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Commercial Risk AFRICA

INTERNATIONAL INSURANCE & RISK MANAGEMENT NEWS

FEBRUARY 2013 www.commercialriskafrica.com

IRMSA CONFERENCE REPORT: CRA reports from Africa’s premier risk management event . . . . . . . . . . 9-12

Dutch court rules against Shell over Niger Delta oil spill Liz Booth

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[LAGOS]—A Dutch court ruled last month that Royal Dutch Shell’s Nigerian subsidiary was responsible for an oil pollution incident in the Niger Delta and ordered it to pay damages. It was the first case of its kind to be heard in the Netherlands and was seen as a test for holding parent companies responsible for the actions of subsidiary companies in foreign jurisdictions.

VERDICTS The district court in The Hague dismissed four other claims involving Shell Petroleum Devel-

opment Company of Nigeria Ltd (SPDC), a wholly-owned subsidiary of Royal Dutch Shell. After the verdict, legal experts said other Nigerians affected by pollution may be able to sue in the Netherlands. However, Shell said: “The District Court ruled the four oil spills in Nigeria in 2004–2007 were caused by sabotage. Furthermore, the court ruled Royal Dutch Shell plc is not liable.”

REACTION The oil company added: “Only in the case of Ikot Ada Udo the court ruled SPDC could have prevented the sabotage by plugging the well at an earlier stage. In this particular case saboteurs OIL: Turn to 2

Peter den Dekker

African Trade Insurance Agency’s chief underwriting officer Jef Vincent is set to spearhead a stronger focus on credit risk insurance. CRA met him in Johannesburg .. . . . . . 19

Transport shoots up African risk agenda Adrian Ladbury

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[johannesburg]—The rapidly escalating cost of marine insurance as a direct result of the explosion of piracy off the coast of east Africa is one of the many big risk management challenges that South African and international companies have to cope with as they expand into Sub Saharan Africa (SSA) and beyond. The business opportunities in emerging markets such as SSA are huge as the region enjoys impressive growth rates as more mature economies struggle to grow at all. For South African-based companies the lure of growth rates to the north are currently more enticing than ever as growth at home, while still high on a global scale, has stuttered of late.

Stop cash flow underwriting in Africa: Den Dekker [johannesburg]—A leading European risk manager has told international insurers and facultative reinsurers that they must stop cash flow underwriting on the basis of little real risk information in Africa and other emerging regions of the world or else the underlying risks and their results will never improve. Peter den Dekker, Insurance Risk Manager for VimpelCom, the Amsterdam-based global telecommunications group that

THE WEATHERMAN:

has significant operations in Africa, said that he has recently been shocked to find that leading global facultative reinsurers and insurers take limited risk information for granted when they underwrite African risks. The former high profile president of the Federation of European Risk Management Associations (Ferma) has just completed his first major global

DEN DEKKER: Turn to 3

Gillian Edworthy, Group Risk Officer of AECI

But companies should not pile into new markets in SSA without first doing their homework and properly analysing the risks that are attached to the growth opportunities. If they fail to do so then they could end up with severely burned fingers.

EXPERIENCE

PIRACY: Turn to 2

These were some of the key conclu-

ATI makes commercial risk push Kapila Gohel

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The World Bank-backed African Trade Insurance Agency (ATI) aims to significantly increase the proportion of commercial risk business risk it writes, according to its chief underwriting officer, Jef Vincent. In an interview with Commercial Risk Africa (see page 18) Mr Vincent

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sions recently shared with African risk managers by Gillian Edworthy, Group Risk Officer of AECI, the South African-based chemicals and industrial explosives group that now operates across 20 African countries and is expanding its reach worldwide. Ms Edworthy shared her experience during a speech at the recent IQPC two-day Enterprise Risk Management conference in Johannesburg on February 5–6. Ms Edworthy’s comments on the day-to-day impact of the rise in piracy off the coasts of Somalia, Ethiopia and other east African nations was particularly illuminating as it made the direct link between headline-grabbing ‘risk’ news and the more mundane task of balancing risk and reward that risk managers must carry out on a daily basis.

revealed that ATI is looking to grow the commercial risk side of its business to 30% of its portfolio, from the current level of 12%, over the next three years.

LOW BASE “Right now trade credit insurance represents 12% of our total exposure. But proportionally, our aim is to come to a 70%–30% balance… ATI: Turn to 3


Continued from page one NEWS

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PIRACY:

CONTINUED FROM PAGE ONE

She said that piracy is a real risk to a company like hers that exports large portions of its products. She noted that there were some 297 piracy attacks last year and that ‘Oceans Beyond Piracy’ (OBP), the US-based project launched to fight piracy, estimates the annual cost to be some $7-12bn. These costs include the cost of diverting shipping to safer routes, paying for escorts and naval services, ransoms, security equipment and higher marine insurance premiums (see story below). Of the latter she said: “Insurance costs are becoming so exorbitant that it does not make economic sense anymore so we are now shifting to road transport where possible, despite all the challenges that are involved with road transport in Sub Saharan Africa.”

INFRASTRUCTURE GAP Transporting materials to neighbouring Zimbabwe actually ‘only’ involves a 200km trip from South Africa but it takes four days by truck as drivers have to struggle with poor roads, animals on the road and the like, explained Ms Edworthy. The queues encountered at borders can be horrendous and require drivers to sleep overnight in the queue. The Zambian border, for example, only has one clearing agent who has to deal with the mass of daily cross-border traffic as its economy picks up. The search for top line growth is the basic rea-

son why companies are prepared to take on such risks and costs in Africa and other emerging markets. But this growth needs to be pursued in a risk-managed way, said Ms Edworthy. The risk manager gave delegates a comprehensive list of the risks and challenges faced when expanding across Sub Saharan Africa, which provides a useful checklist for any risk manager in Africa or other parts of the world whose company seeks expansion in the region. Firstly, she said that companies need to be very aware of the need to invest in the territories to which they expand, and develop local talent. “Social risk is very important. You have to ask how you are going to add value to a country if there are no skilled staff available. You have to ask how to add value there. It is very important for companies to think about this,” said Ms Edworthy. Insurers are more than aware of the rising trend among African governments and fiscal authorities to try and ensure that the premium is not simply shipped out to international markets without adding anything to the local market. The same is true of all other markets as local governments fight to ensure that their human and physical resources are not simply exported out of the economy with little or no lasting benefits. “For management one key concern currently is to keep costs down of course. One challenge is the fact that when expanding you need to match

talented and skilled staff with positions but you cannot just parachute them in because governments want skills developed locally. You have to seek to transfer knowledge and skills and comply with local rules and regulations,” said Ms Edworthy. The risk manager said that one challenge for risk managers is to make sure that senior management truly understands the potential scope and depth of the risks that a company faces when it becomes excited about the prospects of a new market. “You need to go across the borders and go into territories. Not even your own local management will necessarily understand the complexity of the risks faced, therefore we as risk managers need to ask questions to trigger discussion at least,” pointed out Ms Edworthy. Potentially significant risks that need to be considered include volatile commodity prices, which can quickly change the nature of what appeared to be an attractive opportunity. Then there is tax, which again is a subject only too familiar to insurance companies and risk managers using global programmes to manage their cross-border risks. “We thought South Africa was bad for tax but some African countries are adopting more stringent tax requirements than we have. Other countries, such as Namibia, do not present a problem. Then there are very basic problems such as no air strip and having to land on a road and then when you get to your destination you may find that there is no internet access or even a bank,” said Ms Edworthy, again stressing the need to do your homework. Another rising concern for companies that seek to expand in the region is the environment. “If you are buying a local company, a lot of investors nowadays want to know about the environmental risks that may come with it. What about carbon emissions? You need to make sure that you ask the right questions before you go in and importantly make sure that you, as the individual risk manager, have posted these questions with the board to at least trigger the discussion,” advised Ms Edworthy. Then there is organised crime, which the risk manager said is a real problem and not just the source of eye-catching newspaper headlines. “Organised crime actually happens and is part of dayto-day activity in some countries in the region. Sometimes it is supported by the army or police. What do you do about this? If you are listed on the Johannesburg Stock Exchange you have to comply with the rules and simply cannot pay a bribe. It does not matter if that is the way business is carried out in the country, you just cannot do it,” said Ms Edworthy.

OBC counts cost of Somali piracy Oceans Beyond Piracy, a project of the One Earth Future Foundation, a privately-funded and independent non-profit organisation based in Colorado, USA and launched in 2010, released a report at the beginning of February about the cost of Somali piracy to the world economy. It concluded that approximately 80% of all costs are borne by the shipping industry. Governments account for the other 20% of the spend as they attempt to stop the attacks. The report estimates the 2011 economic cost of piracy was between $6.6 and $6.9bn. “The report assesses nine different direct cost factors specifically focused on the economic impact of Somali piracy,” explained Anna Bowden, the report’s author. “Over the past year we have had substantial cooperation from maritime stakeholders which has helped to ensure the figures are as reliable as possible,” he added. The breakdown of the most notable costs

includes $2.7bn in fuel costs caused by the increased speeds of vessels travelling through high risk areas, $1.3bn for military operations, and $1.1bn for security equipment and armed guards. Some $635m is attributed to insurance, $486–680m is spent on re-routing vessels along the western coast of India, and $195m is the estimated cost for increased labour costs and danger pay for seafarers. “The vast majority (99%) of the billions spent is attached to recurring costs associated with the protection of vessels—costs which must be repeated each year,” stated OBP. “This figure is in sharp contrast to the $38m spent for prosecution, imprisonment and building regional and Somali capacity to fight piracy,” it continued. Average ransoms have risen 25% from roughly $4m in 2010 to $5m in 2011.

“Although the total cost for ransoms was $160m for 2011, money collected by pirates represents a mere 2% of the total economic cost. While ransoms provide the incentive for Somali pirates to attack vessels and hold hostages, they represent a disproportionately small cost compared to the nearly $7bn spent to thwart these attacks,” stated the report. “The human cost of piracy cannot be defined in economic terms,” Ms Bowden added. “We do note with great concern that there were a significant number of piracy-related deaths, hostages taken, and seafarers subject to traumatic armed attacks in 2011. This happened in spite of the success of armed guards and military action in the later part of the year.” The Oceans Beyond Piracy Working Group is expected to release recommendations for a ‘better coordinated’ and ‘longer-looking’ strategy against piracy in July 2013.

OIL:

CONTINUED FROM PAGE ONE opened the valve (above surface) with a wrench. In 2010, SPDC took the necessary measures to contain the well. This was also acknowledged by the court.” Mutiu Sunmonu, Managing Director of SPDC, added: “We welcome the court’s ruling that all spill cases were caused by criminal activity. Oil pollution is a problem in Nigeria, affecting the daily lives of people in the Niger Delta. However, the vast majority of oil pollution is caused by oil thieves and illegal refiners. This causes major environmental and economic damage and is the real tragedy of the Niger Delta.”

UNACCEPTABLE “For SPDC no oil spill is acceptable and we are working hard to improve our performance on operational spills. In the past years we have seen a decline in operational spill volumes. These spills, however, were caused by sabotage and the court has, quite rightly, largely dismissed the claims,” he added. Shell is reported to be facing ongoing legal action brought in a UK court on behalf of 11,000 members of the Niger Delta Bodo community, who say the company is responsible for spilling 500,000 barrels in 2008. Shell has admitted liability for two spills in the Bodo region but estimates the amount spilled is far lower. Bodo’s case could be heard in the High Court in London next year.

ON MESSAGE The ruling comes as environmental risk rises up the agenda of boardrooms across Europe, according to underwriters at international insurance company Ace. In a recent study carried out by the insurer, environmental risk is named as the top emerging concern for companies in the UK (cited by 38% of respondents) and France (33%) as well for as mid-sized companies across Europe generally (35%). Ace said the findings are published against a backdrop of an environmental risk landscape that has experienced dramatic change during the last decade, driven by evolution in society’s attitudes as well as legal and regulatory developments. In particular, Ace said that European companies are now exposed to a wider range of risks as they begin to do more business in other regions, not least the world’s emerging markets.


