ART’s a hard sell in developing markets
– Herman Schoeman, MD of Guardrisk

It’s never easy to move into a new geographical market with only the success record of a local model, and Africa offers a unique set of challenges for new arrivals. Many South African companies – in a wide range of industries – can testify to the difficulties of replicating a successful local business model elsewhere in Africa. This is particularly true for alternative risk transfer (ART) providers who find themselves facing difficulties relating to three main areas: legislation, accounting rules and products.

Since ART products are relatively new to most developing markets there is generally a lack of legislation allowing for the flexibility that is often needed for such facilities. This means that ART insurers are often regulated by outdated conventional insurance acts, which are not only inflexible, but which also contain many loopholes that can be exploited by unscrupulous operators. So much so, that it is often difficult for new operators conducting business in other more sophisticated, regulated environments to establish a competitive advantage based on best practice standards and ethics in a new territory.

Something else that makes competition difficult is that, since the industry is many times not governed by the same level of advanced insurance related legislation, the playing fields are not level. For instance, in many developing markets, practices like back-to-back lending – whereby a loan can immediately be affected against a premium paid – occur. In more sophisticated, regulated markets, including SA, this practice by insurers – including ART providers – would not meet the requirements of minimum corporate governance standards and may even be viewed as conducting the business of a bank, effectively prohibiting market participants from structuring ART arrangements on such a basis. The short-term insurance act would generally not even make reference to this type of business, effectively creating a loophole.

The main reason that ART industries in developing markets are not properly regulated is a lack of understanding amongst regulators. Many view the concept with a healthy dose of skepticism, which can only be eradicated by ongoing dialogue in which professional ART providers engage the authorities in discussion that broadens their understanding and, ultimately, support of the industry. Generally, legislators in these markets operate within a rather narrow framework and they are almost always hampered by severe capacity restrictions; thus any ART provider wanting to make inroads into Africa needs to be prepared to invest the time and effort required to get in at the ground floor by assisting with the interpretation of legislation to govern the industry.

Another challenge facing new ART entrants in developing markets is the implementation of accounting rules. There is no doubt that new International Financial Reporting Standards (IFRS) were developed by the accounting profession in more sophisticated markets; which makes them difficult to put into practice in a developing market. In terms of the accounting treatment of ART vehicles, the ART provider again faces a lack of understanding of the concept, which local auditors probably have not previously been exposed to.

There is also a need to adapt products to suit the new market; trying to copy the ART model from a more sophisticated market simply does not work. In fledgling economies, development and growth are the first priorities and the market actually needs to be convinced that risk management products make good economic and financial sense. The more simple and easy to understand and implement the product becomes, the more likely it is to gain favour. And let it be clear: this is not a matter of patronization, but rather of truly understanding the local market and adapting products accordingly. New entrants will also have to revise their targets: management fees as small as R5000 are considered lucrative in many markets.

It’s certainly not an easy road for ART providers entering developing markets. But the need and demand for these products certainly exists and, those companies who are prepared to investment the time and effort to develop and grow a professional industry, will reap the benefits in the long-term.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: +27 11 669-1001

Issued by:
Melanie Davis, PR@Work
Telephone: +27 11 615-3309 / +27 83 225 7450