RISKAFRICA _Issue 17 by COSA Media

RISKAFRICA THE RISK MANAGER’S RESOURCE

Issue 17 | 2014 ISSN 1812-5964

GING MANA

URE

IN FUT

ERTA N UNC

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CONTENTS 04 African banking: managing an uncertain future 08 Mobile money: an African initiative 12 New rules, new risks: Africaâ&#x20AC;&#x2122;s financial regulation in focus

18 Engineering consultants: are the risks really covered? 20 Disruption â&#x20AC;&#x201C; is the insurance industry ready for it? 22 The moment of truth in insurance: claims 28 Catastrophe response 32 AGCS roundtable: retaining knowledge from growth 34 The game of risk: IRMSA conference 2014 36 GIB Africa Alliance Conference 37 China Africa Business Forum

Dear reader No one needs to remind the banking industry that Africa is not a country. After a decade of surging growth for the sector across the continent, the lack of regulatory conformity from country to country remains a critical challenge for pan-African banks. This issue takes a closer look at this and other key risks facing the sector, along with the management practices recommended in response. A new era of economic growth has brought unprecedented opportunity, but as markets deepen and international connectivity increases, the risks are changing and the impact of international shocks are multiplying. Risk awareness and management thereof will be the critical competitive advantage in the future of African banking, say the commentators. Also in this issue, we delve into the shifting dynamics of China-Africa relations, the new board exams for risk management professionals in South Africa and a new African disaster risk pool to provide cover for environmental catastrophes. The pool, which will cover drought losses in five countries initially, is hailed as a landmark step for the self-sufficiency of the continent. We hope you enjoy the read,

38 News

12 Publisher Andy Mark Editor Sarah Bassett Production Nicky Mark Copy editor Gemma Redelinghuys Feature writers Christy van der Merwe; Luka Vracar Design and layout Herman Dorfling; Mariska Le Roux

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African banking: managing an uncertain future By Sarah Bassett

After a decade of unprecedented, surging growth for emerging market banks, sub-Saharan Africa no exception, the future is less clear. Experts warn that risk awareness and management strategy is critical to ensure continued growth. In particular, risk management systems are needed to deal with the changing threats brought on by financial deepening and the changing African economic landscape.

ess affected by the 2008 global financial crisis than their developedworld counterparts, collective revenues for emerging market banks grew from $268 billion in 2002, to $1.4 trillion in 2012. Historically, Africa has suffered comparatively few banking crises, in large part owing to its insulation from the global financial system. Low credit leverage in most economies, ample liquidity, relatively little dependence on external funding, and low exposure to toxic financial assets all assisted the continent in coming through the 2008 crisis relatively unscathed. In fact, in subSaharan Africa, increasing income levels, new lending models and technology-based distribution channels along with diversifying markets have all combined to drive considerable growth over this very period. Nonetheless, there remain fragilities relating to political crises, governance deficiencies and widespread skills shortages. Moreover, the continent’s integration into global financial flows is deepening, with the effect that future external crises could have a far greater impact locally.

As US monetary policy continues the quantitative easing (QE) taper, the reach of international regulation increases and competition gets fiercer, the future is likely to be progressively challenging. According to management consultancy, McKinsey and Company, these shifts are putting risk management strategy front of mind for many emerging market banking CEOs. “The African banking landscape will continue to transform dramatically in the years to come. Most banking systems and markets on the continent remain small in both absolute and relative size, characterised by low loan-to-deposit ratios and as a result, high levels of assets are held in the form of government securities and liquid assets. Lending is currently still predominantly short term, with roughly 60 per cent of loans carrying a maturity of less than a year,” says Saadia Khairi, vice president of risk management at the International Finance Corporation. As the fundamentals shift across markets at rapid pace, country by country, financial institutions are on their guard, she adds.