NEWS Continued from page one

DEN DEKKER: CONTINUED FROM PAGE ONE

programme for VimpelCom, which he joined in December of 2011. He told Commercial Risk Africa that the level of interest shown in the local risks by the reinsurers was ‘unbelievable’. “What you see is insurers and facultative reinsurers underwriting the large African (and other emerging territories) clients’ risks with hardly any proper (basic) underwriting information, as long as the price is good,” he said. Mr Den Dekker said that this approach was ‘unbelievable’ and clearly represented little more than cash flow underwriting that will never help improve the risk management culture in emerging countries if carried out on this basis. “At group level (as long as your HQ is in Europe or the USA) they want all kinds of analysis, cat models based on Google Earth, engineering reports, key suppliers and the like, but when I asked for the local information that they had asked for previously (on a standalone basis) from the local cedents they had very little to offer. This is a huge contradiction and all the global insurers and reinsurers do the same and so they are treating African (and Asian) -based companies in a different way to European or American-based companies. In Africa

and Asia they only want to look at the property values and price. But this is not good enough,” Mr Den Dekker told CRA. “I asked one underwriter in London why they do this and he said basically that if they didn’t underwrite the business then someone else would do it so they are prepared to take the risk on board without helping to improve the risk management,” he said. Mr Den Dekker said that he thinks the international facultative reinsurance companies in particular need to change their behaviour and treat risk the same wherever it is, ask the right questions and properly underwrite the risk. Only then can they influence the level of risk management of their clients, but if you ask questions and you do not receive the information then I think higher premiums cannot be the solution. “I would be the last to complain about receiving questions about my local operating companies and exposures that form part of the programme. If some insurers are doing exactly the opposite you have to ask: ‘Where is the consistency?’ continued Mr Den Dekker. On the positive side the risk manager mentioned that the support

3

from the global insurance market in placing global programmes for his company was very good. “Insurers need a risk-managed programme with a strategy and the confidence that the risk manager can implement this strategy company-wide. I am pleased that the market provided us with this support,” he said. More broadly, the key to understanding risks in Africa from a European or international perspective is not to make too many assumptions based upon what is seen in the international news and actually go and see the risks on the ground, said Mr Den Dekker. “You may naturally ask yourself why should I go there and risk encountering rebels, war and the like. But really you should not complicate it too much. The risks are the same as elsewhere and should not be treated that differently. Treat and underwrite your risks in Africa or Bangladesh the same as your risks in Italy,” said the Vimpelcom risk manager. Mr Den Dekker said that obviously risk managers and insurers may be reluctant to do business in areas they are not familiar with, because they have to deal with different cultures, religions and other aspects that can be challenging at first. But, in his opinion, European underwriters in particular need to really experience the risks that they are dealing with on the ground to properly underwrite the risks. “The people in these countries, my colleagues in Africa, are well

educated and very eager to learn and participate in discussions on risk management and that is nice because they want to learn. I can learn from them specifics about the risks that I need to know. I know a lot more about the Central African Republic and Algeria today than I did two months ago!” said Mr Den Dekker. “If you look at the risks from a local perspective then you find that the risks are exactly the same. Earthquake and political terror risks in Africa have exactly the same impact as in Italy, London or Amsterdam. Only the likelihood may be bigger so you have to take appropriate measures if you can and have plans ready. If you go to places like the Central African Republic be aware that there has been recent rebel activity and see what contingency plans you have in place and how it works on the ground,” he continued. Mr Den Dekker said that local managers of course have already considered the potential risks that they face and have responses in place. But it can be useful to provide a ‘fresh pair of eyes’ and use experience to make suggestions about how such contingency and business continuity plans can be improved. This is again another good reason to actually visit the territories in question. “The local manager should see you as a resource to help facilitate solutions that can make a real difference to them. A lot of the things I see in Africa or Pakistan are really

ATI:

—Adrian Ladbury

on new states as shareholders, the biggest of which is to inaugurate the country as a member state. To become a member state of ATI, the membership must be ratified by its parliament because to become a member, the country signs an agreement that ensures they will not cause a claim and that ATI has preferred creditor status in the event a claim occurs on an ATI-backed political risk transaction in their country, he revealed. Other hurdles that are more commercial in nature include the fact that ATI’s policies are currently written in English. As the agency enters into the Francophone region, it will have to translate its policies into French.

CONTINUED FROM PAGE ONE

where we will continue to insure a high number of investments, while we also develop and grow the trade side of business,” revealed Mr Vincent. Traditionally ATI has focused on political risk insurance and investment insurance. But, given Mr Vincent’s expertise of the credit risk insurance business, ATI is gearing up to develop new products in this space as part of a new three-year business plan. Under Mr Vincent’s leadership ATI has revamped its Whole Turnover Credit Risk Insurance product (insurance that protects a company against non-payment by a portfolio of buyers) to make it more flexible to the needs of individual clients, launched surety bonds as well as a new customised product for banks.

JURISPRUDENCE

FACILITATOR In the surety bond space, ATI will act on a reinsurance basis in order to support and increase capacity rather than issuing bonds directly, particularly as many insurance companies and banks already offer equivalent products. ATI has been signing on average eight deals per month in the commercial risk space, according to Mr Vincent, who stated: “It will take the better part of two years until we reach a 20% volume in trade credit insurance, after which we will assess the situation with our board to see whether they are confident to further this line of business to around 30%,” he explained. “It will not happen overnight,” he added. “We still insure a lot of political risk and we are expecting political risk to grow significantly this year due to some large infrastructure projects

not that much different, particularly technology, it is just the people and cultures that are different,” said Mr Den Dekker. Risk training and knowledge sharing is obviously critical for a global company such as Vimpelcom that, like all others, does not provide its risk manager with legions of risk managers on the ground to implement the risk management strategy on a full-time basis. In such a global group, active on diverse continents such as Africa and Asia, it is important to have a flexible approach, said Mr Den Dekker. “In many countries we have a local risk manager and people are stepping up and in many cases starting business continuity programmes which is great. We say go for it. When we have significant operations in a country or region we have risk managers or operational risk managers in place dealing with insurance risks, health and safety, security and the like. They are not the same in every country but we do have local knowledge and skills available,” explained Mr Den Dekker. The next phase is of course training which, thankfully he said, is in demand. “They ask for it which is great. Part of every visit is training and we are trying to ensure that all the local knowledge and expertise and best practice is shared across the group. It is important to get people together,” added the risk manager.

that will come on.” In 2011, ATI reported its gross written premium had increased 112% to USD$10m and its total assets grew 53% to USD$162m. ATI is a multilateral financial institution that has traditionally provided political risk insurance, investment insurance and to a lesser extent export credit insurance. It also provides other financial products to help reduce the business risks and costs of doing business in Africa. This year, the agency will make a push into three new west African markets—Benin, Ghana and Sierra Leone. ATI will begin work in Benin and in principal Ghana at the end of this

quarter, according to Mr Vincent. “Ghana is likely to be a very open market. And we also hope that Sierra Leone, with which we are quite involved, will come on board. There may be others but it’s hard to predict at this time.” Around 90% of ATI’s shareholders are African states—Burundi, the Democratic Republic of Congo, Kenya, Madagascar, Malawi, Rwanda, Tanzania, Uganda, Zambia, and the newest—Benin. Mr Vincent mentioned there will be challenges that ATI faces when it comes to signing

Furthermore, ATI’s policies are ruled by English law which may also pose a challenge with the Francophone states. It is an area that ATI is currently looking into, said Mr Vincent. “And then we will face the normal operational problems, country by country—especially for commercial risk. With political risk insurance there is no real issue because most of our clients are outside the country. They are mostly banks and investors that want to invest in the country and need insurance to protect that investment,” he explained. “But when it comes to commercial risk, the risk of default, we will face the challenge of assessing each country on their bankruptcy laws, rule of law, how fast the judiciary system works, how reliable it is, will we be able to collect efficiently and so on. So there are feasibility studies that will need to be completed on the countries we hope to attract in the next couple of years.


Mining NEWS

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Natural resource nationalism, infrastructure and supply chain top mining sector risk list: Willis Adrian Ladbury

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[ j o h a n n e s b u r g ]—Resource nationalism, poor infrastructure that impedes development and supply chain disruptions are some of the biggest risks that face the mining sector in the year ahead, according to global insurance broker Willis Group. The broker said that global economic uncertainty combined with political upheaval has generated a volatile environment in which demand for metals, natural resources and commodities has ebbed and flowed considerably in its annual Mining Market Review. Despite these challenges, insurers in the mining sector have been tightening their pricing, capacity and coverage following a period of poor underwriting results, the broker warned risk managers in the sector. Willis therefore called on insurers to be more flexible and innovative and seek to provide solutions that account for these rapidly changing circumstances. At the same time the broker urged mining companies to review their risks more frequently and more ‘dynamically’. Other risks faced by the sector

according to Willis include: dramatically rising costs, skills shortages, and the threat of losing a social licence to operate. Andrew Wheeler, Willis’ Mining Practice Leader, said: “Resource nationalism and business interruption as a consequence of strikes probably represented two of the biggest risks facing mining companies in 2012 and this trend is set to continue for 2013.” The threat of strike action was no more evident than in South Africa last summer when unlawful strikes by miners led to deaths at the Lonmin platinum mine in Rustenburg. The unrest spread to other mines in the region.

‘UNREST’ Willis pointed out that political ‘unrest’ at the highest level is an equal if not bigger risk for the mining sector. In July last year, for example, the Bolivian government announced the nationalisation of a silver and indium mine, Mallku Khota, operated by a Canadian firm, the third major nationalisation project within four months. Mr Wheeler said: “One way in which foreign investors may mitigate the risk of resource nationalism is building relations with the host state

by adopting a sound corporate social responsibility strategy, such as healthcare initiatives, building schools and other community projects.” Mining companies are also facing more and more challenges in winning a ‘social licence to operate’, warned Mr Wheeler. Many jurisdictions are changing their attitudes towards mining projects, making it more complicated and expensive to secure and retain a licence to operate. “It is increasingly easy for local people to oppose mining projects and to force the cancellation of rights already gained. This trend is expected to escalate through 2013 and beyond,” stated Willis. The report also highlighted some of the challenges of operating in emerging markets, such as Africa and China, which include: political instability, poor liquidity, inadequate regulation, substandard financial reporting and large currency fluctuations. Certain emerging economies can be a natural haven for crime, corruption, extortion and the fomentation of terrorism, warned the report. Furthermore, the location of many of these economies, combined with their lack of infrastructural and service resilience, make them particularly vulnerable to natural disasters, warned

the broker. “A good understanding of potential or current exposures as well as the appropriate risk mitigation measures is essential to success in these markets,” stated Willis. Last April rival broker Marsh published a report on the mining sector that concluded that overall, mining companies have an ‘impressive’ track record for delivering continuous improvements in safety and risk governance standards.

DETERMINATION It confidently predicted: “We have no doubt that the professionalism and expertise present within the industry will ensure that any new and emerging risk challenges are dealt with in an equally determined fashion.” The broker said that insurers have generally recognised the achievements of mining companies in identifying, mitigating and retaining their risks, pointing out that many mining companies have ‘close and longstanding’ relationships with their insurers built through regular dialogue with mining company executives and visits to mining sites and processing facilities. But Marsh agreed with Willis that this is an inherently challenging sector, if only because the very nature of mining natural resources means that operations are often in some of the

most remote and inhospitable areas in the world. “In addition to the traditional risk factors, the mining industry now faces an even wider range of challenges. Factors such as climate change, new technologies, economic uncertainties and a secure supply of key consumables like electricity, water, gas and other fuels are all difficult to predict and bring additional complications to securing appropriate balance sheet protection,” added the Marsh report. Marsh also pointed to increasingly significant political risks in the mining sector, not least in Africa. “The expanding geographical reach of mining companies brings greater exposure to host government actions—such intervention has increased substantially in recent years. The economic crisis has led to the introduction of new taxes and royalties on mining companies. We have seen levies introduced in Chile and many parts of Africa—and proposed in Australia,” stated the broker. “Some countries are also looking to replace lost revenue by nationalising mineral assets, which could lead to the imposition of resource rents, affect royalty rates, increase control of foreign participation and introduce new mining codes,” continued Marsh.


NEWS JSE sustainability index IMF on SSA

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Labour problems in mining sector hit JSE sustainability performance Adrian Ladbury

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[johannesburg]—The number of best performers in the Johannesburg Stock Exchange 2012 SRI Index review fell to 10 last year compared with 22 in 2011 because of more demanding reporting requirements and labour problems in the mining sector. The JSE said that six potential best performers had been precluded from the best performer category in the 2012 SRI Index because the mining sector was no longer considered for best performer status following the labour unrest. “Labour relations are a complex matter affecting most players in the industry and in business in general. The JSE has had the opportunity to liaise with a number of companies in the mining sector, as well as with the Chamber of Mines, and is encouraged by the positive steps being taken in recognising the urgency and extent of the matter,” said SRI Index head Corli le Roux. The JSE said that while ‘serious efforts’ are being made to resolve the labour relations unrest at individual as well as industry level through the Chamber of Mines, given the significance of the issue it decided that it was

not possible to include mining companies in the best performer category in 2012. Ms Le Roux said: “The mining industry has been the stalwart of the SRI Index for many years, demonstrating strong commitment to all aspects of sustainability and achieving high levels of performance and disclosure, as is demonstrated through the broader assessment of these companies against the criteria. Excluding them from best performance was therefore a difficult decision to take, however, the SRI Index is designed to be sensitive to sociopolitical events, with the current issue reflecting fundamental challenges to business in this country.”

opments in sustainability. Investors are asking companies for increased transparency, which motivated this move in the 2012 SRI Index,” said Ms Le Roux. For 2012 a parallel analysis was also conducted on all participating companies that was based purely on publicly available data. This was designed to help companies and assess current levels of disclosure, given the likelihood that the Index will move to a process that only considers publicly available information this year, explained the JSE.

