EXPERTS last week issued another warning that more stringent regulation of the insurance sector could cause weaker companies to succumb.

In separate comments, experts warned that reforms, similar to those that would impose higher capital and liquidity ratios on global banks, could prove too onerous for some insurers, forcing them to seek shelter in mergers and acquisitions.

Insurers are expected to comply with the Solvency and Assessment Management (SAM) regime, expected to be implemented from January 2015.

However, interim measures are expected to be phased in by the end of this year to help insurers understand governance and risk management practices under the regime.

The project director for financial services at the South African Institute of Chartered Accountants, Yusuf Dukander, said last week that the implementation of the regime was a requirement insurers could not avoid.

The cost of SAM - its European equivalent is called Solvency 2 - could prove too steep for smaller and weaker insurers in SA, Caroline da Silva, executive for sales at short-term insurer Mutual & Federal, said last week. Just the sheer size of the project of using actuarial models to determine compliance would be costly for some companies, she said, predicting this could result in consolidation in the sector.

Deloitte's insurance industry country leader, Yuresh Maharaj, also said the change could result in smaller companies unable to comply seeking alliances or being acquired.

The big nonlife and life insurers in SA are at various stages of implementation of the regulations, with companies such as Old Mutual ahead of many rivals.

Mr Dukander said the proposed regime would require an overhaul of systems and processes. He said that, as with Basel 3, it would be a comprehensive set of reforms devised to strengthen the regulation, supervision and risk management of the sector.

" Its requirements thus far are being embraced by SA's insurance industry as the Financial Services Board's approach to implementation of the SAM framework has ensured an inclusive consultative process," he said.

"More specifically, SAM will increase the quality of insurers' capital as a result of the design of the new framework, which encompasses more appropriate capital requirements and a reduction in systemic risk."

Questions have been raised about the extent to which the implementation of SAM will spark consolidation, with some experts saying competition authorities will not favour further dominance by the larger firms.

Santam, the largest short-term insurer, has ruled out major acquisitions in SA because it would face regulatory hurdles, CEO Ian Kirk said in a recent interview.

Old Mutual is focusing on consolidating its market share, particularly in the mass market, and so is rival Liberty, whose CEO, Bruce Hemphill, said recently he saw growth opportunities in the emerging black middle class.

However, industry experts say mid-tier insurers could pick up assets as smaller rivals struggle to survive tight competition, tougher regulations and rising costs, in addition to loss of skills.

kamhungas@bdfm.co.za