The large regional banks face a challenging transition. With an operating presence in 33 African countries, Togo-based Ecobank has the widest footprint on the continent. South African and Nigerian groups have also expanded aggressively; these groups include Standard Bank and United Bank for Africa. In combination with the Bank of Africa group, which operates in 11 sub-Saharan African countries, these four banks collectively manage more than 30 per cent of deposits in 13 countries in Africa. The International Finance Corporation (IFC) has noted important supervisory weaknesses in the areas of consolidated banking supervision and of co-ordination between home-base and host-country supervisors and regulators, making this a critical area to watch. “Profitability in emerging markets remains far higher than in developed markets: countries such as South Africa, for example, enjoy very high return-on-equity ratios and strong value creation. Yet revenue margins that have been twice those in developed markets have

competition gets fiercer, the future is likely to be progressively challenging. According to management consultancy, McKinsey and Company, these shifts are putting risk management strategy front of mind for many emerging market banking CEOs.

include Standard Bank and United Bank for Africa. In combination with the Bank of Africa group, which operates in 11 subSaharan African countries, these four banks collectively manage more than 30 per cent of deposits in 13 countries in Africa.

“The African banking landscape will continue to transform dramatically in the years to come. Most banking systems and markets on the continent remain small in both absolute and relative size, characterised by low loan-to-deposit ratios and as a result, high levels of assets are held in the form of government securities and liquid assets. Lending is currently still predominantly short term, with roughly 60 per cent of loans carrying a maturity of less than a year,” says Saadia Khairi, vice president of risk management at the International Finance Corporation. As the fundamentals shift across markets at rapid pace, country by country, financial institutions are on their guard, she adds.

The International Finance Corporation (IFC) has noted important supervisory weaknesses in the areas of consolidated banking supervision and of co-ordination between home-base and host-country supervisors and regulators, making this a critical area to watch.

“Profitability in emerging markets remains far higher than in developed markets: countries such as South Africa, for example, enjoy very high return-on-equity ratios and strong value creation. Yet revenue margins that have been twice those in developed markets have already reduced in some regions, and further deterioration seems likely,” says Omar Costa, partner at McKinsey and Company. “The net result is that risk management has moved to the top of the agenda for emerging-market bank CEOs and their boards. Risk teams that once focused only on measurement, compliance, and control must now shift toward mitigating challenges on credit,

An integrated approach “Following the financial crisis of 2008, some African businesses are sceptical of risk management practices as there is for some a perception that the crisis was the result of the failure of risk management practices. What I try to explain is that the global financial crisis was not a failure risk management – it was a failure risk management. Had the framework been fully integrated throughout every level of business and fully adhered to, the crisis would not have happened,” says Olumide Olayinka, partner and head of risk consulting at KPMG Advisory Services Nigeria. “For integration, risk management has to be intrinsic to the strategy of any bank. It has to be part and parcel of the strategy and the risk managers have to be a key part of the development of that strategy,” says Costa. “When any part of your risk management practices are out of sync with overarching strategy, it can disrupt the implementation of a robust risk management system. In the future of banking, having risk management effectively embedded in your strategy will become a key competitive advantage.”

Create a risk culture The next key step, says Olayinka, is to develop the organisation’s risk culture, and that requires making risk management everybody’s job.

capital allocation, and liquidity or funding.”

Getting left behind For many African banks, focus on risk management practices and strategic decision-making has been far from central to the strategic framework. “African banks are increasingly realising that they must invest in risk management as a priority. Governments are also strengthening regulatory frameworks and working to build stable investment climates to support sustainable, long-term growth,” says Khairi. Despite efforts to improve risk management within many parts of the African banking sector, with many companies having formed independent risk management functions, non-performing loans remain a significant and dramatically prevalent concern in multiple countries, adds Khairi. In Kenya, for instance, 95 per cent of the country’s banks had formed independent risk management functions by 2011, yet 2013 data from the Central Bank of Kenya revealed that nonperforming loans increased 34.4 per cent over the 2013 year. Effective risk awareness and strategy integration into the business framework is yet to take pace, it would seem.

