Download ART can mitigate economic fallout

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Prepared for Cover magazine – August 2012 issue
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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