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Corporates retaining more risk in shape shifting risk landscape

15 June 2022 Guardrisk
Amon Khoza, Executive: Risk Finance at Guardrisk

Amon Khoza, Executive: Risk Finance at Guardrisk

More and more South African corporates are turning towards risk retention to protect their businesses in an ever-shifting, and often volatile, risk landscape. That’s according to Amon Khoza, Executive: Risk Finance at Guardrisk.

Reinsurance premium rates have been steadily hardening since 2018, and the Covid-19 pandemic hasn’t helped. Not only is the market constrained by tight capacity, there is also a discernable reduction in risk appetite from reinsurers. The latter is fueled by uncertainty and unpredictability, not least from the beating the industry took over the past two years, as a result of Covid-19 driven litigation around the world. And, when cover is available, it is expensive and often limited.

Traditionally, SASRIA has provided cover against risks such as civil commotion, public disorder, strikes, riots and terrorism to South African individuals, businesses and government, at affordable prices. But, because of the magnitude of the losses sustained during the July 2021 unrest, government had to extend a significant bailout to the state-owned insurer. Further unrest (not unimaginable given the prevailing political climate) would put SASRIA under even more pressure. That said, given the extent of the losses experienced in 2021, the Sasria cover limit of R500 million for the property class subject to predefined premium rates (with a further R500 million wrap cover available at a cost, on request), has left corporates searching for alternative ways of funding these types of risk beyond this limit.

“Retailers and property managers particularly are exploring different options for political risk cover, many opting to blend risk transfer and risk retention strategies to protect their businesses,” says Khoza.

Conscious of the unforeseen and far-reaching impact that events like the extensive, sustained unrest and the unprecedented Covid-19 pandemic had (for example, both the unrest and the pandemic severely disrupted business supply chains, albeit for different reasons) reinsurers are now specifically moving away from non-damage business interruption, thus leaving clients with narrower cover.

Khoza says that risk retention should always form part of any effective strategic risk financing strategy.

“From a sustainability point of view, and to protect themselves against volatility in reinsurance pricing, companies simply cannot afford to ignore risk retention. And the sooner you start, the more prepared you will be. Our mantra to clients is, plan, plan, plan. In today’s fast changing risk climate, it is simply not feasible to be reactive.”

Armed with an in-depth understanding of their unique risk profile, clients should incorporate the risk management initiatives they have in place and how prudently these are enforced, to make smarter decisions to balance their risk finance strategy – i.e. which risks make sense to retain and which ones should be considered for transferring to the reinsurance market.

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