Short-term insurance

The Group's short-term insurance operations include Santam and MiWay, the direct financial services company launched during 2008.
Risk management framework
Santam has an established enterprise risk management framework that is designed to identify, assess, measure and manage exposure to risk. Its primary objective is to protect the Group from events that hinder the sustainable achievement of the Group's performance objectives, including failing to exploit opportunities.
Regulatory impact on risk and risk assessments
Santam's short-term insurance operations are subject to regulatory requirements that prescribe the type, quality and concentrations of investments, and the level of assets to be maintained in local currency to meet insurance liabilities. These requirements help to maintain market risk at an acceptable level.

Santam monitors specific risks on a regular basis through its risk monitoring framework. Business units are required to disclose to the Group risk function all material risks, along with information on likelihood and severity of risks, and the mitigating actions taken or planned. This enables Santam to assess its overall risk exposure and to develop a Group-wide risk map, identifying any concentration of risk that may exist, and to define which risks and what level of risk Santam is prepared to accept. The risk map is refreshed quarterly, and business units are required to escalate material changes intra-quarter. 
Market risk
Market risk arises in business units due to fluctuations in both the value of liabilities and the value of investments held. At a Santam Group level, it also arises in relation to the value of investment assets owned directly by the shareholders' fund.

Santam has established a policy on market risk which sets out the principles that businesses are expected to adopt in respect of management of the key market risks to which Santam is exposed. Santam monitors adherence to this market risk policy and regularly reviews how business units are managing these risks through the Santam Investment committee. For each of the major components of market risk, described in more detail below, Santam has put in place additional policies and procedures to set out how each risk should be managed and monitored, and the approach to setting an appropriate risk appetite. 
Price risk
Santam is subject to price risk due to daily changes in the market values of its equity and debt securities portfolios. Santam is not exposed to commodity price risk.

The objective is to earn competitive relative returns by investing in a diverse portfolio of high-quality, liquid securities. Portfolio characteristics are analysed regularly and equity price risk is actively managed through a variety of modelling methods. Holdings are diversified across industries, and concentrations in any one company or industry are limited by parameters established by management and statutory requirements. Short-term insurance liabilities are not directly sensitive to equity price risk. Long-term investment contract liabilities are sensitive to price risk of linked assets.

The Santam Board actively monitors equity assets owned directly by Santam, which include some material shareholdings in the strategic business partners. Concentrations of specific equity holdings, e.g. strategic holdings, are also monitored. 
Interest rate risk
Interest rate risk arises primarily from investments in long-term debt and fixed income securities, which are exposed to fluctuations in interest rates. Exposure to interest rate risk is monitored through several measures that include scenario testing and stress testing using measures such as duration.

Interest rate risk is also managed using derivative instruments, including futures, options and swaps, to provide a degree of hedging against unfavourable market movements in interest rates inherent in the assets backing technical liabilities. At 31 December 2010, Santam had an interest rate swap agreement to partially mitigate the effects of potential adverse interest rate movements on financial assets underlying the unsecured subordinated callable notes.

Short-term insurance liabilities are not directly sensitive to the level of market interest rates, as they are undiscounted and contractually non-interest-bearing. 
Foreign currency risk
Santam's exposure to currency risk is mainly in respect of foreign investments made in line with the long-term strategy approved by the Board for seeking desirable international diversification of investments to expand its income stream. The company has investments in foreign subsidiaries whose net assets are exposed to currency translation risk, primarily to the British pound. In addition, the southern African operations have foreign exchange exposure in respect of net monetary assets denominated in foreign currency, predominantly US dollar and the British pound.

Santam does not take cover on foreign currency balances, but evaluates the need for cover on transactions on a case-by-case basis.

The following assets and liabilities denominated in foreign currencies are included in the Statement of financial position (including non-current assets classified as held for sale in 2009): 
R million
United States
31 December 2010
Equities and similar securities
Debentures, insurance policies, public sector stocks and other loans
Cash, deposits and similar securities
Net other liabilities
Net working capital
Foreign currency exposure
31 December 2009
Equities and similar securities
Debentures, insurance policies, public sector stocks and other loans
Cash, deposits and similar securities 1 347 77 425
Net other liabilities (7) (48) (55)
Net working capital 66 (149) (83)
Foreign currency exposure (6) 365 (72) 287
Derivatives risk
Derivatives are primarily used for efficient investment management, risk hedging purposes or to structure specific products. Santam does not use derivative financial instruments for speculative purposes, but instead to manage financial risks and to preserve its capital base. Predetermined mandates control the use of derivative financial instruments.

