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For immediate release Prepared for Cover magazine – February 2012 issue The ART of converting capital market capacity to insurance capacity Traditionally, capital and insurance markets have each stuck to their own ‘space’; but, thanks largely to the ongoing woes that have plagued the world’s financial markets in recent years and the resulting low interest rates, these two sectors now find themselves converging, speaking the same language and working together far more than in the past. Capital markets are inherently more cash flush than insurers and reinsurers, so the latter are, understandably, more conservative. Especially in the first world, capital markets’ Holy Grail has always been higher returns but, in the current financial climate, these are extremely hard to realise, so capital markets are looking elsewhere to deliver those returns. Enter emerging markets, where capital providers are willing to operate in a more risky environment in order to secure good returns. Yes, the risk is higher but, with the potential to boost returns by up to ten times that of first world markets, capital markets are developing an appetite for emerging market insurance risk. Of course, it’s not quite as simple as that: the capital first needs to be transformed into insurance capital and this is where alternative risk transfer (ART) comes into play. In a nutshell: the ART structure facilitates the most effective use of capital, providing insurance cover and laying the risk off to the capital market through some form of alternative structure, rather than conventional reinsurance. Such structures – which, until now, have been relatively rarely used in South Africa – can, if used properly, provide significant capacity. When the insurance market is in a hard market cycle, or there is no appetite for a particular risk in the conventional market, ART facilities can play a pivotal role in providing cover by converting capital risk into insurance risk. This is also true of the current soft, but selective, insurance market, where insurers are writing primarily for price, even though there is capital available. Using their ART facility to convert capital market capacity into insurance capacity effectively allows corporates to enhance their facility’s capacity and, at the same time, secure the exact cover they need, at the best possible price. The concept of converting capital risk to insurance risk is not new: reinsurers have been doing it for years. What is new is taking it into the ART environment, where facility owners are able to access capital markets directly, allowing them to tailor make cover according to their very specific needs. Using ART to convert capital market capacity to insurance capacity has other benefits too: providers of capital are protected against taking excessive risks in areas where they have less expertise in terms of management and pricing of risks; and financial companies are able to hedge risks that did not exist before. In recent times, the lines between different financial markets have blurred considerably. Banks are shifting credit risks from their balance sheets to insurance companies; and insurance companies are issuing catastrophe bonds that are being sold to institutional investors such as investment funds and other capital investors. And, through it all, ART continues to play an important role: helping to facilitate more manageable credit and insurance cycles and even smoothing premium curves, leading to lower cyclicality among financial companies’ earnings. 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