Louis Ferreira
Cover Magazine
November 1999
Not so, says Louis Ferreira, Joint Managing Director of Eikos.
ALTERNATIVE RISK TRANSFER, or ART as it is commonly known, has in recent years, moved from humble beginnings under the auspices of ‘risk control’ into the mainstream of general management responsibility. For those not yet involved, who should ART concern? Quite simply any managing or finance director that recognises risk and the inherent uncertainties in our changing environment as not only unavoidable, but intrinsic to the trading environment. Facing risk as a daily business reality, the modern corporation therefore requires a strategy reaching beyond mere risk containment, towards leverage of all corporate assets and thereby profitability.
Whilst risk transfer was still the sole domain of the insurance company, the corporate risk manager was traditionally the person responsible for assessing the company’s area of risk. The manager then transferred the risks too large to retain to the insurance market.
Reasons for change
Change came about from a growing realisation on the part of South African companies of two significant facts. In the first instance, companies were frequently paying to transfer risk to companies smaller than themselves (by inference less able to carry the risk). Secondly, premiums were increasingly recognised as a straight cost to the business, and a missed opportunity to leverage what would otherwise be money paid away.
The implications were evident: better to retain the high frequency low impact risks (i.e. the eventualities you statistically know are going to happen), and insure for highly improbable events which would put the company out of business if they actually took place. A more sophisticated approach to risk control was thus needed.
With this in mind, throughout the late 1970’s and early 80’s, and against a background of chronic lack of capacity in the insurance industry due to sanctions, key industry players increasingly focused on finding a more integrated approach to risk management. Gradually the definition of risk management was broadening to include both physical and financial risk.
Traditional insurance
With the increasing onset of ART (which now accounts for more than 50 percent of premiums that would have traditionally been paid away), it could be construed that traditional insurance no longer has a vital role to play in the management of corporate risk. This would in reality be totally misleading; in fact even ART’s most persuasive advocates maintain that the insurance industry’s capacity to accept risks which are too large to retain, will continue to guarantee a key role for traditional insurance in the proper management of a corporate risk portfolio.
However, competitive developments in this market mean that the corporate consumer will ultimately gain. The hitherto comfortable guaranteed incomes generated by writing all-encompassing insurance policies, are increasingly becoming a thing of the past. Insurance companies are responding aggressively to the erosion of their traditional premium income by launching an array of products designed to take advantage of the onset of ART. Typically these products have an element of risk retention, now with fees as well as premiums. The essential point to note is that as these policies increasingly include advice on risk retention, it is the now the quality of the advice that is paramount. With any aspect of risk retention it is the client company, and not the insurer, who carries the risk.
The future
What of the future? From its origins in physical risk control, risk management has grown to include financial risk. Industry leaders increasingly feel that the term ‘risk management’ offers a focus which is too static and inward looking. Hence the preferred ‘Alternative Risk Transfer’ which places increasing emphasis on risk information, and recognition of the role that correct handling and leveraging of risk plays in attaining the company’s strategic objectives.
This article is reproduced with the permission of the publisher.