Over-the-counter derivative contracts are entered into only with approved counterparties, in accordance with Santam policies, effectively reducing the risk of credit loss. Santam applies strict requirements to the administration and valuation process it uses, and has a control framework that is consistent with market and industry practice for the activity that it has undertaken. 
Credit risk
Key areas where the Group is exposed to credit risk are:
> Financial assets and cash and cash equivalents;
> Amounts due from insurance policyholders;
> Amounts due from insurance contract intermediaries; and
> Reinsurers' share of insurance liabilities.
Santam determines counterparty credit quality by reference to ratings from independent ratings agencies such as Standard and Poor's or, where such ratings are not available, by internal analysis. Santam seeks to avoid concentration of credit risk to groups of counterparties, to business sectors, product types and geographical segments.

The following table provides information regarding the aggregated credit risk exposure for financial assets with external credit ratings: 
Credit rating
Carrying value in Statement of financial position
R million
31 December 2010
Debt securities – quoted
1 372
3 388
Debt securities – unquoted
Receivables due from contract holders/ intermediaries
1 025
Reinsurance receivables
Other loans and receivables
Cash and other short-term interest-bearing instruments
1 682
1 263
4 828
  Credit rating Carrying value
in Statement
of financial
R million AAA AA+ AA AA- A+ A A- BBB Not
31 December 2009
Debt securities – quoted 933 29 448 359 215 372 25 15 2 396
Debt securities – unquoted 587 78 86 751
Receivables due from contract holders/ intermediaries 12 24 14 9 1 326 1 385
Reinsurance receivables 7 63 1 28 24 11 33 116 163 446
Other loans and receivables 23 17 16 7 5 16 347 431
Cash and other short-term interest-bearing instruments 2 351 91 1 877 1 170 306 38 14 86 5 933
The carrying amount of assets included in the statement of financial position represents the maximum credit exposure.

Unrated receivables that are due from contract holders and intermediaries emanating from the southern African business amounted to R970 million (2009: R1,3 billion). Santam is protected by guarantees provided by the Intermediary Guarantee Facility for the non-payment of premiums collected by intermediaries to the value of R571 million (2009: R737 million).

The financial instruments, except amounts owed by reinsurers, do not represent a concentration of credit risk, as Santam deals with a variety of major banks and its accounts receivable are spread among a number of major companies, intermediary parties, clients and geographic areas. 
Reinsurance credit exposures
Reinsurance is used to manage insurance risk. However, this does not discharge Santam's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, Santam remains liable for the payment to the policyholder. Santam has some exposure to concentration risk with individual reinsurers due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The creditworthiness of reinsurers is considered annually by reviewing their financial strength prior to finalisation of any contract. Santam's largest reinsurance counterparty is Lloyds. This exposure is monitored on a regular basis with the forecast to completion monitored for any shortfall in the claims history to verify that the contract is progressing as expected and that no further exposure for Santam will arise. BBB-rated reinsurance receivables of R97 million (2009: R93 million) relate to reinsurance brokers for the Group. The reinsurance receivable balances, disclosed as not-rated on a Group level, relate to cell owners and reinsurance brokers.

There were no material financial assets that would have been past due or impaired had the terms not been renegotiated.

There is no concentration of credit risk with respect to loans and receivables, other than reinsurance debtors, as Santam has a large number of dispersed debtors. 
Insurance risk
Santam issues contracts that transfer insurance risk or financial risk or both. This section summarises these risks and the way Santam manages them. 

Terms and conditions of insurance contracts

Engineering – Provides cover for risks relating to
> The possession, use or ownership of machinery or equipment, other than a motor vehicle, in the carrying on of a business; 
> The erection of buildings or other structures or the undertaking of other works; and
> The installation of machinery or equipment.
Guarantee - A contract whereby the insurer assumes an obligation to discharge the debts or other obligations of another person in the event of the failure of that person to do so.

Liability - Provides cover for risks relating to the incurring of a liability other than relating to a risk covered more specifically under another insurance contract.

Motor - Covers risks relating to the possession, use or ownership of a motor vehicle. This cover can include risks relating to vehicle accident, theft or damage to third-party property or legal liability arising from the possession, use or ownership of the insured vehicle.

Accident and health - Provides cover for death, disability and certain health events. This excludes the benefits to the provider of health services, and is linked directly to the expenditure in respect of health services.

Property - Covers risks relating to the use, ownership, loss of or damage to movable or immovable property other than a risk covered more specifically under another insurance contract.

Transportation - Covers risks relating to the possession, use or ownership of a vessel, aircraft or other craft or for the conveyance of persons or goods by air, space, land or water. It also covers risks relating to the storage, treatment or handling of goods that are conveyed.

