More and more SMEs turning to the ART market

Although the advent of one of the local alternative risk transfer (ART) market’s most popular facilities – the cell captive – came about directly because many companies could not afford either the money or the resources to form their own captive, even the cell captive arena has traditionally been dominated by larger companies. But that all seems to be changing.

The UK market (widely acknowledged to be a good indicator of trends that will impact on South Africa) reports that there has been an increase in the number of small managed companies looking at captives and cell captives. This comes as no big surprise: with company directors being forced by ever stricter corporate governance rules to keep close tabs on their risk management and risk financing programmes, they are spending more time on these issues and discovering that there are very real bottom line benefits to be had by tapping into ART structures instead of just remaining in the traditional market and paying away premium.

In the decade between the mid- 1980s and mid-1990s, captives came under fire because some critics viewed them, as best, as tax avoidance. Tightening of the UK’s Controlled Foreign Companies (CFC) legislation and the compliance regulations of the UK’s accounting rules, forced captive owners to take a closer look at their captives, many of which had accumulated significant asset bases. The result was that even some of those that were established predominantly for tax advantage were reinvented as valid risk retention and transfer vehicles. In 1997 the UK’s version of the cell captive (the protected cell company) was born, offering both SMEs and larger parent groups with international operations or diversified activities all the benefits of owning a captive without the inherent financial or administrative burdens. Suddenly captives and protected cell companies shed their image of being formed primarily for tax reasons and took their rightful place as valuable ART structures.

While the UK’s current proposals for further changes to their CFC legislation may be interpreted by some as a threat to these types of structures, experts disagree. According to Caledonian Insurance Management – a Gibraltar-based independent insurance management consultancy – tax reasons have long not been the reason for captives’ and PCCs’ existence and the additional legislation “could result in the owners of captives not requiring their captive to make any distribution of profit in the form of dividends, thereby allowing the captive to build its balance sheet and provide it with the capacity to write even more of the parent group’s insurance programme”.

In fact, they counter that the very reasons that captives were first formed in the UK nearly 100 years ago – a lack of capacity for specific types of risks; conventional markets’ reluctance to cover the types of risk; and high premiums from traditional markets – are as valid today as they were then. But this time around it’s not only the corporate giants that are able to opt for an alternative: structures like the PCC (and, closer to home, the cell captive) make it possible for companies of all sizes that are serious about risk management and risk financing to opt for ART solutions.


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