The credit crunch may provide opportunities for ART market

While the rest of the world reels in the wake of the doom and gloom pervading financial markets in recent months, the current state of the world's economy may well solicit innovative responses from alternative risk transfer (ART) providers to corporate clients needs.

The challenge of writing a column in a magazine is the lead time, especially when the subject deals with something as volatile as the state of the world's financial markets. And these days even the most experienced economists are reluctant to make predictions, but one thing that we all know for sure is that recovering from the turmoil that's engulfed the global economy in recent months is going to be a long and painful process.

Following the failure of global financial giants, today's business environment is characterised by unease and distrust. Corporates are no longer sure who they can trust with their money and this is exacerbated by the fact that credit ratings have lost some credibility. While ratings will no doubt still have a role to play in the future, there is growing acknowledgement that they are merely one part of the puzzle and may not take into account the entire spectrum of risk that a company faces. For instance, it is not only its core business failures that can cause an organisation to fail; a non-entity but market specific failure could have a significant, and potentially catastrophic, impact.

In this environment, a growing number of corporates are choosing to deal with higher levels and even new components of their business risk themselves; opting to forsake traditional insurance and financial markets for the more "secure" option of having their own facility and building reserves for a rainy day. Long-time ART users, who hung in while the markets softened and continued the discipline of building reserves, are the big winners and many of them are now opting to extend the concept to other facets of their businesses.

One of the biggest risk headaches facing corporates today is that of counterparty risk and, here too, ART is increasingly being used to mitigate companies exposures.

One would think that the credit crunch would reduce the amount of business placed in ART facilities that write third party (volume) business. But the opposite is happening: as the downturn squeezes ever harder, companies core businesses are not generating sufficient returns and they are using their ART vehicles to enhance their earnings by selling insurance products linked to their core offerings. The growth in the volume ART market can further be attributed to the fact that products like life cover, credit protection and extended warrantees being sold out of the ART environment are more valid to the consumer in hard times as there is less cash available for the individual to fund one's own risks.

Generally, the move towards ART facilities is a response to changes in the traditional insurance market. Thus the hardening of the local market by all accounts the 2009 treaty renewals are going to be tough augurs well for ART providers in the coming months.

For further information please contact:
Herman Schoeman, MD of Guardrisk
Telephone: 011 669-1001

Prepared by:
Melanie Davis, PR@Work
Telephone: 011 615-3309 / 083 225 7450