Crop - Provides indemnity for crops while still on the field against hail, drought and excessive rainfall. Cover ceases as soon as harvesting has taken place.

Alternative risk transfer (ART) - The use of techniques, other than traditional insurance, that include at least an element of insurance risk, to provide entities with risk coverage or protection.

Insurance risk in Santam arises from: 
> Fluctuations in the timing, frequency and severity of claims and claim settlements relative to expectations;
> Unexpected claims arising from a single source;
> Inaccurate pricing of risks when underwritten;
> Inadequate reinsurance protection or other risk transfer techniques; and
> Inadequate reserving.
The risks under any one insurance contract are the frequency with which the insured event occurs and the uncertainty of the amount of the resulting claims. For a portfolio of insurance contracts where the theory of probability is applied to pricing and reserving, the principal risks Santam face are that the actual claims and benefit payments exceed the premiums charged for the risks assumed and that the reserves set aside for policyholders' liabilities, whether they are known or still to be reported, prove to be insufficient.

By the very nature of an insurance contract, this risk is random and therefore unpredictable. Changing risk parameters and unforeseen factors, such as patterns of crime, economic and geographical circumstances, may result in unexpectedly large claims. Insurance events are random and the actual number of claims and benefits will vary from year to year from the estimate established using statistical techniques. 
Santam bases its pricing policy on the theory of probability. Underwriting limits are set for underwriting managers and brokers to ensure that this policy is consistently applied. Santam also has the right to re-price and change the conditions for accepting risks on renewal. It also has the ability to impose deductibles and reject fraudulent claims.

Through the use of extensive expertise, well-maintained data resources, selective underwriting practices and pricing techniques it is able to produce appropriate and competitive premium rates.

The net claims ratio for Santam (continuing activities only), which is important in monitoring insurance risk, has developed as follows over the past seven years: 
Loss history
2009 2008 2007 2006 2005 2004 2003
Claims paid and provided %*
70,6 68,4 68,2 68,6 65,3 57,0 64,8
*Expressed as a percentage of net earned premiums.
Factors that aggravate insurance risk include a lack of risk diversification in terms of type and amount of risk, geographical location and the industries covered. Experience shows that the larger the portfolio of similar insurance contracts, the smaller the relative variability about the expected outcome will be. Therefore a diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio.

Santam has developed its insurance underwriting strategy to diversify the type of insurance risks accepted, to achieve, within each of these categories, a sufficiently large population of risks to reduce the variability of the expected outcome. A specialised catastrophe reinsurance programme mitigates the risk arising from this. 
Claims development tables
The presentation of the claims development tables for Santam is based on the actual date of the event that caused the claim (accident year basis). The claims development tables, represent the development of actual claims paid. 
Payment development
Conventional short-term insurance claims – gross
Claims paid in respect of
Reporting year
R million
2009 2008 2007 2006 2005 2004 and
Actual claims costs:                
– 2010 9 999
7 144
2 236 411 116 41 23 28
– 2009 10 016
7 702 1 959 197 92 28 38
– 2008 8 996
7 181 1 547 156 47 65
– 2007 7 971
6 219 1 385 132 235
– 2006 6 988
5 521 1 062 405
– 2005 5 955
4 711 1 244
– 2004 4 797
4 797
– 2003 5 076
5 076
– 2002 4 832
4 832
Cumulative payments to date 64 630
7 144
9 938 9 551 8 079 7 195 6 003 16 720
Conventional short-term insurance claims – net
Claims paid in respect of
Reporting year
R million
2009 2008 2007 2006 2005 2004 and
Actual claims costs:                
– 2010 8 710
6 401
1 816 323 103 35 17 15
– 2009 8 805
6 928 1 651 131 41 19 35
– 2008 7 727
6 172 1 381 93 31 50
– 2007 6 672
5 292 1 197 99 84
– 2006 6 020
4 924 909 187
– 2005 5 185
4 223 962
– 2004 4 064
4 064
– 2003 4 194
4 194
– 2002 3 754
3 754
Cumulative payments to date 55 131
6 401
8 744 8 146 6 907 6 290 5 298 13 345
Reporting development
Short-term insurance claims provision – gross
Financial year during which claim occurred
Reporting year
R million
2009 2008 2007 2006 2005 2004 and
Provision raised:                
– 2010 3 809
2 357
556 312 171 146 137 130
– 2009 4 288
2 617 712 401 281 174 103
– 2008 4 075
2 579 630 356 260 250
– 2007 3 774
2 804 405 202 363
– 2006 3 922
2 929 375 618
– 2005 3 187
  2 340 847
– 2004 2 436
2 436
– 2003 2 303
2 303
– 2002 1 747
1 747
Cumulative provisions to date 29 541
2 357
3 173 3 603 4 006 4 117 3 488 8 797
Short-term insurance claims provision – net
Financial year during which claim occurred
Reporting year
R million
2009 2008 2007 2006 2005 2004 and
Provision raised:                
– 2010 2 896
1 814
402 228 132 117 105 98
– 2009 2 952
1 861 435 280 200 103 73
– 2008 2 699
1 805 403 195 145 151
– 2007 2 444
1 807 268 134 235
– 2006 2 484
1 916 214 354
– 2005 1 909
1 453 456
– 2004 1 056
1 056
– 2003 1 104
1 104
– 2002 768
Cumulative provisions to date 18 312
1 814
2 263 2 468 2 622 2 696 2 154 4 295
The above tables exclude IBNR.
Claims are analysed separately for long-tail and short-tail claims. Short-tail claims can be estimated with greater reliability, and the Santam estimation processes reflect all the factors that influence the amount and timing of cash flows from these contracts. The shorter settlement period for these claims allow Santam to achieve a higher degree of certainty about the estimated cost of claims, and relatively lower levels of IBNR are held at year-end.

