Corporate risk-transfer strategies must change
There is no doubt that the global insurance industry has changed dramatically. This has affected the South African industry as it bases its business on those found in the US, the UK and Australia.
If a company does not adapt its risk transfer strategies, it will struggle to keep up with the pace of the current changes influencing the market.
Over the past decades, the nature of business has changed dramatically. The digital and real worlds have converged, and this in turn has enabled companies to trade globally. This has seen their value chains grow in scope and complexity accordingly.
As business has become more global and interconnected, so has the nature of the risks it faces. The insurance industry needs to become more creative when helping its global clients to develop innovative risk transfer strategies that are relevant today. This means that companies need to be up to date with international technology changes in order to keep up with this.
Highlighting the dangers
AIG South Africa’s client management team took the opportunity to highlight the alternative options to conventional insurance for these complex risks at their Global Risk Solutions broker and client presentations held recently in Cape Town and Johannesburg.
Speaking at these events, Salil Bhalla, Head of Global Fronting for Europe, Middle East and Africa (EMEA) at AIG Global Risk Solutions said that the practice of global policy insurance has an increasingly important role to play in helping companies with international operations to take advantage of the opportunities inherent in a captive insurance company.
The value of captives
Captives are typically used by companies who carry large risks which they understand well and wish to retain. If such a company has an appetite to self-insure all or a portion of its risk, a captive provides a formal vehicle to do so.
“Some of the key determinants that would make a captive a desirable strategy is if the risk is either not addressed effectively by traditional insurance, or there is a need to meet a requirement to provide evidence of insurance to regulators,” Bhalla observes.
A captive may provide a company the opportunity to benefit from the interest earned on premiums and reserves as well as other financial benefits like tax efficiencies, improved cash flow, and cost efficient access to the reinsurance market. The captive can be well integrated into a company’s strategic priorities.
However, Bhalla continues, “Companies with operations in multiple geographic areas face a significant challenge because of the need to comply with individual local requirements, including an in-country policy issued by a licensed insurer.
Captives are typically reinsurers domiciled in offshore jurisdictions like Bermuda, so opening their own insurance operations in each country in which their parent company has operations would be impractical and hugely costly.”
Benefitting the industry
Fronting is the mechanism used to structure a compliant program where an insurance policy is issued to an insured in each geography either through the insurance company’s own operations, or its established network of partners.
“When choosing a global risk partner,” says Bhalla, “it is important to choose a reputable company with a history of innovation, a track record in this specialized area, and in-depth local market expertise. It goes without saying that the fronting partner would also need to have an extensive global network of its own offices or partners able to issue policies in each jurisdiction.”
Keith Marshall, Head of Client Management at AIG South Africa concludes, “These innovative solutions provide a way for global companies to use the captive model across multiple markets, providing a flexible platform for a responsive and strategic risk-management strategy. It is important that brokers include it as part of the solution set they offer clients in today’s global business environment.”
