experience. This resulted in an increase in actuarial liabilities of R3,6 million. As a result of these non-economic changes, the actuarial liabilities decreased by R16,7 million. Methodology changes to the modelling of savings management charges and allocation rates as well as the mortality rates of the disability annuitants resulted in an increase to actuarial liabilities of R8,7 million. The elimination of negative reserves belonging to a subset of the individual life book resulted in an increase in actuarial liabilities of R12,2 million. The overall impact of all the above changes was an increase in the actuarial liabilities of R32,4 million. Regarding Botswana, the value of liabilities as at 30 June 2013 reduced by P117 000 as a result of changes to valuation assumptions. The main assumptions changes causing this increase were as follows: — The economic assumptions were amended to reflect the current economic environment. This resulted in a decrease in reserves of P117 000. Regarding Lesotho, the changes detailed below were made to the assumptions. As a result the BSR of the with-profitsbusiness decreased by approximately M4,6 million and the without-profit reserves decreased by M0,6 million. — The economic assumptions were amended to reflect the current economic environment. This resulted in an increase in reserves of M4,5 million. — The withdrawal assumptions were amended to reflect current experience. This resulted in an increase in reserves of M1 million. — Decrement assumptions were adjusted to reflect the current and expected future experience. This resulted in a decrease in reserves of M1,5 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 liability 2013 Rm   Change in liability 2013 Rm   Worsening of mortality 10% worse claims 42,3   36,5     Lowering of investment returns 15% lower returns (0,9)   (0,6)     Worsening of base renewal expense level 10% higher expenses 25,8   24,3     Worsening of expense inflation 10% higher expense inflation 4,9   3,1     Worsening of lapse rate 25% higher withdrawals 38,8   35,4     The 2013 withdrawal and mortality 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 changes in lapse and mortality assumptions. 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, e.g. change in interest rate and inflation.