The investment challenge for ART vehicles

One of the most significant draw cards for owning an alternative risk transfer (ART) facility like a cell captive is the fact that the cell owner reaps the benefits of underwriting profits and investment returns.

Although cell captives are primarily insurance facilities and not investment vehicles, there is always the challenge to achieve the perfect balance between secure and prudent investments and providing the client with the maximum, or above average, returns that will enhance the cell’s insurance capacity for future risk exposures. Thus the focus and investment objective should predominantly be on liquidity and capital preservation, coupled with a fair rate of return.

Insurers and other financial institutions will draw criticism from shareholders and analysts if their investment strategies are not proactive in allowing them to take timeous and preventative action before markets slump – to the extent that it is possible to predict market movements. What the recent credit crunch has highlighted, without doubt, is that very few companies’ balance sheets are so strong that they can simply shrug off anything the markets throw at them, even though these losses may not need to be realised to improve liquidity to service operational activities and pay creditors.

The nature of ART business is such that the ART provider is making significant investments on behalf of clients, and the performance of these investments, both from a capital and a return point of view, will impact directly on the client and the primary purpose of the ART facility. And no investment mandate or contractual agreement will protect a company against the potential reputation risk resulting from investment risk.

In cell captive structures, which are consolidated by clients, the cell captive insurer has added responsibility in that it has to make sure that volatilities in investment performance do not significantly impact clients’ results, causing capacity to deteriorate and shareholders and investors to be dissatisfied.

Considering the current state of the equity markets and, taking a longer term view, cell owners that have accumulated capital may well be tempted to diversify portfolios and include, or increase, the exposure to equities. But it is at this point that cell captive insurers should go back to the basic principles and fundamentals that determined the investment strategy in the first place; what must be avoided at all costs is the enticement of the prospect of being a hero in the short-term. 

Asset liability matching should still be one of the key fundamentals that determine the investment strategy. Short-term insurance cell captives insure attritional losses and tend to be more liquid, with fixed interest investments that can be liquidated within a fairly short period of time, without necessarily taking the market position into account. Life insurance cell captives provide for losses experienced over the longer term, thus it is important that funds are accumulated in line with inflation; market expectations are also important and a longer term view on investments will always be appropriate. A distinguishing factor for any cell captive insurer is the ability to provide cell owners with the choice to diversify their investment strategy, providing that it is appropriate to the risk being underwritten and is backed by a reliable system to provide accurate, complete and timeous information.

The cell captive insurers that will be around in the future are those that are willing to advise against clients succumbing to the temptations of ‘making a quick buck’ and backing that up with preservation of capital, solid and sustainable growth rates, and investment returns. After all, the ‘good’ times will quickly be forgotten when ‘bad’ experiences strike and reputations are tainted.

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