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For immediate release Prepared for Cover magazine – August 2012 issue ________________________ ART can mitigate economic fallout Nearly 200 years ago Klemens von Metternich said that “When France sneezes Europe catches cold”. Though von Metternich’s observation (which was later adapted to “When America sneezes the world catches cold”) was made long before the advent of the global village, his theory hold as true today as it did 200 years ago. For instance, the effects of the European financial services sector’s woes were felt far beyond the countries in which the events occurred. In today’s world economic pressure reaches further than ever before and, despite the stability of its own financial services sector, South Africa is feeling the impact of the international fallout from the negative economic events of recent years. Due to limited capacity and the consequent high prices, large South Africa corporates are increasingly being forced to turn to foreign insurance markets for cover. But at a time when foreign markets are facing significant losses due to changes in weather patterns and other catastrophes, they too are experiencing pressure on pricing, even though they have the capacity. Events like 2011 floods in Australia (estimated to have cost the insurance industry $1-billion) and the earthquake in Japan (reported to have cost up to $309 billion) have had a significant impact on insurers’ pricing. While they may have no control on the many factors that influence insurance pricing, many South African corporates have solid risk management policies in place and, in general, their risks are well managed. However, those that limit themselves only to the traditional market are not fully reaping the benefit of their prudent risk management. A solution lies in alternative risk transfer (ART) facilities, through which capacity aggregation structures can be used to ensure that corporates with good risk management programmes in place benefit accordingly. In this context, capacity aggregation is essentially about taking big deductibles on risks where risk management is well controlled and financing this by using multi-year solutions with real risk transfer, which is given on predetermined reinstatement trigger points. In essence, the sizeable deductible will attract competitive market pricing that rewards the corporate for its prudent risk management; but, by using the capacity aggregation structure, the corporate will not leave its balance sheet exposed to the cash flow effect of the loss in the event of a claim. In short, it’s all about balancing the corporate’s reserves (built up within the ART facility over a period of three to five years), with prudent risk management and effective financing of these risks. As reserves build up, the corporate can increase its capacity for self-insurance and become less dependent on the traditional market. This creates pricing stability, insulation from pricing volatility and budget certainty. Multiyear aggregation structures (finite programmes) structures lost favour several years ago when markets could not price them correctly and as a result insufficient risk transfer was given. But that has all changed and today risk within ART structures can be priced accurately, which means that more and more corporates are turning to the ART market, and reaping the financial rewards without sacrificing peace of mind. ENDS For further information please contact: Herman Schoeman, MD of Guardrisk Telephone: 011 669-1001 Issued by: Melanie Davis, PR@Work Telephone: 011 615-3309 / 083 225 7450