“Traditionally, African banks, along with many of those in other emerging markets more broadly, have given little focus to cultivating a risk culture where employees are encouraged and empowered to speak up when they perceive new risks,” says Costa. “One explanation is that developing such an environment takes time and the involvement of multiple stakeholders. In the current economic and banking environment—where banks must respond quickly to existing and changing risks— a strong risk culture is critical.” “Ultimately, there will be another crisis and the banks that survive will be those that have a risk – aware culture and risk management embedded into the heart of their strategy,” Olayinka cautions. To create a risk culture, Olayinka says that risk management must be included in the key performance indicators (KPI) of every employee, with performance measured not

only on profits made, but with a risk-adjusted measure. “If risk conscious behaviour is measured and acknowledged in this way, it will be embraced, and employees are incentivised to avoid putting short-term gains over long-term sustainability,” he comments. “Many banks are now taking this more seriously, with dedicated sessions for business, risk, and control functions to evaluate risk-response scenarios; explicitly defining what’s expected of all stakeholders; and engaging in tests to reinforce a strong risk culture,” says Costa. In addition to the development of effective risk culture, based on its experienced in risk consulting and supported by a survey conducted with the Risk Management Association on practices in enterprise risk management, McKinsey and Company recommends three priorities for emergingmarket banks in addressing critical risk areas:

Improve collections processes There is significant room for improving credit collections, according to Costa. “By way of illustration example, loan-loss impairments for emerging-market banks nearly tripled to €34 billion between 2007 and 2012.” Addressing this issue requires two steps, he says: 1. Identifying responses for nonperforming loans that can rapidly improve bank performance. 2. Supporting improvements to credit management related to a defined recovery strategy, organisational structures and processes, and systems. “We’ve found that programmes of this sort can have a huge impact: in Eastern Europe, for instance, banks have been able to reduce their stock of nonperforming loans by as much as 20 percent,” McKinsey and Company reports in its Rethinking Bank Risk in Emerging Markets report.

Innovative risk models African banks need to make better-informed credit decisions. “There is insufficient information on creditworthiness, be it reliable financial data on customers (particularly for small and medium-sized enterprises), creditbureau information, or historical performance

Mobile

money an African initiative By Luka Vracar

More people in Africa have mobile phones than bank accounts, so African banks and telecommunication giants are joining forces to revolutionise financial services offerings. As with any other new products, banks need to understand the mobile banking environment, the trends, the ever-evolving digital technology being used and the associated risks.

t the recent Apple iPhone 6 reveal, the show-stealer was perhaps the California giant’s new mobile payment service, Apple Pay. Apple has partnered with American Express, MasterCard and Visa to offer a new and safe way of using their mobile devices for financial transactions. Apple Pay allows the user to swipe their iPhone at the retail counter and make an instant payment from their credit or debit card. It makes use of near field communication (NFC), a form of short-range wireless communication, and allows the iPhone to act like a contactless credit card. The security benefit of this kind of transaction is that the retailer never sees the users personal details or handles the user’s cards, and each transaction is authorised with a one-time password (OTP). “Security and privacy is at the core of Apple Pay. When you’re using Apple Pay in a store, restaurant or other merchant, cashiers will no longer see your name, credit card number or security code, helping to reduce the potential for fraud. Apple doesn’t collect your purchase history, so we don’t know what you bought, where you bought it or how much you paid for it. And if your iPhone is lost or stolen, you can use Find My iPhone to quickly suspend payments from that device,” said Eddy Cue, Apple’s senior vice-president of internet software and services at the media launch of Apple Pay on 9 September. Apple ought to be taking user’s security and personal information very seriously, particularly after recent iCloud breaches, which cast doubt on Apple’s ability to protect their users’ privacy. However, for added security, Apple Pay works on an authentication process requiring the user to keep his or her finger on the Touch ID reader when they scan their phones, which eliminates wireless attacks and also makes the phone useless as a payment tool should it be stolen. There has been no word on Apple Pay operations in Africa, but after Apple announced that it has recently partnered with a further 500 banks to take on the Apple Pay system, it is a matter of when and not a matter of if. Still, even if that is the case, the high cost of Apple devices (including previous generation iPhone 5 models, which are Apple Pay compatible) will make the service out of reach for many African consumers. Nonetheless, Africa is a frontrunner in the sphere of mobile and electronic payment solutions, and the options and subsequent risks are growing.

