Full annual report - African Bank - Investoreports

Notes to the group annual financial statements continued
46. Financial risk continued
46.6 Capital adequacy risk (banking)
Capital adequacy risk is the risk that the Bank will not have sufficient capital reserves to meet materially adverse
market conditions beyond that which has already been factored into the business model.
Capital adequacy is measured by expressing capital as a percentage of risk weighted assets. The Banks Act specifies
the minimum capital required to be held in relation to risk weighted assets.
The Bank’s capital adequacy ratio at 30 September 2012 was 27,3% (2011: 28,6%) which is above the minimum
regulatory requirement. The group’s capital adequacy policy is explained in detail in the capital and funding
management section within the risk management review section of the annual report.
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46.7 Life assurance risk
Insurance risk
Insurance risk is the risk assumed under any one insurance contract that the insured event occurs. By the very nature
of an insurance contract, this risk is random and unpredictable. The majority of insurance claims are paid to the
group’s operating companies (as a cessionary) in respect of credit life.
Capital adequacy risk (insurance)
Capital adequacy risk is the risk that there are insufficient reserves to provide for materially adverse variations in actual
claims experience as compared with that which has been assumed in the financial soundness valuation. The capital
adequacy requirement (CAR) ratio of Stangen is 2,55 times (2011: 2 times) and Relyant Life Assurance Company
Limited is 2,06 times (2011: 4,67 times), which is well in excess of the minimum regulatory requirement of 1.
46.8 Insurance risk management
Exposure to insurance risk
The group underwrites risks that natural persons and other entities wish to transfer to an insurer. Such risks include the
perils around physical loss or damage to goods, death, disability and loss of employment that may give rise to an
insured event. As such the group is exposed to uncertainty surrounding the timing and severity of claims under
insurance contracts. The principal risk is that the frequency and/or severity of the claims are greater than expected.
Insurance events are, by their nature, random and the actual number and size of events during any one year may vary
from those estimated and experienced in prior periods. The product features of insurance contracts that have an
effect on the amount, timing and uncertainty of future cash flows arising from insurance contracts are set out below:
– Death and disability – provides indemnity for disability to the insured by settling the amount due to the group;
– Physical loss of goods – provides indemnity for losses sustained through theft, accidental loss or other similar acts
by replacing the goods;
– Damage to goods – provides indemnity for damages to items insured by repairing or replacing the goods; and
– Loss of employment – provides indemnity for losses on group credit exposure in relation to unemployment due
to retrenchment by paying the instalment to the group and/or setting the debt due to the group.
Benefits are primarily paid to settle the outstanding debt owing by the customer to the group or repair/replace the
item sold.
All insurance risks underwritten for non-group companies have been curtailed by 30 September 2010 with the result
that all insurance is now predominantly to customers in respect of transactions with group companies.
Limiting exposure to insurance risk
The exposure to insurance risk is limited through an underwriting strategy, limits and adopting appropriate risk
assessment techniques. In this regard the risk base of the group is not concentrated in any one region or sector of the
economy and the average individual insured losses are approximately R2 400 per product insurance claim and
R10 500 per life insurance claim.