Can Language Prevent Flexible SCR Calculations? New Duties for Auditors in The Prudential Authority v Constantia Insurance Company Limited, Gauteng Local Division, Johannesburg, Case Number 2022-19765

Authors

  • Neels Kilian North-West University

DOI:

https://doi.org/10.17159/1727-3781/2023/v26i0a15074

Keywords:

Solvency capital requirement;, minimum capital requirement;, audit minimum capital requirement;, auditor duties in insurance law;, liquidation of an insurer;, just and equitable;, public purpose.

Abstract

This article analyses the importance of the solvency capital requirement (hereafter SCR) and the minimum capital requirement (hereafter MCR) formulae and why an insurer's external auditor should audit these and disclose its contents in the insurer's financial statements. When calculating the SCR, the reason for requiring such a disclosure is to allow the Prudential Authority an opportunity to understand whether the assumptions, parameters and techniques (also referred to as economic considerations) applied by actuaries comply with section 36 of the Insurance Act 18 of 2017. Administrative costs and written premiums are considered when calculating the MCR, although written premiums could be subjected to different interpretations, which might affect this formula. Accordingly, had Constantia Insurance Company Limited's auditor audited these formulae in 2018 and disclosed their contents in the financial statements, the Prudential Authority would have commenced liquidation procedures in 2019, not choosing instead to wait and monitor the company's solvency requirements on a weekly basis for four years. As a result, owing to the lack of transparency in the financial statements and non-compliance with the SCR and MCR, Constantia spent nearly R733 000 000 over the three-year period to fund its business activities.

Downloads

Download data is not yet available.

Author Biography

  • Neels Kilian, North-West University

    Associate Professor, Faculty of Law, North-West University, South Africa.

References

Bibliography

Literature

Chesterman MR "The Just and Equitable Winding-Up of Small Private Companies" 1973 MLR 129-152 DOI: https://doi.org/10.1111/j.1468-2230.1973.tb01359.x

Deonandan N Insurance Warranties in South Africa: Consideration of Reform of the Law on Insurance Warranties in South Africa and Why There is a Need for Such Reform (LLM-dissertation University of Cape Town 2019)

Doff R "A Critical Analysis of the Solvency II Proposals" 2008 GPRIIP 193-206 DOI: https://doi.org/10.1057/gpp.2008.2

Frostmoser P "The Duties and Liabilities of Auditors under Swiss Law" 1983 J Comp Bus & Cap Mkt L 305-316

Gaa J "Corporate Governance and the Responsibility of the Board of Directors for Strategic Financial Reporting" 2010 Journal of Business Ethics 179-197 DOI: https://doi.org/10.1007/s10551-010-0381-9

Godwin A and Schmulow A "The Financial Regulation Bill in South Africa, Second Draft: Lessons from Australia" 2015 SALJ 756-768 DOI: https://doi.org/10.2139/ssrn.2556544

Haight BS "Predated Automobile Insurance Issued in Absence of a Binder – An Insurance is Void" 1967 Dick L Rev 605-621

Hanion M "What can We Infer about a Firm's Taxable Income from its Financial Statements" 2003 Nat'l Tax J 831-863 DOI: https://doi.org/10.17310/ntj.2003.4.07

Hardy GF "Friendly Societies" 1888 JIA 245-288 DOI: https://doi.org/10.1017/S0020268100004170

Hock C and Chung T "Who Left the Gates Unlocked? Reconciling the Duties of Auditors and Company Directors" 2008 S Ac LJ 171-194

Huneberg S "Consumer Protection Measures in Non-Life Insurance Contracts: A South African and Australian Trend?" 2019 Obiter 170-190

Lee T, Ali A and Gloeck J "A Study of Auditor's Fraud Responsibility for Fraud Detection in Malaysia" 2008 Southern African Journal of Accountability and Auditing Research 27-34

