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Insurance: ACAPS asserting control
Publié dans La Nouvelle Tribune le 12 - 11 - 2019

Morocco's insurance industry is undergoing substantive regulatory transformation with the adoption of a new prudential supervisory regime based on the ‘risk-based solvency' principle. This approach is part of an ongoing process aimed at raising insurance industry standards, thereby enabling insurers to become significantly more reliable, solid and transparent and to comply fully with international standards
Indeed, as was the case with the prudential regulation and supervision of banks which has bolstered the banking system, the Insurance and Social Welfare Supervisory Authority (ACAPS) has set similar goals for the insurance industry.
Based on Solvency II, a single set of prudential and supervisory requirements for European insurance companies, and the IAIS' risk-based solvency standards, ACAPS' approach is entirely consistent with the above norms while taking into account the size of the market and its specific characteristics. The old adage ‘Think big, start small' applies in Morocco's case.
The pillars of reform
When asked about this, Mr Boubrik, ACAPS Chairman, was kind enough to confirm that he was heading up this comprehensive project by adopting standards that are underpinned by three pillars:
The first, quantitative requirements, the ratios that insurers need to comply with in terms of the solvency capital requirement and the amount of capital held.
The second, qualitative requirements, which deals with governance and risk management.
And lastly, the third pillar, which deals with information that insurers need to report to the market and to the Regulatory Authority.
As far as the qualitative pillar is concerned, ACAPS is on the point of finalising, in consultation with the industry, a circular on this matter, which will substantially bolster the requirements imposed on companies, set out in 54 articles. Generally speaking, this circular deals with governance requirements.
A company must therefore have a very clear governance structure, with the role of the Board of Directors or the Supervisory Board specifically defined, as well as that of the CEO or the Chairman of the Supervisory Board, with powers clearly enunciated between the various bodies.
In addition, the circular addresses all key internal audit and risk management functions as well as the compliance function.
The actuarial function is now a requirement, which has not been the case under the current regulations.
Calculating the actual cost
Indeed, even if the actuarial function were to exist, its independence is not enshrined in the regulations concerning a company's entire underwriting policy.
Taking premiums as an example, a premium cannot be established by simply benchmarking it against competitors' premiums and then reducing it a little to make it attractive. The real cost of products needs to be calculated and then projected over subsequent years.
An objective and rational approach needs to be introduced as far as these functions are concerned so as to ensure their long-term sustainability. So much so, that an annual report about the actuarial function now needs to be filed with the Board.
Furthermore, with these new regulations, it is not enough for this function to simply exist. The latter must decide on a company's entire underwriting policy a priori and not simply on the provisions to be recognised a posteriori.
In addition, each of the other key functions must be separate within the company's organisational structure, in addition to being independent, and must inevitably rule on various aspects of the company's operations, with reports filed with the Board.
With the new insurance regulations, the goal is to ensure that companies possess an appropriate system of governance and adequate resources to be able properly manage their operations with an emphasis on managing the risks to which they are exposed.
This regulatory change is fundamental as far as solvency rules are concerned. With Basel, banks made a significant leap forward in terms of governance and management, beyond simply complying with standards relating to the quantitative side of things.
The qualitative aspect is far more important, however, because it results from applying rules of good governance!
Information systems and standards
On the practical side of things, when it comes to applying the new ACAPS rules, the new circular also sets out requirements relating to standards for information systems, which must be regularly audited so that they remain robust, reliable and trustworthy.
And this, in the knowledge that the Insurance Supervisory Authority performs its role on the basis of reports that companies must file, the priority being to support the industry as part of a process of ongoing improvement, with sanctions handed out to companies that do not comply.
Regarding this so-called qualitative aspect, the ACAPS circular is now ready, and with a consensus reached with insurers on each of its articles, will very shorty be adopted!
All this this has been achieved because ACAPS has been working in concert with insurance companies via two vehicles, the Regulatory Commission and the Insurance Federation's Steering Committee, on which the chairmen of insurance companies sit, as well as providing a forum for lengthy discussions about these new developments, prior to their being adopted.
As a result, the industry is in total agreement on Pillar 2 of the so-called qualitative reform of insurance regulations.
Solvency and its new requirements
As for Pillar 1, which concerns the quantitative aspect, i.e. the level of capital, the supervisory authority is going to require that companies introduce new risk-based solvency standards based on a universal principle.
The new risk-based solvency principle is imposed on our insurers because their credibility is at stake, and the country's too, given their expansion overseas.
And, unlike the banks which, when it comes to the quantitative aspect, apply a universal capital standard imposed under the Basel framework, its counterpart for insurance companies, the IAIS, sets out guidelines and leaves it to individual jurisdictions to set standards.
The methodology therefore chosen by Morocco to calculate companies' prudential balance sheets comprises life insurance mathematical provisions, eligible own funds and thresholds and calculation methods for measuring solvency.
The goal, of course, is that companies have sufficient capital to deal with any risk that they may encounter. Although only underwriting risks are covered by the solvency margin at present, the new insurance regulations extend coverage to market and counterparty default risks, thereby taking into account the specific characteristics of the industry, its players and their activities.
