case study millennium underwriting

8/2/2019 Case Study Millennium Underwriting

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CASE STUDY - APPLICATION FOR LICENSING OF AN INSURANCECOMPANY

(This Case Study is based on an actual application)

An application for a license to conduct short-term (non-life) insurance business was receivedfrom Millennium Underwriting Managers (Pty) Limited ("Millennium").

Background

Millennium was launched five years ago to administer, on behalf of alicensed insurer, a book of business. An agreement was entered into betweenMillennium and the licensed insurer whereby Millennium may receive

premiums and settle claims on behalf of the insurer. The agreement was onlyfor heavy commercial vehicles business including fire, cargo and goods intransit. Millennium has a network of 989 brokers and has 25 000 insuredvehicles on their books which generates a premium income of 136 million of the national currency per annum. Millennium is owned by MillenniumHolding Company Limited ("the Holding Company").

Application

Millennium now wishes to acquire an insurance licence to underwrite theabove-mentioned business.

Shareholding and Shareholding Structure

The proposed insurer, Millennium Insurance Company Limited, will be a100 % subsidiary of Millennium Holding Company Limited.

The Shareholding in the Millennium Holding Company Limited will be asfollows:

CT Trust 32 % ACE Brothers 9 % ABC Insurance Company 4 % R Transport (Pty) Limited 35 % Executive Directors/Staff 20 %4


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One of the beneficiaries of CT Trust - Mr Jones was the Managing Director of an insurance company that was placed in liquidation some seven yearsago. Assets of the CT Trust consist of-- Listed equity - 3 million of national currency;- Property equity - 1,7 million of national currency.

The latest financial statements of C T Trust demonstrates that it does nothave sufficient liquid assets.

ACE Brothers (Pty) Limited is a chain store trading in furniture. ABCInsurance Company is a licenced insurance company. R Transport Limitedsshares are listed on a stock exchange and its main business is that of transportation of goods. The net asset value of R Transport is 55 million of national currency. The assets of the company consist only out of property;

trucks; and debtors. See shareholding structure attached hereto (Annex).

Directors and Management

Millennium Insurance Company Limited will have a board of directors to becalled the "Management Board" and the Holding Company will have a boardof directors to be called the "Main Board" (see Annex ).

The board of directors of Millennium Insurance Company Limited willconsist of the following

persons:

Name Qualification CurrentPosition

Position innew Insurer

InsuranceExperience

M June 51 Attorney Senior partner Chairman in non-executive

none.

P Nel45

Matric1 Claimsdirector

at Millennium

Claims director Executivedirector

18 yearswork

experience atvariousinsurancecompanies

P Lam36

B Commdegree(3 years post

Financedirector in

Financedirector Executive

11 yearswork experience in


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matricfinancialqualification)

Millennium director insurance.

D Smith Std 9

Management programat University

Managing

director at Millennium

Managing

director

29 years

work experience atvariousinsurers.

MatricAdmindirector

at Millennium Admindirector

Executive director

E Shaw FCII (3 year insuranceQualification)

Underwritingdirector at Millennium

Underwritingdirector Executivedirector

20 yearsexperience atinsurancecompanies.

The board of directors of Millennium Insurance Company Limited willreport to Millennium Holding Company Limited. The holding company willappoint the directors of Millennium Insurance Company Limited. Mr Smiththe Managing Director and Mr Lam the financial director will also bedirectors of the holding company (the main board). All the above-mentioneddirectors of the management board are fit and proper persons.

The directors of the holding company are as follows:

Mr Jones (Chairman)

He has more than 30 years working experience in an insurance environment.He was managing director of an insurance company that was placed under liquidation seven years ago. He is also the beneficiary of CT Trust that willhold 32 % of the shares in the holding company.

Mr Jones as director of an insurance company acted as investmentmanager/portfolio manager for a pension fund (G A Retirement Plan). Mr Jones used the money of the pension fund to invest in companies in whichMr Jones had an interest.

Mr Smith


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See table above.

Mr LamSee table above.

Ms Roos

Matric with practical experience in insurance.

Mr Steyn

No insurance experience. He is a director at the transportation company.

One of the ACE brothers

No insurance experience. Experience mainly relates to furniture trading.

Manner in which insurance risk will be selected

Millennium will acquire business from existing brokers as it presently doesand will also deal directly with clients. Business presently underwritten on

behalf of the licensed insurer is profitable and the manner of underwritingwill be maintained.