DATA CRUNCH

ENGAGEMENT Engagement with affected companies as well as the Chamber of Mines will continue as the JSE monitors progress towards finding long-term solutions, it added. “The events of 2012 with respect to South Africa’s mining sector are a sober reminder that there is still much work to be done. This calls for a renewed commitment by companies and investors to appropriately address material environmental, social and governance (ESG) factors when seeking investment returns,” said John Oliphant, Principal Officer, Government

Corli le Roux, SRI Index Head

Employees Pension Fund (GEPF). In total, the number of companies from all sectors that met minimum requirements in social areas (including labour relations) rose in 2012. Some 82% of the companies reviewed in the SRI process met the criteria, a two percentage point rise since 2011. The best performer category contracted further in 2012 because the

process evaluated company reporting requirements based only on information in the public domain. Although policy and performance criteria could still be supplemented by confidential information, reporting elements had to be publicly disclosed last year. “The SRI Index deliberately evolves based on investor requirements of companies and the continuous devel-

Just over half of the 108 companies that were assessed in this parallel review were found to be ‘out’ of a prospective Index when only publicly available data is used. This compared to the 70% of companies that qualified for the 2012 SRI Index. The JSE said: “While a number of companies are close to meeting the inclusion margin, environmental and climate change disclosures need the most work, while social reporting is also lacking, particularly in relation to quantitative management data. Governance remains the strongest area of performance. However, only two companies would have qualified for the best performer threshold.”

IMF broadly positive about SSA growth but downside risks rise Adrian Ladbury

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[johannesburg]—The International Monetary Fund (IMF) has confirmed a ‘broadly positive’ outlook for the Sub Saharan Africa region despite slowing growth in the more mature leading regional economy South Africa, drought in the Sahel countries and political problems in Mali and Guinea-Bissau.

GOOD OUTLOOK Antoinette Monsio Sayeh, Director of the IMF’s African Department, commented: “Economic conditions in Sub Saharan Africa have remained generally robust against the backdrop of a sluggish global economy. Most low-income countries continued to grow soundly in 2012, although drought in many Sahel countries and political instability in Mali and Guinea-Bissau undermined economic activity. Middle-income countries, especially South Africa, slowed further, reflecting closer links to European markets. Inflation fell, as pressures on food and fuel prices eased following a surge during 2011.” Ms Saye added that the near-term outlook for the region remains ‘broadly positive’, with growth projected above five per cent a year in

Antoinette Monsio Sayeh, Director of the IMF’s African Department

2012–13. She said that strong domestic demand, including that which is investment-driven, is expected to support growth in many low-income

countries. But a weak external environment, particularly in Europe, will continue to be a drag on middle-income countries’ growth. Global commodity prices are projected to remain ‘soft’ and domestic climatic conditions are improving. Inflation is expected to fall to about eight per cent through end 2012, and about seven per cent through end 2013. The recent surge in international cereal prices is likely to exacerbate food insecurity in some places, and could be a threat to inflation if it intensifies, said the IMF. “Downside risks have increased. Further deterioration in the world economy could quickly spill over into slower growth in Sub Saharan Africa, potentially reducing the regional growth rate by about one per cent a year. The impact would be most severe in countries where exports are undiversified and policy buffers low,” said Ms Sayeh. “Policy settings should reflect country-specific conditions. For now, policymakers should rebuild fiscal and external buffers where these remain low. In the event of a significant global downturn, with knock-on effects on Sub Saharan Africa, pro-cyclical fiscal contraction should be avoided provided that wider fiscal and external deficits can be financed. Monetary and exchange rate levers should be utilised where policy space is

available,” she added. Ms Sayeh also drew attention to key messages of two background papers in its Regional Economic Outlook on potential ‘economic spillovers’ from Nigeria and South Africa and on structural transformation in Sub Saharan Africa. First she said that there are important trade, investment, and financial linkages between South Africa and other countries in the region, especially those which are members of the Southern African Development Community and the South African Customs Union.

EXPANSION Nigeria’s financial linkages with countries further afield are also growing as Nigeria-based banks expand throughout the region. Second, Ms Sayeh pointed out that during the last 15 years most countries in the region have experienced some degree of structural transformation, with a shift of workers from lower to higher average productivity activities and sectors. “Depending on resource endowments, labour skills, and logistical and infrastructural features, some Sub Saharan African countries may find it easier to follow the Asian structural transformation path through manufacturing, whereas others may transform through services, and still others through agriculture,” said Ms Sayeh.


6

Enjoy the read! COMMENT

Commercial Risk AFRICA

Focus on pan-African risk

W

elcome to the second issue of Commercial Risk Africa and the first of this year. We launched this publication at the IRMSA conference in Johannesburg in hard copy format late November last year and it was well received by the South African risk management community and our European and international readership. We kicked off in South Africa because it is the most advanced nation in Africa in risk management and insurance terms and it is also the base from which a fast-rising number of our European and international readers are expanding their African operations. We would like to formally thank the Institute of Risk Management South Africa for its support for the new newspaper and look forward to working with this energetic and forward-thinking association in future, particularly as it extends its reach and influence beyond the Republic of South Africa. This latter point is an important one because Commercial Risk Africa is of course designed for the wider Sub Saharan African community. We have been working hard since its launch in November to ensure that the publication covers more than South African risk news and is read by risk and insurance professionals across the African continent. We have therefore added over 400 senior African risk and insurance professionals for this issue alone. Hence in this issue we do have an indepth report on the highlights of the excellent speeches and debate at the IRMSA conference, which is focused on South Africa. But we also have an in-depth report on the

Kenyan market, latest news that is exclusive to CRA on environmental liability in Nigeria, with deep implications for all companies doing business in Africa, and an interview with a leading insurer in the CIMA Frenchspeaking region. Africa is of course a huge continent with a diverse range of cultures and territories. As such CRA will not attempt to be all things to all men. We cannot hope to cover every risk that develops in every territory across the continent. But what we will do is use our growing team of expert writers, attendance at key events such as the excellent Enterprise Risk event in Johannesburg organised by IQPC last month and interviews with leading market experts such as Delphine Maidou, new CEO of AGCS Africa, and the Marsh Risk Consulting team in this issue to identify the risks that really matter to risk managers in Africa and worldwide as they get to grips with this exciting, fast growing and often challenging environment. Of course publications such as CRA rely on their readership for regular feedback and ideas to help ensure that they cover the topics and news that really matters. This is how Commercial Risk Europe has rapidly established itself as the number one source of risk news and information for the European and increasingly international readership. Thus please do contact me with any feedback and ideas at any time. I look forward to hearing from you. Enjoy the read! Adrian Ladbury Editorial Director Commercial Risk Africa aladbury@commercialriskafrica.com

Editorial Director Adrian Ladbury +44 (0)7818 451 882 [m] aladbury@commercialriskafrica.com

Publishing Director Hugo Foster +44 (0)7894 718 724 [m] hfoster@commercialriskafrica.com

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REPORTERS:

Liz Booth, Kapila Gohel, Stuart Collins, Tony Dowding, Nicholas Pratt, Rodrigo Amaral, Anne-Christin Groeger, Friederike Krieger, Herbert Fromme For commercial opportunities email hfoster@commercialriskafrica.com To subscribe email subs@commercialriskafrica.com Commercial Risk Africa is published ten times a year, by Rubicon Media Ltd.— Registered office 7 Granard Business Centre, Bunns Lane, Mill Hill, London NW7 2DQ Rubicon Media Ltd. Š 2013 All rights reserved. Reproduction or transmission of any content is prohibited without prior written agreement from the publisher Whilst every care has been taken in publishing Commercial Risk Africa, neither the publisher nor any of the contributors accept responsibility for any errors it may contain or for any losses howsoever arising from or in reliance upon its contents.


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CIMA REGIONAL VIEW

8

CRA’s Rodrigo Amaral discussed the development of risk and insurance in French-speaking Africa with Alioune Diouf, CEO of AXA Senegal

Risk management PROFESSION maturES in FrANCOPHONE Africa

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isk management and the insurance market are set for rapid growth in French-speaking Africa as economic development and the rise of the middle class create a new range of opportunities for global companies, according to a leading insurer in the region. Alioune Diouf, the CEO of AXA Senegal, told Commercial Risk Africa that investments in infrastructure and other areas are already pushing the demand for insurance coverages in the countries that compose the Conférence Interafricaine des Marchés d’Assurances (CIMA), a common insurance market. “Companies are increasingly looking for protection, and as result I believe that the job of insurance brokers and, at the level of corporations, of risk managers will see a favourable evolution in the future,” Mr Diouf told CRA. Demand for commercial insurance is growing because of the economic development that some of the economies in French-speaking Africa have enjoyed of late. In countries such as oil and bauxite-rich Ghana, the insurance market has grown at annual rates of 15% to 20%. The pace has also been impressive in Cameroon and the Ivory Coast, Mr Diouf said.

laws are very much inspired by the Napoleonic Code. Insurance regulation, therefore, largely mirrors that of France, the former colonial power. Mr Diouf remarked that the market is dominated mainly by motor and health insurance lines, and it is ruled by a common legal framework that is shared by all the

HOME FRONT “There are important natural riches in the region, and African politicians have been ever keener to process those riches inside their countries,” he pointed out. He mentioned the example of Gabon, which has decided that it will not allow its wood to be exported in natura, and that companies have to industrialise within the Gabonese frontiers. “In order to make that possible, large infrastructure projects are being implemented,” Mr Diouf pointed out. “Dams, airports, ports and roads are being built, and all of that is creating a demand for insurance,” he added. The CIMA region is composed of 14 countries where French is a national language and where

Alioune Diouf

countries. Each country has a national insurance entity, but Comission Régional du Contrôle des Assurances, CRCA, is the highest supervisory body for all of them. Mr Diouf pointed out that the common market creates a positive environment for insurers that operate in the region. For instance, he said that AXA has

found many synergy opportunities in the subsidiaries it maintains in Senegal, the Ivory Coast, Gabon and Cameroon, the four countries of the CIMA region where it currently operates. For international groups that own subsidiaries in several CIMA countries, the common market is also helpful, he said, as it makes it easier for them to manage their insurance arrangements. As legislation is the same in all countries, and there are a number of pan-regional insurance groups, companies are able to negotiate the purchase of insurance in blocs. From an international programme point of view, it is important to note that CIMA countries are non-

admitted jurisdictions. Mr Diouf said that, as a rule, companies that operate in the region and that want to transfer risks located there must place the risks in CIMA countries too. Exceptions can sometimes be made, but they must be approved on a case-by-case basis by the authorities. When it comes to large risks, it is possible to take them to international reinsurance markets, although at least 25% of the risks must stay in the region.

BY THE RULES The law also stipulates that the operation must go through a company based in the CIMA market. “What the large international companies do is negotiate directly with reinsurance markets via their captives or brokers,” Mr Diouf said. “So it is not difficult to integrate the countries of the region in international programmes,” he added. Companies should also bear in mind that some coverages are mandatory, such as motor insurance in almost all countries, and insurance to import products in several of the countries. In some countries construction insurance is mandatory too, or will soon become so. The obligation includes coverages such as all risks construction and ten-year civil liability (decennial coverage). Mr Diouf also said that ever more companies are purchasing health insurance for their workers. On the other hand, property insurance is not a major concern, at least from a catastrophic point of view. “We do not have many catastrophic risks in this region,” Mr Diouf pointed out. “Those who purchase property damage insurance are more worried about risks like fire or explosions, or losses caused by strikes or popular movements. Floods here are very rare, and the same goes for earthquakes.” However, it is not possible to purchase insurance against damages caused during an armed conflict, the CEO of AXA Senegal told CRA.


BEHIND THE NEWS IRMSA

9

Commercial Risk Africa was launched at the IRMSA annual conference in Johannesburg in late November 2012. Adrian Ladbury reports the highlights from Africa’s premier risk management event

Violent strikes can be prevented by risk management says CCMA’s head Adrian Ladbury

news@commercialriskafrica.com

[johannesburg]—The risk of unlawful and increasingly violent strikes that have spread across South Africa in recent times and hit global headlines as strikes erupted into lethal violence at the Marikana platinum mine last August are manageable, according to Nerine Kahn, National Director of the Commission for Conciliation, Mediation and Arbitration (CCMA). The CCMA is a dispute resolution body that is independent of trade unions, government or business and was created as a result of the Labour Relations Act, 66 of 1995 (LRA) by which it replaced the Industrial Court. It was hoped that the creation of the CCMA would signal a shift from a highly adversarial model of relations to one based on the promotion of ‘greater cooperation, industrial peace and social justice’, according to its website. But while recently published case settlement rates suggest that the CCMA is doing a good job, the violence that erupted at Rustenburg and the subsequent wave of unlawful and unprotected strikes across South Africa such as the farmers’ strikes suggest that the country still has a mountain to climb when dealing with workers’ grievances. During a recent visit to the CCMA’s Newcastle office, Ms Kahn conceded that the problem is not an easy one to deal with. “Many employees believe that they are exonerated from compliance with the Labour Relations Act procedures and this has placed additional pressure on commissioner resources in dealing with unprotected strikes in northern KwaZulu-Natal,’’ she said. Ms Kahn cited one recent example of unprotected strikes at Forbes Coal when workers came up with ‘exorbitant’ demands of an over 70% wage increase. Another example she gave was at Moneyline Mine in Vryheid where employees went on strike to demand that no disciplinary action was taken against an employee who was found manufacturing dangerous weapons underground. But despite the scary headlines that currently dominate risk agendas in many South African companies, Ms Kahn told risk managers at the IRMSA conference that the disaster at Marikana actually underlined how this risk can be manageable so long as all parties involved play by the rules and take a risk-managed approach.