Li Y "Research on Financial Statements System Based on Enterprise Resources" in 6th Asia-Pacific Conference on Social Sciences and Humanities (25-27 October 2019 Manila) 508-512

Maloka T and Muthugulu-Ugoda S "The Deadlock Principle as a Ground for the Just and Equitable Winding Up of a Solvent Company: Thunder Cats Investments 92 Pty (Ltd) v Nkonjane Economic Prospecting Investment Pty (Ltd) 2014 5 SA 1 (SCA)" 2016 PELJ 1-23 DOI: https://doi.org/10.17159/1727-3781/2016/v19i0a1153

Marlles JR "Public Purpose, Private Losses: Regulatory Expropriation and Environmental Regulation in International Investment Law" 2007 J Transnat'l L & Pol'y 275-336

Maroun W and Gowar C "South African Auditors Blowing the Whistle without Protection: A Challenge for Trust and Legitimacy" 2013 International Journal of Auditing 177-189 DOI: https://doi.org/10.1111/j.1099-1123.2012.00463.x

Nelson FGP "Some Statistics of the Affiliated Order of Friendly Societies (Odd Fellows and Foresters)" 1877 Journal of Statistical Society of London 42-89 DOI: https://doi.org/10.2307/2339215

Pellecchia M and Perciaccante G "The Calculation of Solvency Capital Requirement using Copulas" 2019 Munich Personal RePEc Archive 1-8 DOI: https://doi.org/10.2139/ssrn.3382556

Pfeifer D and Strassburger D "Solvency II: Stability Problems with SCR Aggregation Formula" 2008 Scandinavian Actuarial Journal 61-77 DOI: https://doi.org/10.1080/03461230701766825

Poufina T and Tsitsika P "An Assessment of the Market Risk Solvency Capital Requirement Simplifications for Insurance Undertakings" 2018 Theoretical Economics Journal 2362-2387 DOI: https://doi.org/10.4236/tel.2018.811153

Steffen T "Solvency II and the Work of CEIOPS" 2008 International Study on Insurance Economics 60-65 DOI: https://doi.org/10.1057/palgrave.gpp.2510162

Tarantino D "Understanding Financial Statements" 2001 The Physician Executive 72-76

Tarr J and Mack J "Auditor Obligations in an Evolving Legal Landscape" 2013 Accounting, Auditing and Accountability Journal 1009-1026 DOI: https://doi.org/10.1108/AAAJ-03-2013-1262

Xuba A The Role of the Prudential Authority in the South African Twin Peaks Model (LLM-thesis University of Pretoria 2019)

Case law

Anderson Insurance Underwriting Managers Pty (Ltd) v Constantia Insurance Company Limited [2017] ZAGPJHC 195 (30 June 2017)

Commissioner of Taxes v Booysens Estates Ltd 1918 AD 576

Ex parte the Prudential Authority (Gauteng Local Division, Johannesburg) (unreported) case number 717/2022 of 18 August 2022

KPMG Chartered Accountants v Securefin 2009 2 All SA 523 (SCA)

Paarwater v South Sahara Investments Pty (Ltd) 2005 4 All SA 185 (SCA)

The Commissioner of the South African Revenue Services v Zikhulise Cleaning Maintenance and Transport Services (High Court of South Africa, Gauteng Division, Pretoria) (unreported) case number 14886/16 of 14 October 2020

The Prudential Authority v Constantia Insurance Company Limited (Gauteng Local Division, Johannesburg) (unreported) case number 2022-19765 of 14 September 2022

Wynand Cornelius van Zyl v Boat Lodge Investments CC (High Court of Kwa-Zulu Natal) unreported case number 9417/2019P of 31 May 2021

Legislation

Companies Act 61 of 1973

Companies Act 71 of 2008

Conventional Penalties Act 15 of 1962

Financial Sector Regulation Act 9 of 2017

Insurance Act 18 of 2017

Government publications

GN R1493 in GG 19495 of 27 November 1998 as amended by GN R1076 in GG 34877 of 23 December 2011 (Regulations under the Short-Term Insurance Act, 1998)

