Freight & Trading Weekly Feature

Hugh Reimers

06 April 2001

As shippers and insurers continue to look for mechanisms to remove the grudge from insurance payments, alternative risk transfer has taken centre stage.

At Eikos Risk Applications Alternative Risk Transfer continues to play a big role, says Hugh Reimers. "We look at the financial consequence of loss and try to optimise the customer's risk management spend."

Says AMUSA chairman John Hill: "An element of loss is predictable and it's therefore pointless to insure against it because all you're doing is rand-swopping.

"The idea therefore is to establish, historically, a pattern of losses and provide for that not by way on insurance where you would not get back rand for rand, but rather by investing that money independently.

This concept of risk retention becomes particularly important with the market hardening, says Reimers. "It becomes important for the client to smooth the cycle of premium increases and decreases.

"One of the important reasons to get into a structured risk financing programme is to provide that smoothing effect over a period of time so that you're not subject to major swings when the market turns. This is why we will always believe that the optimisation of risk retention and risk transfer is the way to go."

The only question, according to Hill, is whether the insurer has got his sums right, because he's providing for the unforeseen or catastrophic loss. The problem arises when the insurer fails to realise the level at which he must pitch his reserves to meet a catastrophe as and when it occurs.

"It could be argued that it's a much purer form of insurance," says Hill. "The shipper decides that losses up to a certain level will not be claimed for because he's provided for those in his day-to-day expenditure. But if anything untoward happens, that's when he will require insurance."

Clearly, among larger entities, this type f alternative risk management is gaining ground.

"The smaller company, however, is less financially viable to go this route," says Hill.

But here, says Reimers, Eikos has put together different solutions which better suit the lower end of the market.

This article is reproduced with the permission of the publisher.