RIGHT TO STRIKE

“The events of this year underlined the importance of managing risks and showed how industrial relations and the extent to which the ripple effect can have on an organisation and the country,” said Ms Kahn. The arbitration chief stressed that it is a constitutional right to strike and for workers this is a ‘very, very important’ right. But she also stressed that it is critical that specific processes are followed. “This year we moved out of that and we need to work out how to deal with that,” she said. Ms Kahn again stressed that strikes are a normal part of the industrial relations process and not necessarily negative. “But breaking the process and relationship is a risk that can have adverse consequences and did so this year and last year as more and more unprotected strikes not protected by the Labour Relations Act occurred,” she said.

The consequences of such actions are simple and not healthy, said Ms Kahn. “They break down relationships between employers and employees. Anger causes problems, disputes, business continuity and production problems, lost business time, profits and jobs. The question is how do you prevent this?” she asked. Ms Kahn pointed out to delegates at the conference that the ‘conventional wisdom’ amongst the wider South African and business community was that the responsibility for the industrial action laid squarely with the trade unions because they had raised expectations in an irresponsible way. “This was really, really not the case,” she said. Ms Kahn said that the seeds of the Marikana dispute had been sown long before the immediate crisis unfurled and led to violence and deaths. She said that there is clearly a growing frustration amongst workers about the huge wage gap evident in South Africa, as stressed by fellow speaker Mark Bussin of the SA Reward Association (see story on next page). And business leaders need to accept that there is shared responsibility for such events if lessons are to be learned. Ms Kahn divided up the responsibility for the Marikana incident into that which laid at the feet of the employers, that which must be borne by the workers themselves and their representatives and that which lies out of all parties’ control. She said the employers were firstly to blame because they displayed an unhealthy organisational culture. “If you ignore employee concerns or just paper over the cracks, eventually it will manifest itself in industrial action,” she said. Ms Kahn explained that strikes are actually hardly ever simply about wages. “Wage demands are usually a manifestation. Generally they (strikes) are caused by autocratic management style. There is a lack of consultation with workers about what can be done to improve conditions,” she explained. A second responsibility that lies with employers is inequitable employment practices, said Ms Kahn. “Often management don’t realise this is a problem but it is very obvious to workers. For example labour broking. I am not suggesting that we should not have it but we should recognise that this system leads to exactly the same person doing exactly the same job but earning less, for less holidays and less benefits, therefore how do you manage that?” she asked. Management of industrial relations by proxy is another typical management failing, said Ms Kahn. She said that the single biggest problem in South Africa in an industrial relations context is the tendency to outsource human resources and thus not deal directly with challenges on the ‘coal face’. Ms Kahn said that employees obviously lose respect for management that delegates such an important function and this approach does not tend to solve problems on the shop floor anyway. “It allows for negotiations but does not deal with issues. HR is there to advise you on procedure, not tell you how to manage employees. This is a big problem. You are absolving your right to communicate,” said Ms Kahn. Equally dangerous for the same reason is a tendency to overly rely on trade unions as the main means of communication with workers, said Ms Kahn. ‘Lawyering up’ as a first resort is another management problem. “We run to lawyers just as we absolve responsibility to the HR department. Lawyers go to court and get a piece of paper and are ignored. Lawyers make a lot of money but do not deal with industrial relations problems…yes you need to lawyer up but it does not solve issues, just escalates them and often endangers the relationship going

Nerine Kahn

forward,” said Ms Kahn. The cause of strikes such as Marikana that lie in the hands of the trade unions are just as plentiful, difficult and in need of corrective action fast, said Ms Kahn. “I would argue that trade unions have become a business. People are collecting money and fail to service the workers. Management is happy because they deal with representatives but do not know whether they are actually dealing with the workers. Too often the representatives don’t live in the community affected and there is a lack of accountability of shop stewards,” explained Ms Kahn. An example of how the trade unions need to be dealt with carefully occurred in 2010 when one mining company agreed to increase wages to keep everyone happy. But the trade union that the management of the company dealt with only represented four layers of workers and the ones that were represented received higher increases. “They were not actually serving all constituents,” she said. Ms Kahn also explained that under the rules of the National Union of Mineworkers, shop stewards and organisers are supposed to be re-elected every four years but in the Rustenburg area the local union bosses decided to ignore that requirement and stay in position.

ACHIEVING AIMS

“You can understand why. They were flown to conferences, were given a car and the like. Why would they want to return to manual labour? But the NUM ignored this because of history,” she said. Ms Kahn also said that a culture of ignoring the LRA has developed, which is leading to a dangerous new environment. “This is a serious offence but the trade unions do not want to talk about this. Therefore the workers believe that if they aren’t violent then they won’t achieve their aims. This is a huge risk,” said Ms Kahn. The causes of illegal industrial action that are under the direct control of both management and the unions include failure of leadership, ignoring the workers’ voice and failure to agree the rules of engagement at the outset. “It is better to argue up front and not in the middle of a process because workers get confused because the process is quite complex. Only after three days of intervening in Rustenburg did the worker delegates realise for the first time that an unprotected strike was breaking the law. They just saw protest as a way of getting what they wanted,” explained Ms Kahn. Wider social, political and economic dissatisfaction also has led to a rise in industrial activity in recent times in South Africa and this is essentially out of the hands of both management and the unions, said Ms Kahn. “Marikana was not a labour dispute in reality but socioeconomic frustration. Workers were expressing frustration with issues that the government could not respond to,” she said. Overall the key for both management and unions to avoid such problems in future is to get together and discuss problems and solutions all year round, and not only act after the problems have boiled over. “It is about effective communication and not just leaflets. You need to talk to people and understand the needs of people and then get a commitment internally to a peaceful line of action from workers and management. One key thing was that the workers at Marikana said that Lonmin management never talked to them. We have had a hard time in South Africa recently but this risk can be mitigated by managing it strategically and operationally,” concluded Ms Kahn.


IRMSA BEHIND THE NEWS

10

President of South Africa, Joseph Zuma

Performancelinked pay part of solution to inequality problem: Bussin

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ark Bussin, immediate past president of the SA Reward Association (Sara), told risk managers at the IRMSA annual conference that, against a backdrop of increasingly violent strikes by disaffected workers, the time has come to take pay and benefits seriously in corporate South Africa. Mr Bussin said that he chairs more remuneration committees than any other African and one question he always asks his committee members is whether they think African CEOs are overpaid. The result was 60% yes and 40% no and, given the current social and political environment in South Africa, he is not surprised by that, he said. “A guy is paid R48m per annum as CEO and we are in union negotiations with his workforce for a 1% increase for workers. The company is dragging its heels over 1%? We can’t ignore the context anymore and need to adopt more robust methods on remuneration,” Mr Bussin told delegates as South Africa was still trying to digest the meaning and causes of the violence and resultant deaths at the Lonmin Marikana platinum mine in Rustenburg last summer. “If risk management is our game then one risk is negative image and the potential for a downward spiral. A salary of R48m versus the downtrodden masses is just too much. It is the greatest job mismatch of all time,” said Mr Bussin. “Kids come out of school to no work and this is not a race issue. Are we teaching them the right things? Where is the IT education? Is the university curriculum still relevant? We need to ask what business needs. Why are there 6–8 million unemployed? This is a big risk because opposite this you have a CEO earning R48m,” continued the pay expert. Mr Bussin said that structural unemployment is a big problem that will not simply go away if not tackled, and not just in South Africa. He quoted a report by Mckinsey published in September 2012 entitled Who ate my job? that predicted that 90 million people worldwide would lose their jobs by 2020. “Technology is eating the jobs so our downtrodden masses need to be more technically savvy. Everyone needs access,” he said.

Mark Bussin

“The Human Resources Institute says that it cannot find good accountants, risk managers and the like and employers from countries all over the word are fishing for talent here. We are just not teaching people what they need to know. We have 1.2% of the worldwide workforce in South Africa but 5% of the unemployed. This is not good enough,” continued Mr Bussin. Mr Bussin focused on the Marikana miners’ strike as a case in point and a harsh lesson for wider business to learn from. “What did the workers want? Production was down 21% and gross profits down 40% but the bosses enjoyed a 23% rise and the workers read about this in the newspapers. We will see more and more strikes of this nature unless we address this,” he warned. As ever, however, Mr Bussin explained that the case is not anywhere near as simple as it was presented in the newspapers and viewed by the disgruntled workers. He pointed out that the average tenure for a CEO globally is three years. Some 40–70% of CEOs will retire in the next five years. He also said that 20,000 South Africans recently attended the Opportunities in Australia Expo in Johannesburg and half of them

were black. Some 150,000 people work in the highly respected South African financial services industry and 10 million job vacancies currently can’t be filled in the US alone. “Retention is a key risk to any company in South Africa currently. One mining company recently offered its entire executive committee $1-2m plus 100% shares basically because if they go the business will struggle. So the question is: ‘How do you retain these people while looking after the downtrodden masses?’ You need to do proper remuneration and performance management,” explained Mr Bussin. The pay expert said that he does not believe that the pay expectations of the trade unions are excessive given the price of food currently. But he said that the answer is not necessarily an outright attack on the executive and higher earning classes. When the mean pay of South African executives is compared to 20 countries with similar GDPs the message is clear: South African business has to show ‘restraint’, said Mr Bussin. The potential ripple effects of a pay assault are clear. “We could see pay caps, an increase in tax if you earn more than R5m of 60%. These are all possibilities and therefore we need to show restraint. The counter argument is that this is a market economy. We have to fight inequality but not just by wage pay freezes. That is short-term. We actually need to create jobs,” he explained. Mr Bussin said that the answer for executive pay is to make a strong link to performance. “You have got to disentangle skill from luck. You can’t have incentive schemes that go up when the tide is high and down when it is low,” he explained. Mr Bussin also pointed out that money is not everything. He said that actually South Africa needs great companies, great leaders and a great work culture that creates great careers. “Great rewards is only 25%. The rest is inspirational leadership. Companies need to put more employees on variable pay, profit-related pay,” continued Mr Bussin. Mr Bussin said that he sits on the commission that sets the President’s pay and did so in 1994. R500,000 was suggested and I suggested a R50m bonus after five years. All the others said no way. But my suggestion was based on targets—to halve unemployment and double GDP. Who now would object to that? It’s about the option,” he concluded.


BEHIND THE NEWS IRMSA

S

outh African companies and individuals need to act to tackle the rising problem of bribery, corruption and ethical decline in government and business or the country’s economic development will be threatened as investors shy away, a leading ethics expert warned IRMSA delegates during the risk management association’s annual conference. The issue was raised at the conference shortly before it was revealed that South Africa’s position in its global corruption perception index published by Transparency International has worsened again. South Africa is now ranked 69 out of 176 countries surveyed in 2012, a fall from last year’s 64th position out of 183 countries.
Moaning about the problem will not make it go away, rather, positive action is needed, stressed Dr Deon Rossouw, CEO of the Ethics Institute of South Africa. “The logic is quite simple. We all complain but it takes two to tango. The role of business in keeping corruption going is recognised and so there has to be a demand for business to get its house in order and play its part in stopping corruption,” said Dr Rossouw, a member of the King Committee that created South Africa’s cutting edge corporate governance code. Dr Rossouw’s institute has recently signed a memo of understanding with IRMSA and he said that this should come as no surprise to anyone because the link between ethics and risk management is ‘abundantly clear’.

