Steady growth expected to continue in ART market
Despite the current turmoil in financial markets around the world, South Africa's alternative risk transfer (ART) market remains buoyant and the healthy growth enjoyed by this sector since it's inception in 1993 is expected to continue for the foreseeable future. That's according to Herman Schoeman, MD of Guardrisk, the world's largest specialist captive insurance group of its kind (in US$ terms).
Since the cell concept was first introduced (by Guardrisk) in 1993, no less than ten short-term cell captive insurers have been formed. To put this in context: there are currently 24 "typical" short-term insurers registered in South Africa, that there are now nearly half as many cell captive insurers clearly indicates that the structure has come of age.
The cell captive structure was extended to the life sector in 1999 where it continues to find favour with employers who are increasingly moving their employee benefit programmes into cell captives because of the flexibility of the actual structure (the employer chooses which benefits to offer) and the fact that the facility can be set up to cater for the company's particular circumstances and the specific risk profile of its employees, taking into account the unique risk management initiatives applied by the employer.
Prior to the introduction of cell captives, captives (wholly-owned insurance structures that underwrite only the risks of the owner) were reserved only for large groups of companies. But cell captives allow companies of all sizes to enjoy the benefits of owning their own insurance company, without the inherent capital requirements, or incurring the considerable operating costs or having to shoulder the onerous compliance burden imposed by legislation pertaining to the financial services industry. Essentially, the cell captive insurer "rents" its license to its clients (cell owners) and provides underwriting, reinsurance, claims management, investment and accounting expertise. In doing so, the cell captive insurer keeps costs down and gives its clients access to a broad base of insurance skills and markets.
Since there is no cross subsidisation of risks, each cell covers only its own risks and the relevant underwriting profits belong to each individual cell, the cell captive environment can essentially be described as an "earn-as-you-go" environment. It comes as no surprise then that corporates, frustrated by the "pay-as-you-go" mindset of the traditional insurance market, are increasingly seeking to reap the rewards of prudent risk management that accrue within the cell captive environment.
The cell captive structure is particularly effective for companies that want to take some self-insurance risk themselves, usually for their potential excess payments or for risks where traditional cover is too expensive or even unattainable. The structure is also well suited to the affinity market whereby companies with strong brands such as the retailers offer their large customer base insurance products aligned to their core business. This has become a clear differentiator for retailers offering additional value add products and services to customers and can also be a valuable contributor to the bottom line at a time when core business lines may be under pressure.
In 2008 a number of independent sources gave cell captives new credence, acknowledging their importance in the local insurance market.
The National Treasury's discussion paper, The future of micro insurance regulation in South Africa, identified the contribution that cell captives can make in the soon to be established micro insurance industry: where the entity seeking to offer micro insurance desires more autonomy in the product design and management process and wants to share in the profit of the risk management, it can buy into a cell captive.
A report on the consumer credit insurance industry in South Africa (commissioned by the Life Offices Association and the South African Insurance Association) recognised the important role that cell captives play in this market and the extraordinary growth of the industry over the past 15 years. Referring to cell captives as an innovative response to the dilemma that arose when the Financial Services Board (FSB) clamped down on the practice of retailers marketing and administering insurance products on behalf of insurers in return for commission and an administration fee, the report acknowledged the diverse range of companies that use these structures to sell branded insurance to their customers.
Today's business environment is characterised by a degree of unease about the security of the balance sheets of large financial services groups and many companies are choosing to increase both the levels and types of risk that they cover themselves. Preferring to put their money into their own facility, and build reserves, rather than paying premiums to the traditional market, says Schoeman.
The cell captive structure has been around for the past 15 years and those clients who've retained their cells through the various market cycles have accumulated significant reserves. Many of these are now choosing to extend the concept to other facets of their businesses.
About Guardrisk
For the year ended 31 March 2008 the Guardrisk group's gross premium written increased by 18% to R4 billion (2007: R3,4 billion). Total assets increased by 19% to R5,7 billion (2007: R4,8 billion) and total shareholders' funds rose 20% to R1,1 billion (2007: R926 million).
For further information please contact:
Herman Schoeman
Guardrisk
Telephone: 669-1002
Cell: 082 376 3821
Prepared by:
Melanie Davis
PR at Work CC
Telephone: 615-3309
Cell: 083 225 7450
