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Resolution Life has been placed under provisional curatorship following an urgent application by the Financial Services Board (FSB) outlining the life assurance company’s dire financial situation, as well as allegations of corporate governance failures and possible reckless trading.
Resolution Life was registered as an assurer in August 2008 and has about 11 700 policyholders, most of whom have individual life and disability cover.
Jonathan Dixon, deputy executive officer of the FSB and deputy registrar of long-term insurance, says the FSB does not have details of Resolution Life’s target market, but policyholders pay an average monthly premium of R170, indicating that they are mostly in the lower- and middle-income groups.
The life company has gross written premiums of just over R2 million a month.
Following concerns about the company’s finances, the FSB put a stop to the assurer writing new business from August 30.
The application for curatorship outlines a series of problems the company had in meeting its capital adequacy requirements (CAR) or solvency requirements right from its launch in 2008, monthly returns that showed a negative asset position and a series of cash injections Resolution Life claims it obtained to improve its position.
The CAR are the reserves that life assurance companies are required by law to hold so that they can meet their liability to you, their policyholders.
In its engagements with the FSB, Resolution Life has admitted that “management failure” has contributed to its not being able to meet its CAR.
In a revised business plan submitted to the FSB in June this year, Resolution Life provided the following reasons for its failure to meet its CAR: management failure; high cost structure; commission model; and strategy.
The company had previously claimed it could not meet its CAR because of its inability to write sufficient business to cover the company’s running expenses.
In 2010, Resolution Life submitted to the regulator an annual statutory return that revealed that its management fees were far in excess of its premium income, resulting in an expense ratio of 177 percent. This means management expenditure was 1.77 times higher than premium income.
According to a June 2012 report by Resolution Life’s auditors, PricewaterhouseCoopers (PWC), the insurer owes R14.5 million to Munich Reinsurance Company (Munich Re), the company’s insurer.
Furthermore, R6.2 million, which represents almost 40 percent of Resolution Life’s total assets, is invested with Resolution Asset Management, an affiliate of the life assurer. The PWC report indicates that the auditors could not obtain confirmation that these assets are indeed held in the name of Resolution Life, which creates uncertainty as to whether the assurer has legal title to them.
The registrar has other concerns about the manner in which Resolution Life is conducting business. These are based on an affidavit by Garth Ibbetson, former director of Resolution Life, in which it was alleged – among other things – that:
* Resolution Life misrepresented its financial position when applying for an insurance licence, indicating that R10 million was available for capital adequacy purposes, whereas it was not.
* This R10 million was in fact a bridging facility from Munich Re.
* The bridging facility of R10 million was structured as a loan at an interest rate of prime plus two percent, and was not reported to the registrar.
* The shareholding in Resolution Life was encumbered by the repayment obligations owed by the shareholders to Munich Re. This was not reported to the registrar.
* Resolution Life was trading recklessly.
* Some of Resolution Life’s directors were not fit and proper.
The registrar says that if these allegations turn out to be correct, Resolution Life’s financial position may be even worse than was indicated in the returns, because some liabilities may not be reported due to their being kept off the balance sheet. “This will result in significant risks to current and potential policyholders.”
Dixon says if Resolution Life never had the required R10 million to start with, it shouldn’t have been approved as a registered insurer.
The registrar says he has considered alternatives to curatorship, such as liquidation.
However, the registrar prefers to endeavour to keep an insurer alive even if it means that the business is transferred to another insurer. A curatorship, unlike liquidation, affords this opportunity.
Ashlene van der Colff and Gerdus Dixon have been appointed as the provisional curators.
The return date for the provisional order is October 16, when interested parties may be heard and a report by the provisional curators will be filed and considered by the court.
Policyholders have been asked not to address inquiries to the curators at this stage.