NEW KING CODE

He pointed out that ethics had risen in prominence in South Africa in recent years not least through the King code. King I was introduced in 1994 and the chapter on ethics was added at the end as an ‘afterthought’, he explained. It gained more prominence in King II introduced in 2002 and by the time King III came along in 2009 it was included within the first chapter. Also the new Companies Act, introduced last year, requires a second statutory committee of the board that deals with social and ethical issues. “We have seen risk management increasingly on the agenda of social and ethics committees because they (risk managers) need to monitor the social and ethical performance of companies. If risks are detected they must be responded to by the board of directors…risk managers typically should advise boards on how ethical

11

Dr Deon Rossouw, CEO of the Ethics Institute of South Africa

risks should be mitigated,” said Dr Rossouw. Dr Rossouw said that importantly the demand for this recent emphasis on ethics has come primarily from outside the closeted world of boards, internal audit and risk management committees. He said that first there is big social demand because there is worldwide declining trust that business will act in the best interests of society and can cope with conflicts of interest. This is reflected in growing pressure coming from above, said Dr Rossouw. The United Nations for example introduced its voluntary code, the Global Compact, and former UN President Kofi Annan called upon companies to become more responsible members of society, focusing more on human rights, labour rights and the like. Then there is pressure from regulators the world over. This accelerated after the recent global financial crisis occurred and led to masses of regulation, much of which was aimed to force companies to become more responsible. Social protest has also risen in recent times, particularly after the financial crisis. Financial centres such as Wall Street and the City in London were occupied by groups demanding a new, more ethical approach to business and society at large. The demand for sustainability is also a driving force according to Dr Rossouw, who said that more and more people are waking up to the fact that there is a ‘very good chance that we

are destroying the planet and we have to stop stealing from our children’. And finally there is investor demand for a more ethical approach to business, said Dr Rossouw. He pointed out that big pension funds have begun properly screening their investment targets and not just for financial performance but rather judging them on economic, environmental, social and governance criteria. “We have seen the whole rise of responsible investment that excludes companies and whole industries such as gaming, tobacco, arms and the like,” he said. Corruption is an element of this focus on ethics and Dr Rossouw said that agreements such as the UN Convention against Corruption, UN Global Compact, the OECD Convention on Bribery and Corruption and US Foreign Corrupt Practices Act (FCPA) are all placing pressure on companies and individuals within them to raise their ethical standards. The UK Bribery Act in particular specifically refers to ethics and risk and has caused something of a stir as it sets the ‘Gold Standard’ for behaviour. As with the FCPA, it significantly allows for the prosecution of individuals involved in corrupt practices even if they are based outside of the UK or US. This is a point not lost on risk managers with African companies with financial links to the UK or US companies or that even just supply them. Dr Rossouw said that one encouraging trend to come as a result of all this is that companies

are actually also beginning to realise that it is not just about compliance but also actually better for the company to be clean and to be seen to be clean. Dr Rossouw said that there are clear advantages associated with having a ‘significant ethical culture’ such as enhancement of the corporate reputation, which remains the main driver. “It raises levels of trust and means you have a better chance of attracting investors. There are examples of products that are no longer sourced in South Africa because of working standards. It also helps to attract and retain talented staff. People want to be treated well and if they are treated unethically they will move on,” said Dr Rossouw. This latter point is perhaps one of the most powerful drivers of all. As was discussed during the IRMSA conference and other risk events attended by CRA in recent times, there is a real battle for talent underway in the global economy currently and shortage of talent is regarded as a big risk by risk professionals around the world currently. As with risk management ethics, of course it starts at the top. “If you want to manage ethical risk it starts at the top. Ethical management needs to built into the board of directors and they should take responsibility via governance structures formally,” said Dr Rossouw.

COST BENEFIT

And of course stakeholders need to be fully engaged. “Ethics is ever more important and prominent. People often think it’s so complex to manage ethical risk. But the short answer to that is try not managing ethics—it’s much more time consuming and costly!” concluded Dr Rossouw. On the specific problem of corruption within the public sector in South Africa, Dr Rossouw said that a ‘culture of entitlement’ unfortunately appears to have developed within the South African public service, ‘not I am here to serve the public’. “There is a rising percentage of frauds involved with doing business with government departments. A line needs to be drawn there, this cannot continue because it is undermining service delivery for the public, building a corrupt culture and this is a big problem,” he said. But Dr Rossouw did point out that the impact of corruption, while worsening, is still small compared to other African countries such as those in the north, Angola, Nigeria and the Democratic Republic of Congo to name but three. Though he did stress again that the UK Bribery Act is already having an impact in this sense because companies are suspending operations and will pull out.

Call to arms on ethics as INDEX marks down SA’s corruption score


Photo: Gallo Images / Sowetan / Bafana Mahlangu

IRMSA BEHIND THE NEWS

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David Lewis, Executive Director, Corruption Watch

FINE WORDS NOT ENOUGH The Transparency International

corruption perceptions index measures perceived levels of public sector corruption and ranks countries based on a score from 0 (highly corrupt) to 100 (very clean). South Africa was ranked at 43. This makes it one of the countries perceived to have high levels of public sector corruption. Adrian Ladbury reports

D

avid Lewis, Executive Director of Corruption Watch, a non-profit organisation launched in January 2012 that relies on whistleblowers to fight corruption and hold leaders accountable for their actions, said following the bad news from TI that, while many leaders in the public and private sectors were deeply concerned about corruption, ‘the public can’t help but see the disjuncture between strong words and weak action’.
 “We are flooded with important policy documents like the National Development Plan and comments by the Minister of Finance among others condemning corruption. And yet the year ends with some very serious corruption allegations directed at no less than the president and his family and the unfortunate decision to forge ahead with the secrecy bill,” commented Mr Lewis at the time.
 “The TI report confirms what a number of local surveys have concluded,” he said. “But Corruption Watch takes some comfort in that the vast majority of the respondents to the South African Social Attitudes Survey indicated that they want to take a proactive stance in combating corruption. Some 85 per cent claim that they would report an incident of corruption, while 82 per cent agree that ordinary people could make a difference in the fight against corruption,” he continued.
“It is this sentiment that we are tapping into and which remains a vital instrument in confronting this economically costly and socially debilitating scourge,” concluded Mr Lewis.
 The latest scandal to emerge from Corruption Watch was published on 29 January as the group claimed to have uncovered an alleged fronting in a R30 million tender won by Mvula Trust to manage the distribution of hundreds of millions of rand through a communitiesbased job-creation project.

Corruption Watch said that the revelations followed a four-month investigation after it was approached last year by a whistleblower who alleged that rural development NGO Mvula Trust had obtained a government tender irregularly. The tender was for a lead agent to manage the Department of Cooperative Governance and Traditional Affairs’ (Cogta) Community Works Programme. The group stated that the tender irregularities occurred under the watch of trust chairperson and Deputy Water and Environmental Affairs Minister Rejoice Mabudafhasi, a member of the ANC’s National Executive Council and former Human Rights Minister. “The investigation found that Mvula Trust subcontracted a significant part of the awarded contract to a third party. This arrangement between Mvula Trust and the third party, Ubuntu Sima, was not disclosed in the initial bidding documents as required. A number of questionable links relating to conflicts of interest between Mvula Trust and Ubuntu Sima were also uncovered,” stated the group.

INVESTIGATION

It added that an ex-trustee had reported the irregularities to the police and the case is being investigated by the commercial crimes unit.
 “We have approached Cogta and provided it with detailed information based on our investigation. We are requesting them to further investigate the matter and to follow up with necessary tough action against those found to be in the wrong,” said Mr Lewis. Mvula Trust reportedly denies that any fronting or corruption took place. But according to NG Pulse, the online news service of The Southern African NGO Network (SANGONeT), the trust did admit the concerned trustee declared her company’s role verbally but only after the tender was awarded. NG Pulse reports that the trust said that it has taken measures to ensure future conflicts of interest are avoided.


BEHIND THE NEWS Kenya

13

[from left] The front runners in the 2013 Kenyan election: Raila Odinga and Uhuru Kenyatta

Kenyan risk managers brace themselves as election nears Liz Booth

news@commercialriskafrica

[nairobi]—4 March, 2013 will be an important day for Kenya, not just in terms of the election result but also the way in which the country reacts—regardless of who wins. Kenyans will vote for a new president to replace Mwai Kibaki. Two front runners have emerged—Uhuru Kenyatta and Raila Odinga. Odinga is significant because his loss back in 2007 sparked riots and intertribal violence that shocked the nation and the watching world. So it is no wonder that 4 March has taken on extra significance this year—not least among risk managers who are busy working on plans to protect their businesses and workforces.

SOME PRECAUTIONS Even at a government level, precautions are being taken. The French embassy, for example, is planning to close during the election period, while businesses are looking at who is working where and when—definitely discouraging people from travelling at night. Simon Roberts, Director of Risk at G4S Kenya, says the violence in 2007 was inter-ethnic and little impacted on large businesses or on foreign workers. However he said: “The violence brought a consequent crime spike at that time. With the police and civil authorities concentrating on the

election violence, there were fewer people to protect other things and so crime spiked. Certainly people who were here last time are getting ready this time around.” His firm can offer general planning advice and information before, during and after the elections and Mr Roberts said: “People seem to want this service—particularly information so that they can manage their own risks.” The African Trade Insurance Agency, which supports more than $2.5bn worth of trade and investments across the region (see profile page 19), reports an uptake of political violence cover of around 50%. Humphrey Kwangi told Commercial Risk Africa: “People are looking back at what happened— nobody was spared, big businesses, SMEs or individuals. Now uptake for political risk cover is coming from both big businesses and from SMEs. I think everyone who owns property or has an asset wants to protect it.” He added that investors are looking to Kenya and expecting the country to have learnt lessons from the 2007 problems. Mr Roberts is optimistic, however, that while the election may be a cause for concern now, it will be a ‘speed bump’ on the road to the general development of the country. While some are reporting that the elections could be make or break for the economy and that any violence would have a disproportionate impact on the perception of Kenya as a good

place to do business, Mr Roberts is much more confident. “Since the last election, roads have been built and investment has been pouring in. There is an element of caution in the run-up to the election but the expectation is that after 4 March there will be a huge spike in international investment.” Mr Roberts believes that Nairobi is well placed as the second major hub in Africa behind Johannesburg but also that it has some distinct advantages. “It is well positioned between the northern and southern hemispheres and is geographically closer to Europe and the US.” Added to that, he said, every east African UN programme is run out of Nairobi while most multinationals make Nairobi their east African hubs. Kenya is well placed to become a major regional financial centre, helped by the political elite, many of whom are among the wealthiest in society. For the moment, however, Kenya is still dogged by security issues. Beyond the interethnic warfare, which continues to the north, the country is also at risk from the al-Qaida-linked militants of al-Shabaab. Kenya lies in a strategic location just to the south of the al-Shabaab heartland—something western governments are all too aware of. Kenya has suffered terrorist attacks in the past year, although Mr Roberts stressed that, to date, these have tended to be smaller attacks. About

three months ago, the authorities released details of a weapons find and most risk managers keep security high on the agenda. The country is changing—not necessarily because Kenya itself is changing, but because outside interest in the country is growing—and fast. This is reflected in the latest World Economic Forum Global Competitiveness Rankings 2012– 2013. Kenya is ranked 106th this year, showing a relatively steady performance.

IMPRESSIVE INNOVATION The report points out that: “Kenya’s innovative capacity is ranked an impressive 50th, with high company spending on R&D and good scientific research institutions that collaborate well with the business sector in research activities. “Supporting this innovative potential is an educational system that, although educating a relatively small proportion of the population compared with most other countries, gets relatively good marks for quality as well as for onthe-job training.” The report continues: “The economy is also supported by financial markets that are well developed by international standards and a relatively efficient labour market. On the other hand, Kenya’s overall competitiveness is held back by a number of factors. Health is an area of serious concern, reducing the productivity of the workforce. The security situation in Kenya is also worrisome.”


Kenya BEHIND THE NEWS

14

Energy growth sparks risk culture Liz Booth

news@commercialriskafrica

[ n a i r o b i ] — T h e o v e ra l l message for Kenya is positive—not least thanks to the recent development of oil and gas reserves. Deniese Imoukhuede, Senior Financial Analyst at credit rating agency AM Best, explained that the burgeoning energy market is having a ripple effect across the whole business community and driving the adoption of more mature risk management and transfer techniques. “The development is being carried out by multinationals and risk management is improving because these firms are working with international reinsurers and are being exposed to those demands,” said Ms Imoukhuede. She cautions, however, “When we talk about growth at the moment it is not substantial growth. Insurance and risk issues are developing off a very low base, so you may see a multi-100 percentage growth but reality the actual numbers are still low. “It is still mostly the multinationals that have insurance programmes and risk management plans—in the SME section of the market there is still a very long way to go.” Total insurance premiums in Kenya reached US$1bn in 2011, with total insurance penetration of 3.2% making the country east Africa’s largest insurance market. Kenya has rolled out some initiatives for microinsurance and Takaful. Last November, Insurance Regulatory Authority (IRA) Technical Manager Agnes Ndirangu outlined a draft microinsurance policy. She said insurance penetration in Kenya is low at around 3%, compared with other markets like South Africa at 15%. The aim of the IRA, she said, is

that: “The new policy will help Kenya achieve 5% penetration within the next five years. There are 43 licensed insurance companies in Kenya and Kenyans’ uptake of insurance cover, both at corporate and personal levels, remains predominantly in the motor, fire, industrial and personal accident classes. Both the IRA and the government more generally have been quoted as stressing the importance of access to insurance for all, helping to protect the most vulnerable which in turn will help develop the economy and boost larger businesses too. Like Mr Roberts, AM Best’s Ms Imoukhuede is optimistic for the future—not least because of the level of regulation in Kenya. “The Kenyan regulators are very proactive,” she said. “More insurance associations have been formed to drive growth and there are plenty of local insurers providing a competitive marketplace for buyers.” Kenya established the IRA as the new insurance regulator in 2007 following the Insurance (Amendment) Act 2006. Following the act, Kenyan (re)insurers were required to meet higher minimum capital requirements (MCRs).