Africa The World Bank and Groupe Speciale Mobile Association (GSMA), an international telecommunications group, report that globally, 4 361 out of 100 000 people were using mobile payment services as of June 2013. In sub-Saharan Africa, with a quarter of the population banking on their mobile phones, the number was six times higher. The GSMA reports that over 150 mobile financial providers operate in Africa, the Middle

East, and Asia, catering to 82 million people. In fact, Africa is the world’s largest market for mobile financial services offerings. According to Garter Inc, Africa’s mobile banking market was $61 billion in 2012. Kenya’s M-Pesa, mobile money transfer and micro-financing service, is perhaps Africa’s greatest mobile banking success story. Launched in 2007 by Vodafone it allows users with a national ID document or passport to transfer money from one person to another, take out insurance policies, and collect payment from government agencies without the use of an app, a smartphone, or highspeed Internet. M-Pesa users buy credit on their phone accounts to pay bills or buy products, and the debits are deducted from their phone account, eliminating the need for a bank account. Debtors receive the payment on their mobile phone account. Simplicity is the key to M-Pesa’s success. So much so, that it has since expanded to South Africa, India, Afghanistan, and even to Romania. “A mobile cashless approach does away with barriers to entry to banking and

eliminates socio-economic divisiveness. Because it offers such inclusiveness, mobile cashless banking encourages more people to participate in the formal economy,” says Vuyo Mpako, head of innovation and channel design at Standard Bank. Standard Bank’s mobile cashless offerings already include InstantMoney, SnapScan, a range of banking apps, and MasterPass. MasterPass works similarly to Apple Pay, allowing the user to scan a QR code with their mobile, choose payment card, and make the payment via their ATM PIN or an OTP. The highly successful SnapScan is even easier, allowing the user to pay instantly by scanning the participating merchants QR code. “As cash is not always accessible, using technology to eliminate, or at least reduce the need for cash is as much about empowerment as it is about convenience. It is out of this realisation that SnapScan was borne. We saw an opportunity to create a secure, convenient and customer-centric application that would put the consumer in charge of their money,” says Mpako. Internet and mobile technologies are also driving consumer behaviours that favour instant gratification, which, in banking terms, translates into instant access to banking facilities and selfservice capabilities anywhere, anytime.

“This is evident in the adoption of SnapScan by consumers with over 70 000 downloads since launch. SnapScan is currently available at over 12 000 merchants and even being piloted by car guards in Cape Town – an exercise that is being positively received. Not being able to offer mobile cashless facilities makes banks less competitive and less sustainable,” says Mpako. Mpako says that there is pressure from governments for banks and other financial institutions to provide mobile cashless facilities. An example is the Israeli Government, which has strategies in place to completely eliminate cash from their economy. Banks in Israel will have no choice but to create the necessary mechanisms to turn the strategy into a reality. The cashless approach to finance is also providing commercial entities, including banks, in emerging communities advanced technology capabilities to help create an economy in which money can be exchanged for goods and services without the need for cash, bank accounts, or access to the internet. “One of the large cellular networks in Zimbabwe initially created mobile payment facilities for non-governmental organisations that were trying to channel money to Burundian refugees. It has since adapted the technology for use by ordinary Zimbabwean citizens for making payments and for saving, even with amounts as small as $1. The company is working on a mobile system that will give informally employed people access to credit,” says Mpako.

In Tanzania, Kenya, and Rwanda, people in rural regions now have the ability to purchase Mobisol solar panel systems through incremental payments over 36 months via mobile banking. The solar panel systems are then used by small business to provide electricity for their communities. “Also in Africa, a company has established water dispensing ‘ATMs’ at which people can insert a fob key, loaded with money via their cell phones, and eliminate the cost of the middleman usually needed to distribute water within the community. In circumstances like these, people are using their phones as bank accounts. In the process, the concept of banking is changing profoundly,” says Mpako

Risks Changes in the way banks offer their services, particularly the use of new technologies, open the institutions and their clients to new security risks, threats, and challenges. With mobile banking, consumers are presented with far more control than they had in the past – codes, passwords, applications, menus and evolving digital interfaces, are all in the user’s hands. Loss of control in these areas creates new challenges and grey areas for risk assessment and management (can a service provider be held liable if a user’s password is inadequate?). Yet banks remain responsible for ensuring their systems are as secure as possible for their clients’ sake, and up-to-date and relevant for their own. The Open Web Application Security Project (OWASP) is an online nonprofit community dedicated to resolving issues surrounding web application security. It is maintained by 200 chapters in over 100 countries around the world. Earlier this year OWASP published the final list for the top 10 mobile risks. These illustrate the risks faceing mobile banking services: • Weak server controls: weak server side controls encompass the essential back-end computers that process mobile banking applications and services. This is the first

