Specialised insurers impacted by wild rand exchange rate swings

Quinten Matthew, Executive Head of Specialist Business at Santam

Businesses exposed to currency turmoil must review insurance policies too

Wild swings in the rand exchange rate, brought on by local labour unrest and the ongoing European sovereign debt drama, are forcing specialist insurers and their clients to realign their risk management strategies.

“Companies need to closely monitor their operating environment, foresee the impacts on exchange rates, and adopt plans to mitigate the risk to their bottom line,” says Quinten Matthew, Executive Head of Specialist Business at Santam.

While currency hedging has long been a common place for South African businesses that have foreign currency exposure, the last few months have been bracing with the rand losing almost 7 percent against the US dollar year to date, after giving up a whopping 21 percent in 2011.

The rand’s dire performance has pushed up costs for parts and repairs across aviation, motor and marine businesses.

Mike Brews, COO of Associated Marine, the marine division of Santam Ltd says that they are faced with exchange rate issues on a regular basis.

“As our business focuses on international trade, a large portion of our cargo business is contracted in US dollars. When the rand exchange rate deteriorates, we find we have a larger exposure than we anticipated,” Brews says.

Brews explains that if a client is importing cargo with the value of 10 million USD, the exposure to the business in rand is R85 million at an exchange rate of R8.5 to one US dollar. But if that exchange rate deteriorates to R9.5 to one US dollar, the exposure is increased to R95 million – a jump of R10 million – something that can happen during the course of the voyage.

“This issue can even arise while we are investigating a claim and we may be bound to pay a client overseas the US dollar amount,” says Brews.

A similar situation may occur where repairs need to be carried out by an international company and the payment for those repairs and parts needs to be done in dollars. While the insurer may agree to the claim initially, during the process of repairs the exchange rate may fluctuate to the extent that the repairs may cost more than the initial value of the item that was insured.

Specialised aviation insurers experience similar problems, says James Godden, Head of Santam Aviation.

Godden says that on claims that are repairable, the problem can get more complicated due to the time it can take to repair an aircraft.

“This can take months and in that time the exchange rate could slip further. As most parts are imported and priced in dollars this could increase the cost of a claim on a daily basis,” Godden says.

As far as the client is concerned there is also a real danger of insuring the aircraft in rands and then waking up after a claim to realise you cannot replace your aircraft for what you originally paid for it.

“With the runaway exchange rate that we have seen of late, it is critical that specialised businesses evaluate their contracts regularly to accommodate their evolving needs,” Matthew says. “The role of the insurer and broker becomes more vital in the specialist business market with the industry challenges and the very different set of risks these businesses face.”