For example, as far as the assets side is concerned and its composition, given the limited investment possibilities, a more ‘simplistic' approach needs to be adopted by applying the ‘principle of proportionality'.
Consensus
Mr Boubrik wishes to point out that, as far as Pillar 1 is concerned, a market consensus also exists about this methodology, which is at an experimental stage.
In fact, to establish quantitative threshold requirements, a template was designed, enabling prudential balance sheets to be drawn up on the basis of the new rules laid down by the draft circular, and conveyed to companies. The latter have already provided initial feedback, just six months after the initial impact study was conducted between July 2018 and January 2019.
ACAPS has therefore been able to measure the impact from applying its new risk assessment rules.
The Authority is now consolidating these results and discussing ways of improving this system with each company.
A new impact study will be carried out as soon as the corrections have been filed by each company and incorporated and the template's thresholds readjusted a second time. At the end of this process, ACAPS will set out the rules and thresholds and will give companies time to implement them.
According to Mr Boubrik, the framework is now well defined and includes solvency margins, a claims reserve, a minimum solvency capital requirement, provisions for different risk types as well as claims, that are simply underwriting risks.
In addition, with this reform, risks will be appraised as a general policy and values will be measures on a ‘best estimate' basis rather than using historical book values.
A web-based approach
The third pillar of the new insurance regulatory regime is information, which naturally depends on the qualitative pillar. In fact, once the governance framework is in place, companies will be able to provide data on a regular basis after investing in platforms for communicating with the Supervisory Authority. Data exchange within the industry really needs to improve.
ACAPS has already made a start with Web Inter, an application for brokers, with the latter previously having to file quarterly statistics with ACAPS. The app provides a means of communicating with them.
The Authority now no longer requests these statistics, which companies provide themselves directly. The platform provides a means of communication between ACAPS and brokers, ideal for managing and monitoring administrative dossiers.
The Authority is developing a data exchange platform in conjunction with insurance companies.
Quarterly reports and annual summary financial statements are already being filed via this channel, which makes for easier analysis as well as saving DAPS time. Previously, DAPS did not have any figures for the industry for a given year until the following June, in a best-case scenario.
The new regulatory framework introduced by ACAPS is a real revolution for the insurance industry!
By adopting a participatory approach, the industry's supervisory authority has been able to take decisions by reaching a consensus with stakeholders, which have been keen to be involved in implementing the new regulatory regime through application tests, prior to the new insurance regulations being implemented in 2020 …
All in good time
Solvency II is not an international standard. It is a European directive that has been designed by Europe for Europeans on the basis of the risk-based solvency principle.
ACAPS would like to move towards applying this standard while taking into account the size of the market and its specific characteristics. The old adage ‘Think big, start small' applies in Morocco's case.
Bank Al-Maghrib has played a vital role in modernising the banking sector. The same must be done for insurance companies by giving them time to adapt to the new standards.
The ills affecting the industry
Generally speaking, the insurance market remains highly lucrative and profitable.
The industry generates annual profits of between MAD 3 billion and MAD 4 billion while return on equity ranges from 11% to 12% in the best-case scenario and 8% to 9% at worst, which is an acceptable level of profitability.
The main factor influencing insurance companies' earnings is the behaviour of financial markets, given that earnings depend on the performance of companies' technical reserves, which fall if the stock market underperforms.
And, despite auto insurance claims rising in 2018, this did not prevent the auto insurance segment from continuing to perform well. It has for a long time subsidised the two other structurally loss-making segments, health insurance and occupational accident insurance.
For Mr Boubrik, Chairman of the Insurance and Social Welfare Supervisory Authority (ACAPS), what is important is that each category within the insurance industry is profitable.
Understandably, there needs to be competition between insurance companies so that consumers can benefit from a fair price, but we cannot allow any one segment or category within the insurance industry to be structurally loss-making as is the case with the two segments mentioned above.
That is why, the FMSAR Steering Committee, at a recent meeting, agreed to introduce a premium provision. Given that the health, personal accident, occupational accident and auto insurance segments are structurally loss-making and that they account for a significant share of the overall insurance market in volume terms – the health insurance market is worth MAD 4.5 billion – by introducing a so-called premium provision, insurance companies will be able to cover their losses in respect of these products. This will certainly have a negative impact on their earnings, but companies will be able to gradually do away with it when they return to break-even.
This provides insurers with the motivation needed to tackle the situation surrounding loss-making market segments.
At a prudential level, we understand that, thanks to this provision, companies will be able to take the time needed to engineer a recovery.
And as far as the current situation surrounding the auto insurance segment is concerned, it is clear that it has suffered the consequences of companies introducing extended customer warranties for their customers.
These extended warranties cover fire, glass breakage, courtesy cars, third-party liability in the event of a collision, benefits and other types of cover that are not included under civil liability insurance, which, as everyone knows, is mandatory. It is abundantly clear, however, that premiums for these warranties have not been high enough.


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