COMPETITION Primary insurers have faced pressure on their capital positions owing to a volatile stock market and AM Best expects consolidation to follow, given these pressures. Kenya’s insurance market is very competitive, in part as the main insurance buyers tend to be governmentrelated bodies. These entities are obligated to accept cover based on pricing as opposed to terms and conditions. Insurers therefore face pressure on margins. Non-life risks are commonly broker-

sourced, with the top three brokers generally having access to better quality business. Increasing competition from regional and international reinsurers continued in 2012. Foreign participation in Kenyan risks is mainly from regional financial groups—from eastern and southern Africa, or India, where there are cultural links. For example, General Insurance Corporation of India has a 14.8% stake in East Africa Re. In 1979, four Indian insurance companies operating in Kenya merged to form Kenindia Assurance Co. There is little visible foreign participation from large, western players. Recent legislation has restricted the maximum shareholding by any one party in an individual institution to 25% of paid-up share capital. AM Best says that, as is common with other emerging insurance markets, there are compulsory cessions for reinsurance risks in Kenya. Kenya Reinsurance Corp. Ltd., which is partially privatised and 60% controlled by the Kenyan government, is supported by compulsory cessions

that oblige insurers in the Kenyan market to cede 18% of all treaty business written to the company. ZEP-RE (also known as PTA Reinsurance) is a regional reinsurer created in 1992 by an agreement of heads of state and governments of the Common Market for Eastern and Southern Africa (COMESA) countries.

TREATY RULES Cedents in its core markets of Kenya, Uganda and Tanzania must place 10% of treaty business with the company before ceding risks with other reinsurers. Meanwhile, Africa Re receives a legal cession of 5% on all reinsurance treaties from insurance companies that operate within its member states. Reinsurers tend to have material voluntary business, in addition to compulsory risks. These legal cessions in both the local and regional markets, and the greater economies of scale enjoyed by the larger reinsurers, limit rival reinsurers’ competitive positions and constrain their ability to increase market share, according to Ms Imoukhuede. The government had promised to phase out these cessions—originally

scheduled to happen in 2011, delayed to 2013 and currently on hold until 2015. “Don’t hold your breath on that one,” advises Ms Imoukhuede, who believes that it will shake up the market when change finally happens. The delays aside, Ms Imoukhuede says all the signs are of a developing market in which insurance will play an increasing part in risk transfer. Kenya does still face some other economic challenges and AM Best says the country still suffers from high political, economic and financial system risks. The collection of premiums also remains an issue for the market. The inflationary environment in Kenya throughout 2011—when inflation reached an estimated 18.6%— and the subsequent increase in interest rates affected results. Although inflation fell to an estimated 7% in 2012, AM Best expects the economic environment to remain volatile. Meanwhile the IRA reveals that insurance claims numbers have been rising throughout 2012. For the second quarter, it reports that claims incurred under general insurance business amounted to KES14.36bn by 30 June, 2012. This had increased by 17.0% from KES12.27bn recorded in the previous year. For the third quarter of 2012, insurance claims incurred under general insurance business amounted to KES22.43bn by 30 September, 2012. These had increased by 15.4% from KES19.43bn recorded in the same period of the previous year. The claims numbers reflect increases in insurance premiums paid to insurers in both quarters, in turn reflecting an ever-increasing use of insurance as a risk transfer mechanism.


BEHIND THE NEWS Kenya

15

Risk management arrives in Kenyan boardrooms Liz Booth

news@commercialriskafrica

[nairobi]—Riskmanagement is increasingly seen as a boardroom issue for all types of Kenyan-based firms. A survey from PwC shows risk is high on the agenda. CEOs in Africa, it says, are primarily concerned about economic and policy risks like uncertain or volatile economic growth, exchange rate volatility, inflation, bribery and corruption and overregulation. Other threats such as the availability of key skills, energy costs and an increasing tax burden are also worrisome from an operational standpoint.

TIME SENSITIVE view, the first line of defence is management’s processes and While most CEOs are responsible for managing risk, the controls.” PwC survey found 54% of them ‘wish that they had more She added that the second line of defence should be varitime to spend on it’. ous business oversight functions, principally risk manageReflecting the changing nature of the business environment and compliance. “Closely linked to the first two is ment, 81% of CEOs anticipate changes to their approach the third line of defence: internal audit, where we’re seeing to managing risk this year, perhaps because business risks rising boardroom expectations around skills and impact.” have a complex and expensive impact on operations. Ms Eriksson believes that business leaders and regulators For example, according to the survey, 60% of CEOs have recognised that, for internal in Kenya say inadequate infraaudit to be effective in supporting structure is a threat to growth, organisational risk management but exchange rates and energy efforts, the minimum standard of costs have affected the Ministry of performance has to rise. Roads’ ability to buy bitumen or “In the ever-shifting African diesel to build new roads, accordrisk landscape, internal audit caning to Eng. Michael SM Kamau, not simply react to events; but Permanent Secretary of the Minmust adopt a strategic mindset istry of Roads in Kenya. that is responsive to risks and Economic uncertainty is also helps to ready organisations for cited as a risk for 79% of CEOs in new threats and opportunities,” Africa and this is driving strategy she said. change for 62% of them. Ms Eriksson added that some Anne Eriksson, a partner with are ‘raising the bar’ by expanding PwC Kenya and a risk assurance the footprint of risks they cover. expert, told CRA: “Public and However, just 34% of CEOs in private organisations are investing Africa say that a change in risk more than ever in different lines Eng. Michael SM Kamau, tolerance is driving strategy of defence to manage Africa’s Permanent Secretary in the change, even though 81% say complex risk environment. In our Ministry of Roads, Kenya

that risk features among their top three agenda items. Ms Eriksson warned: “To effectively manage risk, organisations must create a culture whereby stakeholders and internal audit teams hold robust dialogue around enterprise risks, share their objective perspectives and reach a common viewpoint on their roles around the most critical risks. These must then be communicated to management and non-executive directors on a timely basis.” George Akello, Chief Risk Officer at Standard Chartered Bank Africa based in Nairobi, echoed the need for good risk management to start internally and for the need to bring staff on board with the concept. “Staff must be trained,” he said, “to appreciate and be able to identify, manage and control the risks around the areas they operate. They should own the risks and act as the first line of defence for the risks in their respective areas.” Mr Akello said that Kenya faces plenty of emerging risks, many of which echo those risks faced across the world. “Some of the emerging risks include the co-relation risks that come with globalisation—the risk of something happening in isolation somewhere in the world or in a different industry that is not related to you directly but ends up significantly impacting your business.”

RIPPLE EFFECT An example of this, he said, was the volcanic ash in Europe that affected the flower business in Naivasha, Kenya. As for so much of the world, Mr Akello said another risk facing Kenyan businesses is one of regulatory intrusion. Across the world most regulators are imposing more and more regulations. “While well intended in a number of instances the extent to which these are being made prescriptive becomes an impediment to doing business,” he warned. A Kenyan example of this is the proposed Finance Bill amendment. Another set of emerging risks are those associated with technology, particularly in areas where firms may hand over control of delivery channels or data to third parties. As elsewhere, Kenyan businesses are exposed to growing fraud issues as the use of technology grows.

Natural resources drive Kenyan growth The Kenyan economy has been growing and changing, not least thanks to recent oil and gas exploration. According to East Africa Oil & Gas, even Australia could face stiff competition from east Africa for LNG exports after 24 oil discoveries have been made from just 27 test wells. While Australia currently exports 25 million tons of LNG per year, east Africa is reportedly planning to export 36 million tons annually. No wonder then that Kenya is positioning itself as the business hub for the region, with Nairobi set to exploit the new opportunities. Agriculture has long been a mainstay of the Kenyan economy, although there is huge variance in size and sophistication of the operations. Back in 2006, Swiss Re instituted an agricultural insurance market study in Kenya, moving into the market two years later. The firm says its indemnity-based, multi-peril crop insurance product was targeted at the medium-scale to large-scale commercial farming segment from 2008. By 2011, more than 1,000 farmers in 15 districts of Kenya

were insured, bringing in a total premium income of about US$2m. More than 50,000 hectares of barley, wheat, tobacco, sugarcane and maize were covered, representing about 0.6% of all arable land in Kenya. Development of risk management solutions has been a key part of this and Reto Schneider, Swiss Re’s Head of Agriculture Business in Africa, says: “Swiss Re sees great opportunities to contribute to the further development of the agricultural sector in Africa, using appropriate risk transfer solutions in cooperation with local partners.”

Key industries in Kenya: n Agriculture is Kenya’s largest industry, accounting for 23% of GDP in 2011. Figures are set to improve in 2012 following a good harvest. It has been falling back as a proportion of the whole economy, while n Industry and manufacturing accounted for around 19% of GDP in 2011, and

n Services, including wholesale and retail trade, transport, government, financial, professional, and personal services made up 58% of Kenya’s overall GDP in 2011. n Meanwhile oil and gas is on the increase. This year the government is auctioning five new exploration areas to bring the total available to 51. The winning bidders must not only put forward the best plan but also pay a one-off auction fee of $1m to the government.

The insurance numbers: n n n n n

T  otal non-life market size: US$607.1m Motor market: US$275.7m P  roperty: US$113.30m Liability: US$55.8m Marine, aviation, transport: US$31.5m Source: Lloyd’s, figures for 2010


Delphine Maidou, AGCS IN PROFILE

16

BIG PLAN FOR ALLIANZ IN AFRICA

Allianz Global Corporate & Specialty (AGCS), the fast-growing arm of the German and global insurance group, launched its new strategy for South Africa and the wider Sub Saharan African continent to key customers and brokers this January. Commercial Risk Africa editor Adrian Ladbury discussed the group’s plan with Delphine Maidou, CEO of AGCS Africa

A

n intense series of roadshows with customers and brokers at the start of this year marked the end of a dramatic beginning for Delphine Maidou, the recently appointed CEO of AGCS Africa, which has seen her move from head of markets in Canada to the leader of the group’s ambitious African strategy in the large corporate market in the space of a few short months. While the new job and move to Johannesburg may represent a dramatic personal change for the youthful Ms Maidou, a native of Burkina Faso, it also represents quite a shift for Allianz. The group has been active in South Africa for many years but AGCS’s operations were effectively ‘put on ice’ in 2001 after the group dramatically restructured its global industrial business after a period of unacceptable underwriting losses. The back to basics strategy adopted for the Allianz industrial business at the time meant that markets such as Sub Saharan Africa were not actively pursued as the group focused on its core markets. The South African office remained but became primarily a servicing operation for AGCS customers in core markets such as Germany, the US, France and the UK, which had interests in the country and adjacent region. The Allianz turnaround team, initially led by Steve Schleisman and from 2006 Axel Theis, increasingly supported by Andreas Berger and with the backing of Clem Booth on the main board, did the job and moved firmly onto the front foot after Dr Theis took over the reins. Over the last seven years the business has gone from strength to strength. The AGCS leadership team have steadily built new dedicated operating centres around the globe, supported by an AGCS capital and reinsurance base and credit rating that helps to deliver decentralised decision making and the required central controls to maintain the rating. Ms Maidou’s appointment as regional head and the series of roadshows with brokers and customers in South Africa is the real start of that new regional strategic direction for the Munichheadquartered group in Africa.

REGIONAL ROADSHOW

Ms Maidou was exhausted when we met as she had just completed an intensive series of meetings over a number of weeks but said she found it immensely enjoyable, valuable and positive. “The series of roadshows enabled us to reintroduce ourselves to the market. We have hired a lot of new people and of course I have only recently taken over with a new regional brief across Sub Saharan Africa and so it was right that we reintroduced ourselves to the likes of Marsh, Aon, Willis, JLT and other brokers. They have all heard that we have a new strategy and we needed to tell them what we are focused on,” explained Ms Maidou. The arrival of Clem Booth, a well-known and respected figure in international insurance and reinsurance circles and a South African citizen, for the tour was a significant boost which helped underline the importance of Africa to the group. Ms Maidou said that Mr Booth explained the overall Allianz group, how AGCS fits into the bigger picture and how Africa fits into the overall strategy to the brokers and clients. Then the AGCS team explained in depth the underwriting strategy for their core lines of business which are property, engineering, marine, aviation, energy and financial lines. “It’s been asked why Allianz withdrew from South Africa and are now reinvesting here. We actually never left but effectively put the operation on ice for a period (as the industrial business was restructured from 2001–2006). We wanted to ensure that the brokers and clients understand that AGCS is here in Africa to stay and is much more focused than in the past,” explained Ms Maidou. She said that AGCS does not pretend to be ‘everything to everyone’. The insurer tends to concentrate on the biggest global clients and specific segments at a global level. This means that the AGCS offering is very consistent whether in Africa, Asia or Europe, said Ms Maidou. “One key thing to realise is that right now we are seeing the largest growth in engineering and construction across Africa and the oil and gas sectors too. Marine is part of that as equipment for the engineering and construction projects has to be moved too and this of course also includes property risks. Right now we are strong in property in South Africa and we are looking to grow that across the region,” she explained. The timing is obviously linked to the fact that the economic outlook for Sub Saharan Africa is so much better than elsewhere in the world, certainly in the so-called developed world and even compared to other developing regions, notably Brazil and the wider South American continent, which has slowed somewhat. The International Monetary Fund, for example, published a positive report about the prospects for

Delphine Maidou

the SSA region in October in which it described recent growth as ‘robust’ and averaging just over 5%. In late January the IMF issued an update that looked even more positive for the region. It now forecasts output growth in the whole SSA region to be 5.3% in 2013 and 5.7% in 2014. South Africa will register a less exciting but still growing 3.5% and 4.1% respectively, said the IMF. The overall forecast output growth rate for the developed world is 1.4% and 2.2% respectively and for Europe a depressing negative 0.2% this year and only 1% in 2014. It is no surprise then that companies the world over, not least mineral-hungry Chinese and Indian operations, are attracted to opportunities in the region and not just South Africa which is the traditional springboard for growth into the region.

