ART surpluses headed for the HR department - April 2004
There is major growth ahead in the alterative risk transfer (ART) market as available capacity is increasingly being extended to cover other risks.

Many companies that bought into ART structures, like cell captives, in the nineties have accumulated healthy surpluses by practicing good risk management. These funds can now be used to provide for other exposures like employee benefits (EB). Following the international trend of moving EB schemes to self insurance vehicles, local companies are catching on to the fact that bringing employee benefit risk benefits into an "earn-as-you-go" as opposed to the traditional "pay-as-you-go" environment rewards both the employee and the employer. Capacity is developed by sharing in the underwriting results, which allows the employer to stabilise future contribution rates, while maintaining and improving benefit levels for employees.

This is particularly relevant in the South African market where the prevalence of mergers and takeovers - especially in the context of Black Economic Empowerment - often unites workforces with different benefit structures and risk profiles. In such instances surplus capacity from the company's existing ART structure can be used to "fill the gaps", thereby providing for the impact both financially and in terms of worker satisfaction. This is also relevant for employees moving around the world when benefits vary in different countries.

Another "gap" that these funds can be applied to is to address the effect of the HIV epidemic on the sustainability of employee benefits. Employers are increasingly facing the choice between unacceptable premium hikes or equally unacceptable benefit cuts. By using their surplus ART capacity employers often choose to accept the cut of benefits from their insurer and provide enhanced benefits themselves. This provides a holistic solution that consolidates all benefits offered by the employer, avoiding over insurance and large pay away premiums.

Traditionally, the ART structure - along with the risk management programme - was the domain of the financial director, while the human resources director ran the employee benefit programme. Within the current culture of extended enterprise risk management these individuals are talking to each other, finding mutually acceptable ways to meet each other's needs. And it is within this framework that ART principles come into their own. The challenge of applying ART to employee benefits generally lies in effecting the paradigm shift that is often required by both the trustees of the EB programme and the employer. This necessitates moving way from simply providing a price driven product towards a holistic, longer term financial solution.

The results of a Tower-Perrin survey of 60 Fortune 500 companies in the US and Europe on the use of captives for employee benefits, indicate that 38% of respondents currently use a captive for EB (mostly in Europe) or are in the process of implementing one - 22% are considering doing so within the next two years. Interestingly 60% of the feedback came from the finance or risk managers and 40% from HR managers, indicating that both these parties are involved in the alternative risk solution. In future, as short-term and life ART structures continue to converge, companies will increasingly be called on to put their money where their mouth is. Virtually all annual reports cite the staff as the company's "greatest asset" - ART structures allow employers to afford their "greatest asset" the same protection traditionally afforded to its other assets.