Local ART market holds its own in international arena
Herman Schoeman, MD of Guardrisk

South African's are notorious for thinking that anything foreign is better than the homegrown version, but alternative risk transfer (ART) providers, and their clients, will be pleased to know that at the recent World Captive Forum in Arizona, USA, the local ART industry more than measured up to its international counterparts.

One of the areas in which local ART providers are way ahead of the international market is the type of programmes that are typically being put into place in South Africa. Here corporate captives and cell captives are used more inventively to underwrite diverse risks, whereas international usage is limited to more simple, somewhat one dimensional, applications. Typically, local captives and cell captives make better use of actuarial models. Uninsurable risks (either due to pricing issues or unavailability of cover in the conventional market) are incorporated and effectively insured. And, capacity built up within the ART facility is used efficiently to smooth volatility in traditional market pricing.

The focus of international captives and cell captives, on the other hand, seems to be completely different in that they are used more as a facility to blend premiums from different territories and place business in a single market, effectively acting as a conduit, or central hub, for group insurance placements.

Another area where SA leads the pack is in the pooling of risks by non-related parties, and specifically non-profit organizations like universities and municipalities, to effectively combine buying power through the ART vehicle. Internationally this is done predominantly on a single parent, or one-on-one, basis where common views are not always shared, thus limiting the effectiveness of the programme.

But there are lessons for local ART providers to learn from the international ART market: more could certainly be done here in terms of using ART vehicles to facilitate accessing international markets. In other words, having cracked the challenge of using these facilities innovatively, local providers should be turning their sights towards also using these facilities as central hubs for all insurance activities with groups. One of the limitations in this regard is that the SA regulatory environment still focuses on approved and non-approved reinsurance markets, rather than international credit ratings. The international market, which relies on credit ratings to assess individual markets, has no such limitations. No doubt in future there will be increasing pressure to recognize international trends and use international credit ratings to assess markets, which will create significant opportunities for the local ART market.

Another lesson that can be taken from international markets is that they spend a great deal of time dealing with the investments of funds within their ART facilities. In South Africa we tend to be more conservative: preferring to keep cash in the bank; while internationally the emphasis is more on enhancing returns, even if that involves risk taking.

International facility owners are also not reluctant to capitalize their ART facilities whereas locally the inclination is to put in the minimum required. Interestingly, local facilities provide for complex risks but rely mainly on premium income, while international facilities cover simple risks but place emphasis on well capitalized ART facilities. It would require a paradigm shift, but if the local market were to place more emphasis on capitalizing at the correct level, the cost of risk would certainly decrease 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