Internal models versus standard formula: South Africa's experience

Thanks to onerous costs and Solvency II’s tight deadline, many insurers are pulling out of the internal model approval process and opting instead for the standard formula. Clive Davidson draws a parallel with similar events in South Africa and asks whether there could be negative implications for smaller firms

A central tenet of Europe’s Solvency II and similar regimes, such as South Africa’s Solvency Assessment and Management (Sam), is that insurers can opt to use an approved internal model to calculate regulatory capital rather than the regulator’s standard formula. It is something many companies argued for in the reforms and, following a great deal of time and energy expended on establishing the rules under which such models would be acceptable, it was assumed that the majority of more