Proposed reinsurance arrangements

Quota share reinsurance arrangements will be in place with net retention inthe first year of 10% to increase to 30 % in year 5. Millennium will alsoarrange catastrophe excess of loss reinsurance.

Share Capital

Issued- ordinary shares plus share premium 10 000 000-00 of nationalcurrency- preference shares 10 000 000-00 of national currency


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- debentures1 5 000 000-00 of national currency(Capital required in terms of business plan is 18 million of nationalcurrency)

Administration cost and commission

Millennium anticipates that it will maintain a 10,5 % of GPI (GrossPremium Income (before commission and reinsurance)) as administrationcost due to existing systems that are already in place.

Basis of premium rates

The basis of premium rates follows generally accepted but competitivemarket rates.

Auditors

Millennium have appointed a well established auditing firm withinternational backing.

A form of loan capital. Long-term instruments with a fixed interest payment

LEGAL CONSTRAINTS AND REGULATIONS APPLYING TO THELICENSING OF AN INSURANCE COMPANY

(a) A company who wishes to carry on non-life insurance business mustapply to the supervisory authority for registration as a non-life insurer.

(b) The supervisory authority must be satisfied of the followingrequirements before approval will be granted:

the applicant must have the financial, organisation and management

resources that are necessary and adequate for the carrying on of the businessconcerned; any person who wishes to carry on non-life insurance business shall applyto the supervisory authority for registration as a non-life insurer. Thesupervisory authority must be satisfied of the following requirements beforeapproval will be granted:


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- any person who is, or will, from the date of the proposed registration, be adirector or managing executive of the applicant must be fit and proper tohold the office concerned;- the direct or indirect control of the applicant by another person, whether byvirtue of shareholder, voting power, the power to appoint directors, or in anyother manner, may not be contrary to the interest of policyholders;- the applicant is, or will be, able to comply with the legislation;- the proposed registration must not be contrary to the public interest.

(c) An applicant for registration must be:

a public company; or

incorporated without a share capital under a law providing specifically for

the consultation of a person to carry on non-life business as its mainobjection.

(d) The following requirements for Public Officer, Directors and ExecutiveManagement.

Public Officer (Compliance Officer)

A non-life insurer must appoint a natural person who is permanently residentin the country as its Public Officer.

The Public Officer shall be the compliance officer of the non-life insurer andit is expected of such person to be knowledgeable about the provisions of thelegislation.

The Public Officer must be fit and proper to hold office and the supervisoryauthority may terminate the appointment of the Public Officer. It is requiredof the Public Officer to complete the Personal Questionnaire Form.

All correspondence from the supervisory authoritys office will be addressedto the Public Officer.The Public Officer should preferably be one of the executive management of the company.


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Directors and Managing Executive

The composition of the board of directors of a company must comply withthe following guidelines as set for non-life insurance companies:- minimum of 4 directors;- executive directors must be resident in the country;- non-executive directors must be independent and should constitute at least50 % of the board;- at least two executive directors or senior members of management shouldattend board meetings with a duty to inform members on issues for whichalignments is sought;- the chairman should preferably be non-executive and need not be residentin the country.

There must be sufficient insurance, legal and accounting experience andexpertise amongst the board of directors and executive management. Alldirectors and managing executive must be fit and proper people and will berequested to complete the Personal Questionnaire Form to be accompanied

by a full curriculum vitae. The supervisory authority must be informed of any changes in directors and executive management within 30 days of suchchange and must also be furnished with the reasons for the change. Thesupervisory authority may remove the directors or a member of themanaging executive who is not fit and proper to hold the office concerned.

A minimum paid-up capital requirement for registration is currently set at 5million of the national currency for one or more kinds of non-life insurance

policies. Capital must be of a permanent nature and may only consist of ordinary shares. Secondary capital i.e. debentures, loans and preferenceshares may only be issued with the approval of the supervisory authority andonly as a temporary measure.

A five year business plan must be submitted with the application containingthe following:

- an underwriting revenue account;- a profit and loss account;- a balance sheet;- a statement of insurance assets;- a statement of insurance liabilities; and- an asset cover statement including solvency margin.


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QUESTIONS TO THE READER

Kindly give your comments on:1. Suitability of directors and management.2. Suitability of shareholders/owners.3. Capital adequacy.4. Whether you will grant the license or not - give reasons?

case study millennium underwriting

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