Risk Management

The convergence of the ART and Traditional Markets

The advent of the cell captive – arguably South Africa’s most popular and successful alternative risk transfer (ART) structure – came about as a response to the inability of the traditional market to respond quickly and adequately to corporates’ unique risk profiles. Over the past two decades, many corporates – weary of being at the mercy of contracting capacity and premium volatility in traditional insurance markets – rejected the ‘one size fits all’ offering from insurers. This allowed the cell captive market to flourish and become a major player in the local insurance arena.

But now the landscape is again shifting: the latest trends indicate that corporates are no longer simply choosing between traditional insurers and ART providers. It is not an ‘either/or’ option anymore. The buzzword today is ‘partnership’ and locally, and internationally, there is a distinct convergence between the traditional and ART markets, each acknowledging that the other has an important role to play and willing to harness each other’s best qualities in the interest of developing effective solutions for corporates that are facing an unprecedented and ever-changing onslaught of risks.

In the past, cell captive insurers would access capacity only from professional reinsurers; today this also comes from traditional insurers. In fact, it may now be more appropriate to describe the ‘alternative’ in ART as ‘associated’, since ‘alternative’ implies that one or the other should be chosen, when today traditional insurers also carry risk above the predictable losses that are typically self-insured.

It should be said though that the cell captive market – both in its drive to establish itself and the zeal of its creation – did much to create the divide between ART and traditional offerings over the past two decades. Now, not only have both industries matured to the point where they are willing – and indeed, eager – to embrace each other in the interest of the client, but the risk landscape has changed, and grown, to such an extent that concerted efforts by several players – including the traditional insurer, broker, client, cell captive insurer and reinsurer – are required to meet the challenges that corporates face today.

The extent to which corporates embraced the cell captive concept led many traditional insurers to launch their own cell operations in recent years. But this was a defensive mechanism and few got it right; it was always going to be an add-on, rather than the insurer’s core business. It remains vitally important that the ART provider stays independent of the traditional insurer to avoid any potential conflict that may arise in this ‘partnership’.

In the current spirit of co-operation and convergence, independent cell captive insurers (those not affiliated with traditional insurers), are getting closer to the traditional market, with the latter essentially functioning as reinsurers to cell captive insurers.

With traditional insurers – even those that have had difficulty with their own cell captive operations – recognising the value of the cell captive structure, there is widespread acknowledgement on both sides of the spectrum of the new value propositions that the traditional market and cell captive insurers can offer by working together.

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