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

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.