GLOBAL REACH

“We have never really gone after that business and actively marketed what we can do to help this development. One thing that is different to before is that, in the past perhaps, the growth in South Africa used to come from global programmes. We may receive a request from France for example to issue a local policy and this has been and remains a key servicing role for our operation,” explained Ms Maidou. “Now we are looking to focus on accounts domiciled on the continent that have exposures overseas. We can provide global programmes solutions from South Africa,” she continued. The group’s South African licence enables it to look after the wider regional business of South African-based businesses from South Africa and also their domestic business. It also enables the insurer to underwrite business in other territories, such as Mozambique, on a reinsurance basis via a fronting insurer. To underwrite business well on a fronting basis means that the lead insurer needs to find the right


IN PROFILE Delphine Maidou, AGCS

17

In north and French-speaking west Africa Allianz group is well represented because of the historic presence that came with the acquisition of AGF in the ‘90s back up its regional aspirations because not all the business can be underwritten and perhaps more importantly serviced out of Johannesburg. “In the long run it is not doable,” she said. In north and French-speaking west Africa Allianz group is well represented because of the historic presence that came along with the acquisition of AGF in the 1990s. But for now as most of the business is large engineering and construction, oil and gas projects there is not an immediately compelling need to set up AGCS offices on the ground and so the business is written out of South Africa. One way to boost business flow, however, is to work more closely with Allianz’s credit insurance group Euler Hermes, which is active across Africa and based in the same office in Rosebank. “We are making sure that we are working together with Euler Hermes,” said Ms Maidou. “When there is a shipment it needs marine insurance and credit and we need to use that because we can offer multiple product lines. The office is small enough not to have developed silos and every underwriter sees every other line of business and we will make sure that this continues. We have a team which is very strong on their specific lines but also very flexible and able to understand what we can offer the customer from across the Allianz group,” she added. The prospects for new business are healthy in the South African market, which Ms Maidou described as ‘surprisingly open’.

BROKER FRIENDLY Andreas Berger

partner in the source country. Given that SSA business is becoming so popular among international insurers and reinsurers currently one has to assume that any decent local insurer in a territory such as Mozambique must find itself in a strong position and be able to pick and choose which insurers it does business with. Ms Maidou said that this is not necessarily the case. “It works both ways. Sometimes we bring the local insurers the business such as when a South African company has set up business in that country and needs local capacity and so in that case we bring the business to the local partner insurer. This is also where the strength of the Allianz group is useful because local insurers tend to want to do business with our brand. They know that we are a €100bn company that does business with most of the Fortune 500 companies. So when a French company we insure looks to place insurance for an operation in Ethiopia for example they will look for someone like us to find a partner through our network in Ethiopia,” she explained. Ms Maidou said that AGCS certainly has not experienced problems in building relationships, adding that it helps that the company does not seek exclusivity. “This is partly because we want to see that the African market keeps growing and we do not want to stop the flow of business by insisting on exclusivity to exclude others. This is the case with Allianz companies too. Allianz in Ghana is free to work with AGCS or any other insurance company. We never try to pin down a company,” added Ms Maidou. The basic question for a prospective customer that seeks to expand its business across the region and buy coverage for the resultant risks is, why use AGCS and not a competitor?

TICK-BOXING CLEVER

“We are very focused and not a capacity provider. We make sure that any relationship established with a client involves risk engineering because the strongest offering is that it is always better to avoid a loss. There is also claims handling, which we authorise locally, which provides dedicated people to achieve results when claims occur, which is what the client pays for ultimately,” said Ms Maidou. She said that it is also important for customers to deal with local underwriters who have a level of authority to make decisions. “Munich is still very involved because this is where the capacity is based but the underwriters are given the authority to make decisions. It is key for the underwriter to be close to the market but we also bring best practices and experts to the table. We are a very technical underwriting entity and are proud of that but we are not going to bring a product or service locally that is not applicable to the local market,” added Ms Maidou. In terms of target markets Ms Maidou said that South Africa clearly remains the strongest economy on the continent and so is an important focus. AGCS is based in the financial centre of Rosebank, Johannesburg, along with most other insurers and brokers. But Ms Maidou said she recognises the fact that the Cape Town and Durban markets are in fact very distinct markets. Having an office in both cities is not out of the question and it will enable it to stay close to customers and brokers because the old mantra ‘out of sight, out of mind’ still applies even in today’s global, web-based economy. “Most of the largest Durban-based clients will eventually show up in Johannesburg but not all, and particularly not marine perhaps,” she explained. Ms Maidou also appreciates the need for AGCS to expand its footprint outside of South Africa to

“One of the things that I was told was that the brokers are very protective of their clients the same as everywhere. But it is not any worse than the US or Canada. As long as the broker is kept in the loop every step of the way that you are having a discussion, if you are a good broker then you should not be worried that an insurer is talking to a client. Setting up meetings with the brokers has not been difficult at all and having the Allianz name does really help to open doors to brokers who want to know what you are about,” she explained. In South Africa Ms Maidou said, after the big four global brokers, the market is really limited to about 10 leading brokers focused on large corporate business. Again she stressed that AGCS does not want to try and be ‘everything to everyone’ but really focus on business that fits their appetite. “There are some areas of mid-sized corporate business where some brokers are saying we could be really quite strong and we are making ourselves available,” she said. One area that is becoming increasingly important for insurers and brokers to offer a superior service in order to beat the competition and tap the kinds of opportunities offered by the global expansion to regions such as SSA is global programmes. The broker or insurer that can offer a service a cut above the rest really stands to reap big rewards in the short and long run. Ms Maidou said that she has no secret formula for Africa on global programmes but sticks to the AGCS philosophy. “We have to respect the local regulator and this is one thing that is done across the group. We use a database so that we know exactly what we are doing as we expand and we have a dedicated person on a full-time basis to ensure that we understand the local requirements,” she explained. This is no easy task even in long-established markets, she said. “We have been in South Africa for many years but things change. You need to understand everything and how they interrelate thus we are hiring a legal and compliance offer by the end of the first quarter. Part of the plan for us is to have a sizeable presence and so we have to comply, because at the end of the day we are following our client where they need to be and this needs to be the case whether the risk is South Africa domiciled, other African countries or European,” explained Ms Maidou. But who is ultimately responsible for compliance: insured, broker or insurer? Ms Maidou’s answer to this popular question among risk managers currently is ‘everyone’. “This is not a fault-based issue. Everyone needs to be on the same page and responsibility lies with all three. As the insurer we have always said that Allianz will not issue non-admitted policies. If the opportunity is there we admit even if the client says that they want non-admitted policies. In some cases the client or the broker says that you don’t need an admitted policy in this country and it is of course cheaper. But we believe that you have to admit policies where the opportunity allows,” said Ms Maidou. “Sometimes we go beyond what is needed but if there is a loss in a country and if you have issued a non-admitted policy it is not always easy to transfer the money into the country where the loss occurred and if a plant needs to be rebuilt that is a problem,” she continued. There is no doubt in Ms Maidou’s mind that this is a critical market for AGCS and customers in general and it is no longer an esoteric specialism but actually part of day-to-day business. “We are present in 78 countries all under the Allianz logo. We have a dedicated team for international programmes but deal with them in each country on a daily basis. Global programmes are completed every day and it is now everybody’s responsibility,” she concluded. This is an exciting part of the business and one which is becoming intensely competitive and increasingly important in growth markets such as Sub Saharan Africa. There can be absolutely no doubt that AGCS has made the right decision to focus part of its future strategy on this region particularly as Latin America and Asia have become so competitive. And in Delphine Maidou they have certainly picked an individual to lead the effort who has the intellect, energy, appetite and positive attitude needed to help make it work.


Jef Vincent, ATI HOT SEAT

18

Traditionally a provider of political risk and investment insurance, the African Trade Insurance Agency’s chief underwriting officer Jef Vincent will mark his second year in the role by spearheading the launch of new products and a stronger focus on credit risk insurance. Kapila Gohel, Commercial Risk Africa’s Johannesburg-based correspondent, reports

C

the weather

hief underwriting officer Jef Vincent joined the African Trade Insurance Agency (ATI) in November 2011 and has already implemented a global strategy that will change the face of its business offering over the next three years. World Bank-backed ATI has strongly focused on political risk insurance and investment insurance since its launch in 2001, and to some extent commercial risk. The latter is an area that Mr Vincent, who has a strong background in credit risk insurance, seeks to develop. “Right now trade credit insurance represents 12% of our total exposure. But proportionally, our aim is to come to a 70%–30% balance over the next couple of years whereby we will continue to insure a high number of investments, while we also develop and grow the trade side of business,” Mr Vincent told CRA. “It will not happen overnight. We still insure a lot of political risk and we are expecting political risk to grow significantly this year due to some large infrastructure projects that will come on,” he added. The initiative is already gaining traction, with ATI signing on average eight deals per month. “It will take the better part of two years until we reach a 20% volume in trade credit insurance, after which we will assess the situation with our board to see whether they are confident to further this line of business to around 30%,” he explained. Mr Vincent has kicked off his trade growth plans in the commercial risk area by developing ATI’s Whole Turnover Credit Risk Insurance product (insurance that protects a company against nonpayment by a portfolio of buyers). This is a product which he feels will move quickly in the market. “We have issued this product in the past but last year we began to revamp the entire product to make it more flexible so that it’s easier to adjust it to the needs of individual clients,” he said. “As a result, ATI has been able to sign on more and larger policies, where we are insuring corporates that are taking insurance on their corporate clients. It is an area which will surely develop this year,” he explained. ATI has, for example, been insuring a number of farming companies and flower growers in Kenya that export to the Middle East and Europe. Meanwhile, on the domestic side, the firm is gradually beginning to insure local companies against the risk of non-payment from their local clients. Mr Vincent explained that the product can be tailored to the needs of the client; ATI is now able to give selected clients the ability to provide discretionary credit limits on their buyers which will increase efficiency and reduces the processing time for issuing credit limits. Furthermore, ATI has also reduced the cost of the product following feedback from clients by introducing a ‘reverse no claim bonus’, which lowers the annual premium by 20%. This is offered on the assumption that the client will not record a claim. If the client records a claim they will simply revert back to the higher premium rate. “Generally the rate of claims is rather low, and so we have received positive feedback from clients on these changes,” he said. Meanwhile, ATI started to roll out a variation on the Whole Turnover Credit Risk Insurance product last year, which will really break through in 2013, according to Mr Vincent.

Jef Vincent, ATI

“The new product will factor invoice discounting whereby we are insuring either banks or specialist factoring companies that are buying invoices (trade receivables) from their clients without recourse,” he explained. “If we are able to take on the credit risk of the client, they will be able to purchase those invoices without recourse—meaning that if the buyer doesn’t pay, the supplier who has sold the invoices doesn’t have to take them back,” added Mr Vincent.

Untapped potential At the end of 2012, ATI began to develop and launch surety bonds, another area of untapped potential in the African market, according to Mr Vincent. ATI has entered this space not so much directly as an underwriter, because there are already a number of insurance companies and banks that offer equivalent products. It has entered the market instead on a reinsurance basis. “There is a lack of capacity in this market and so we are able to support or increase the capacity in this area by enabling the local players to insure larger bonds. As we are rolling out this product in different countries we will have to adjust it to local expectations and so on,” explained Mr Vincent. Commercially, the third strand of important development that Mr Vincent will oversee as part of ATI’s strategy over the next 36 months is the development of a new customised product that fast tracks the insurance of banks against the risks associated with the provision of letters of credit and loans to corporate clients. “In the past we have done this on a case-by-case basis, but with the new product we will have the ability to insure these banks on a portfolio basis. We will have a master agreement, which will define most of the terms and conditions, which will make it easier to roll out the product and insure one loan after another without the added administration. Obviously we will still look at the quality of the risk when we do our underwriting.”