The longer time needed to assess the emergence of a long-tail claim makes the estimation process more uncertain for such claims. The uncertain nature of the costs of this type of claim causes greater uncertainty in the estimates, hence the higher level of IBNR. Where possible, Santam adopts multiple techniques to estimate the required level of reserving. This provides a greater understanding of the trends inherent in the experience being projected. The projections given by the various methodologies also assist in estimating the range of possible outcomes. The most appropriate estimation technique is selected taking into account the characteristics of the business class and the extent of the development of each accident year. At year-end, Santam believes that its liabilities for long-tail and short-tail claims are adequate.

In calculating the estimated cost of unpaid claims, Santam's estimation methodology is based on standard statistical techniques. For claims that have been reported to Santam by the valuation date, expert assessors estimate the expected cost of final settlement. In addition to this, testing of the entire portfolio is done to determine whether or not these estimates are likely to be sufficient in aggregate or if an additional reserve amount is required. For claims that have not been reported to Santam by the valuation date, the chain-ladder methodology is used to determine the expected cost of these unreported claims.

A stochastic reserving process is performed and Santam holds its reserves for unpaid claims at at least the 75th percentile level of sufficiency.

Claim provisions for all classes of business are regularly reviewed and audited internally to make sure they are sufficient. These analyses draw on the expertise and experience of a wide range of specialists, such as actuaries, underwriting and accounting experts. 
Accumulation risk
Santam is exposed to accumulation risk in the form of geographical (large metropolitan) areas as well as class of business concentrations of risk. The risk appetite policy dictates how much capital the company is willing to put at risk in the pursuit of value. It is within this risk appetite framework that the reinsurance programme has been selected to mitigate accumulation risk within its portfolio.
Santam obtains third-party reinsurance cover to reduce risks from single events or accumulations of risk that could have a significant impact on the current year's earnings or capital.

This cover is placed on the local and international reinsurance market. Santam uses a number of modelling tools to monitor aggregation and to simulate catastrophe losses to measure the effectiveness of the reinsurance programme and the net exposure of Santam. The core components of the reinsurance programme comprise: 
> Individual excess-of-loss cover for property, liability and engineering risks, which provides protection to limit losses to R50 million per event, excluding reinstatement premiums due as a result of the claim against the cover; and 
> Catastrophe cover to the extent of 1,6% (2009: 1,6%) of the total exposure of the significant geographical areas, amounting to protection of up to R6,5 billion per event. 
The Santam Board approves the reinsurance renewal process on an annual basis. The major portion of the reinsurance programme is placed with external reinsurers that have an international credit rating of no less than A- from Standard and Poor's or AM Best. 
Liquidity risk
Liquidity risk is the risk that the business will encounter difficulty in raising funds to meet commitments associated with financial instruments. Liquidity risk arises when there is mismatching between the maturities of liabilities and assets.

Santam is exposed to daily calls on its available cash resources from claims. Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Santam Board sets limits on the minimum proportion of maturing funds available to meet such calls.

Santam actively manages its cash resources, split between short-term and long-term to ensure sufficient cash is at hand to settle insurance liabilities, based on monthly float projections. Santam has sufficient cash resources to cover its obligations. Altogether R6,4 billion (2009: R6,5 billion) of insurance liabilities are payable within one year, with the remaining balance predominantly payable within two to five years. Cell owners' interest liabilities are predominantly payable within two to five years.

Refer to the analysis of exposure to market risk as measured by GEV