International instruments

Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the Taking-up and Pursuit of the Business of Insurance and Reinsurance (Solvency II) [2009] OJ L 335, 1-155

Internet sources

Bechard M 2022 Health Squared Placed under Provisional Curatorship https://www.moonstone.co.za/health-squared-placed-under-provisional-curatorship accessed 12 September 2022

Deloitte date unknown International Accounting Standards Board (IASB) https://www.iasplus.com/en/resources/ifrsf/iasb-ifrs-ic/iasb accessed 1 September 2022

European Insurance and Occupational Pensions Authority 2021 Solvency II Single Rulebook: Calculation of the Basic Solvency Capital Requirement https://www.eiopa.europa.eu/rulebook/solvency-ii/article-6543_en accessed 19 September 2023

Financial Services Board 2015 Solvency Assessment and Management: Steering Committee Position Paper 68 (v4). SCR – Simplifications for First Party Insurance Structurers https://www.fsca.co.za/Regulated%20Entities/ SAM%20DOCUMENTS/Position%20Paper%2068%20(v%204)%20FINAL.pdf accessed 17 October 2022

Financial Services Board 2016 Solvency Assessment and Management: Steering Committee Errata (v 4) to Final Position Paper 741 (v 4). Minimum Capital Requirement (MCR) https://www.fsca.co.za/Regulated%20Entities/ SAM%20DOCUMENTS/Errata%20(v%204)%20to%20Position%20Paper%2074%20(v%204)%20FINAL.pdf accessed 30 October 2022

Hollander H and Van Lill D 2019 A Review of the South African Reserve Bank's Financial Stability Policies. Stellenbosch Economic Working Papers: WP11/2019 https://www.ekon.sun.ac.za/wpapers/2019/wp112019 accessed 19 September 2023

International Financial Reporting Standards Foundation date unknown Home https://www.ifrs.org accessed 12 October 2022

Kruger P 2016 Liquidation of SaXum Insurance https//www.moonstone.co.za/ liquidation-of-saxum-insurance accessed 17 October 2022

Norton Rose Fullbright date unknown Solvency II: Ten Things to Know https://www.bila.org.uk/wp-content/uploads/old/509ce6da277006.77306714.pdf accessed 17 October 2022

Norton Rose Fulbright 2015 Ten Things You Need to Know about Solvency II https://www.nortonrosefullbright.com/en/knowledge/publications/f12a4a4a/ten-things-you-need-to-know-about-insolvency-ii accessed 4 October 2022

Penman SH 2016 The Design of Financial Statements https://academiccommons.columbia.edu/doi/10.7916/D82N5DNK accessed 19 September 2023

SaXum Insurance (In Liquidation) date unknown Main http://saxuminsurance.com accessed 5 September 2022

South African Reserve Bank 2023 Order Granted for the Final Winding Up (Liquidation) of Constantia Insurance Company Limited https://www.resbank.co.za/en/home/publications/publication-detail-pages/media-releases/2022/Order-granted-for-the-liquidation-of-Constantia-Insurance-Company-Limited accessed 24 September 2023

Todd P 2022 Constantia Insurance's Remarkable Turnaround https://m.youtube.com/watch?v=wUuFgSFkAjk accessed 17 October 202

Published

29-02-2024

Issue

Section

Special Edition: Language and Law

How to Cite

Kilian, N. (2024). Can Language Prevent Flexible SCR Calculations? New Duties for Auditors in The Prudential Authority v Constantia Insurance Company Limited, Gauteng Local Division, Johannesburg, Case Number 2022-19765. Potchefstroom Electronic Law Journal, 27, (Published on 29 February 2024) pp 1-28. https://doi.org/10.17159/1727-3781/2023/v26i0a15074

Similar Articles

1-10 of 1179

You may also start an advanced similarity search for this article.