With its base in Nairobi, this product will logically be rolled out in Kenya to begin with. “It is the most mature financial market in east Africa. We intend to get this product out to the market over the subsidiaries of banks with which we have a relationship and in regions where the product is already in use. Once you have a breakthrough with one branch it makes it easier to roll out in other countries,” he explained. However, what Mr Vincent really wants for the product is to market it in the countries where ATI is comfortable and can add value. “The big problem for commercial risk insurance for us is that traditionally ATI has been a political risk insurer. Once you know the particular political risk well and can take the risk on it is pretty straightforward. When it comes to insuring credit risk, particularly on a portfolio basis, you need to assess the credit worthiness of each individual risk, and in order to do that you need information,” he told CRA. The lack of information within the African insurance industry is one of the biggest challenges that ATI faces, according to Mr Vincent. “There are very few reliable comprehensive databases, if any,” he pointed out. “And so the collection of information that allows us to make decisions is a very difficult task and in some countries it is nearly impossible. Therefore, it would not be particularly proactive to promote the new product in some countries.”

Going west In fact, the next big step ATI plans to take is to become more active in west Africa. Around 90% of ATI’s shareholders are African states—Benin, Burundi, the Democratic Republic of Congo, Kenya, Madagascar, Malawi, Rwanda, Tanzania, Uganda, and Zambia. This year the agency will begin work in Benin, west Africa, and in principal at the end of this quarter it should be able to work in Ghana, according to Mr Vincent. “Ghana is likely to be a very open market. And we also hope that Sierra Leone, with whom we are quite involved, will come on board. There may be others but it’s hard to predict at this time,” he said. ATI faces a number of hurdles when signing on the three west African states mentioned, the biggest being to inaugurate a country as a member state. To become a member state of ATI, the membership must be ratified by its parliament. This is because, to become a member, the country signs an agreement that ensures that it will not cause a claim and that ATI has preferred creditor status in the event a claim occurs on an ATI-backed political risk transaction in their country. ATI also faces hurdles of a more commercial nature. ATI’s policies are currently written in English, and, as it enters into the Francophone region, it will have to translate its policies into French. With so much planned for ATI over the next three years, including its push into west Africa coupled with its renewed focus on the commercial risk side, ATI will need reliable sources of information to bridge the gap that has been a challenge to not only the company, but the African insurance industry in general. Under Mr Vincent’s guidance, the first step on ATI’s agenda for 2013 will be to build a risk database compiled of information on companies from its member countries, making the path into the African financial landscape that little bit clearer. CRA will report on developments for readers as they occur in this important part of the market for the growing African risk management community.


Q&A Von Widdern & De Jonge, Marsh

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At the 2012 IRMSA conference Adrian Ladbury met Volker Von Widdern, Managing Director Risk Consulting Africa and Rob De Jonge, Leader of Marsh’s EMEA Risk Consulting business at the Marsh head office, to find out what the broker has planned for the market now that the AFRS acquisition has bedded in

the bigger picture T

he South African and wider Sub Saharan African insurance broking market was significantly shaken up towards the end of 2010 and in 2011 when Aon acquired Glenrand MIB and then Marsh acquired the brokerage business of Alexander Forbes Risk Services, the leading domestic South African broker. This was part of a long evolution that had seen the likes of Marsh and Aon create global broking powerhouses, not least to service their ever-expanding larger corporate customers since the mid-1990s. For the first issue of CRA we discussed Aon’s strategy for the South African and wider African market with Anton Roux, CEO of Aon Africa, and we now meet Volker Von Widdern and Rob De Jonge of Marsh. Adrian Ladbury (AL): What kind of a market position does Marsh have in South Africa and wider Sub Saharan Africa currently? Volker Von Widdern (VVW): We have a leading market share in corporate South Africa particularly in sectors such as banking and financial institutions, mining, some construction and multinationals where we are very well represented. Add this all together and we have a leading position in the top end of the market. Alexander Forbes Risk Services was very strong in the commercial sector with many schemes in particular targeted at sectors such as cane growers, farmers and the like and had an extensive client base when the acquisition was completed. We have a dominant share in leading sectors such as mining, transport, construction and retail. But remember South Africa has about 14,000 brokers who have passed the exams and 700 of these work for Marsh. So we do not completely dominate the market by any means because the ‘one man band’ market is still big here and they do a great job for smaller companies and individuals in particular. But in the larger company space Marsh and Aon are certainly dominant. But after the top two there is really quite a big drop. My space is actually risk consulting which employs 120 people which is big compared to the competition. The next largest player in the broking area employs eight people.

AL: How does such a relatively small group of people account for such a large proportion of Marsh revenue in your region?

Volker Von Widdern

AL: How do you define risk consulting and how does this fit into your business? VVW: Risk Consulting is the range of risk assessment and response services across strategic, financial, modelling, operational, hazard and qualitative / compliance fields, intended to sustainably reduce the total cost of ‘enterprise’ risk. Both Alexander Forbes Risk Services and Marsh had risk consulting businesses. Forbes had about 75 people dedicated to this and Marsh about 45. In the old Marsh before the merger we were responsible for just over 25% of the total Marsh business and the Forbes risk consulting team about 10–15%. So it is a significant business especially when compared to the number of people deployed who are of course highly skilled. The basic service is engineering, property consulting, qualitative strategic risk consulting and financing. It is corporate focused and strategic from the ground level up. The advice provided is not just about insurance, or how to rebuild your productive capacity under various scenarios. There is currently a debate about quantifying the true cost of risk, partly driven by Munich Re, arising from the impact of the floods in Thailand and the disaster in Japan. We are always looking for a better understanding of what drives risk for corporations and the impact on their business and not just from an insurance perspective.

VVW: It is skills-based. Marsh has a very strong collection of skills sets in areas such as enterprise risk, capital modelling for risk, supply chain risk assessment and we have been rolling out these services aligned to identify needs. Specifically there has been significant interest in areas like environmental loss prevention, asset valuations, risk financing, enhanced use of captives and risk modelling. We did not want to be led exclusively by central mandates but rather by the customer’s risk response strategy. It helped that Alexander Forbes had a similar strategy. In addition to creating bespoke risk management plans for large clients, they asked: ‘Why shouldn’t smaller and medium-sized enterprises without full-time dedicated risk managers carry out proper risk audits and consider the ‘rent-a-risk manager’ approach?’ Comprehensive and customised operational risk assessments were developed, which grew the business substantially. The combination of our actuarial and financial modelling capabilities creates a broad offering which is complementary to the qualitative risk advisory services. AL: What are the main challenges in this area? Rob De Jonge (RDJ): The biggest problem here in South Africa and worldwide is finding the right people. I would say that the Marsh DNA is arguably more advisory than Aon. The founder of Marsh said over a hundred years ago that the main value for customers is not insurance but risk management and this was well before the risk management profession as we know it today emerged. In some ways insurance kind of debases the risk management culture. In the late 1990s and turn of the century there was a huge process of consolidation in the broking market and for many of the brokers this was all about economies of scale and efficiencies for transactional insurance business. I would argue that the process was somewhat different for Marsh as we rapidly sought to use our new geographical and specialist capabilities across CONTINUED ON PAGE 21


Von Widdern & De Jonge, Marsh Q&A

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many sectors to deliver more of an advisory service, not just transactional. The consulting service is given as a professional service and the transaction comes with a value attached. So it does not mean that this is a service that is difficult to measure and evaluate. If you cannot prove the value you lose the business. VVW: The soft insurance market is a challenge too as it does not allow room for clients to manoeuvre because underwriters give such competitive terms and this does not necessarily promote good risk management. Also problems arise when the underwriters do not pay the claims. To a large extent this is old fashioned broking and underwriting. The rating is often dependent on a limited number of cases and does not ensure that the underwriters are writing the right risks because the pool and experience is so limited. We see thousands of risk audit cases and they (the underwriters) do not see nearly so many. AL: But surely the rising complexity of African and global business demands a more risk managed and less transactional approach? RDJ: In many ways we work in an increasingly complex environment and this is not helped by the fact that operations need to be lean and mean and costs reduced. But the problem is that, by doing so without proper risk consequence analysis, more risk is inevitably introduced into the organisation. Companies really do need to understand their risks better than they did in the past in this difficult economic environment. Nowadays you may find that companies incur more risks to reach the earnings expectations of the market by adding more complexity. AL: This did seem to be underlined by the impact of the Japanese earthquake and Thai floods did it not? VVW: Yes, such events and the drive towards greater supply chain and procurement efficiencies created additional risks and revealed the heightened interconnectedness of business. One widget may be missing because of an efficiency drive and this can have wide effects because the dependency factors have not really been analysed fully. The supply chain can fall down or be delayed because of a tiny missing part in a cell phone or the loss of wiring on the 28th floor of a life office. We would like to understand the supply chain. An insurer may say they will cover the first tier of suppliers. We would ask that cover be added for key parts of the second tier at least, being the key suppliers of the first tier, but limited cover is available. So this is a problem for the risk manager. RDJ: And you have to bear in mind that worldwide insurers will limit their capital at risk especially for such uncertain risks in an environment of tighter solvency regulations such as Solvency II. VVW: You can understand the position of the insurers on this point. Company X has a range of second tier suppliers and it may be aware of

the risks but it does not know what lies behind those suppliers. If the exposure of the second tier is not visible then it can’t model the risk. But it almost becomes a risk not to do anything about risk. The risk manager will be challenged at meetings and by outside clients and stakeholders who will ask more questions. We want to position ourselves as key advisers in this area and help customers solve such questions. AL: How mature is risk management in South Africa? VVW: I would say that risk management is reasonably mature for the larger corporates in South Africa. The public authorities are much more risk aware and know that investment in risk management needs to be good. But when people talk about the total cost of risk they do tend to define this in absolute financial terms and are pleased that they have managed to gain a 10% reduction in insurance rates to cover such risk. However, the assessment should include the risk adjusted return on the gross investment as well as understanding the full costs of a loss event. People are still very focused on the Rand value. We are doing a project to assess the consequential loss scenarios to better inform the TCOR debate. A wider perspective on the cost of risk is needed, beyond insurance. You have to ask how you get to the loss and try to understand the full consequences, both insurable and non-insurable, such as brand, reputation, whether the systems operate as intended. This is the consequential cost of risk and is not to do with insurance. When the full consequential cost of risk is identified and explained, the question is whether the customer needs any help to sort it out. But we are not BPR experts; we are simply trying to establish the link between risk and insurance in a more strategic way. RDJ: The name of the game is to take all the risks through the process but not market risk of course. We can do scenarios, MPLs and ways of looking at the risk because we have so many analysts and experts available for clients. We are very good at looking at the potential financial impact of risks. VVW: Companies should analyse the large external risks, otherwise they become too internally focused. We have just carried out work for a big infrastructure project, which was built around a portfolio risk model. Having calibrated the top risks and ranked them in a consistent manner we identified the linkages such as the price of steel. The enterprise risk manager wants to know the impact of certain exposures on an appropriately aggregated basis. AL: Is this a competitive market and who do you regard as your main competitors in South Africa and the wider SSA region? VVW: If it’s operational risk such as asset protection then it’s local competition and the insurers to an extent. Each consulting practice has a different set of competitors in reality. Overall, for traditional broking business the main competitor is Aon. We have a lot of opportunity through Marsh’s wider African client base. Also there is business opportunity from outside of the Marsh client base, probably

about 10–20% comes from outside Marsh. These tend to be affinity solutions where we can add value by supplying innovation and product developments as well as setting up a captive cell and working in the business continuity space. AL: In what areas do you see opportunities for new growth? VVW: We see our growth coming from across the space in all the areas of our business because we have the resources and capability to add real value to our clients and prospective clients. AL: What about so-called emerging risks such as cyber? Is this as big a topic in Africa as it is in Europe and the US? VVW: IT provides a disparate range of services and the question is: ‘How does the standard cover respond to these risks?’ The risk includes a wide range of exposures such as breakdown of IT infrastructure, loss of data and the like. It is possible that standard cover responds to only a small part of the whole exposure. This is much like supply chain risk. It is likely to happen but hard to solve. Traditionally the insurance market needs around 10 years of experience before it can insure a ‘new’ risk but this is a problem. The South African financial institutions are well regulated but risks become concentrated in the payment systems. Much is debated about cyber risk exposures—Marsh has the resources to evaluate these risks in a broader commercial context. RDJ: If you look at the amount of services online they will double over the next 10 years. Just as more cars on the road lead to more accidents you will find the same in this space. You will see an increase in internal and external accidents, loss of data and misuse of data. VVW: Brokers are trying to innovate and in many respects South Africa is ahead of the game. However the emphasis remains on asset coverage but not consequential loss exposures, where then an arbitrary policy loss limit helps no one. You don’t need 10 years of data for technology risks, particularly since these industries are developing quickly. A more structured exposure and fault tree analysis is needed to map and evaluate exposures, whereafter underwriting decisions can be made. AL: What about the global programme market in Africa? Is this a growing market and what are the main issues to be dealt with? VVW: There are really two different markets in this respect: offshore investors and local operators. For example a mega mining group will need global programmes, such as business interruption coverage globally that it cannot achieve locally because the local capacity and wording is not adequate. In such cases we want to help local markets and regulators overcome such problems. Each market has its own capacity and limitations and therefore we work with the local regulators to add intellectual capital and capacity to the local market and take it from there.


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