line of security, and the protection and authentication of this system needs to be strong enough to withstand interference from malware, and any other agent that acts as a source of untrustworthy input to the backend. • Unsecure data storage: this is perhaps the most common risk. Threat agents (such as disgruntled staff, opportunistic criminals, competitive corporations, or anyone else who could benefit) can gain access to sensitive data through lost or stolen mobile devices or malware/spyware if the data is not adequately secured. • Inadequate encryption: insufficient transport layer protection in the encryption of data as it travels through public networks. With public wireless Internet usage increasing at pace, the encryption of data must be complex and impenetrable to ensure security. • Poor authentication and authorisation can lead to exploitation by threat agents. Certain applications rely on unchanging authentication values, and this can mean that data remains even after data wipes or rests. • The other risks named by OWASP include: unintended data leakage, broken cryptography, client side injection, security decisions via untrusted inputs, improper session handling, and lack of binary protections. Mobile applications are, however, not the only method of delivery for mobile banking information. In many emerging African markets, where the high cost of smartphones and tablets place them out of reach for most consumers, banking is available via SMS messages. The risk here is that SMS messages are sent over congested telecommunication networks and yet have no encryption capabilities. SMS messages also store a lot of information regarding the user’s account and details. Should a phone be stolen or lost before those messages are deleted, it would leave the user vulnerable. Users can also be victims to fake banking messages engineered by criminal agents, which could prompt the user to divulge account information. For smartphone users, their mobile’s internet browser is often used to conduct banking. This method opens the user to the same vulnerabilities as using their personal computer would. However, in the case of a mobileenabled browser, security is not as clear and it is usually harder to use the mobile devices security features.

Mitigation Banks need to develop systems that effectively protect the mobile banking process from these risks. Foresight is important. While the use of SMS and browser-based mobile banking is declining, the applications which replace them are evolving in complexity, as is the technology used to attack them. OWASP offers the following suggested risk mitigation solutions: • identification and protection of sensitive data on mobile devices; • ensuring that user’s sensitive data is protected while in transit on the network; • the correct implementation of user authentication and authorisation; and • securing data integration with third party services and application. Risk identification and the implementation of mitigation measures are vital to achieving a safer mobile banking environment. According to the above list, OWASP emphasises that risk management elements need to be based on the data concerned in the system – the type of data, its state and its location. As no cash or hardcopy forms change hands, the most important element of mobile banking is the safeguarding of data. Apple’s new mobile payment system transfers the least amount of data needed for a financial transaction, along with a multilevel security system which includes complex encryption and authentication is a good example of what users can expect to become common in the near future. “As Africa’s largest bank, whose success is linked with that of the continent, Standard Bank tracks developments in mobile banking very closely and, where relevant, adjusts our solutions and services either in accordance with people’s existing needs or in anticipation of their future expectations. Although there will always be a role for cash, what is important is that a cashless approach appears to, very affordably, address many different needs for many kinds of communities. That’s technology at its best and most sustainable,” concludes Mpako.

New rules, Africaâ&#x20AC;&#x2122;s financial regulation in focus In the fallout following the 2008 financial crisis, the global regulatory environment has shifted at dramatic pace. For Africa, this same period has been one of striding growth in the banking sector as incomes rise, new lending models emerge and markets develop and diversify. Regulatory development and coordination across the continent has lagged far behind, however. By Sarah Bassett

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, new risks

ccording to Wim Mostert, director of banking at international legal advisory, Mostert Opperman Inc., new regulatory requirements impacting banking have escalated globally by an average of 34 per cent, or a third, every year since 2009. This amounts to a 215 per cent increase in the number of regulations applicable to banks internationally in just five years. These changes can generally be grouped into the following categories, says Anthony Smith, head of KPMG’s Africa Regulatory Centre of Excellence (RCoE): • Conduct legislation protecting the consumer and market conduct (including governance): this ranges from consumer protection legislation; acts regulating the extension of credit and the manner in which advice is provided to customers and how firms are remunerated for the provision of such services, to legislation protecting customer data. This could also include the remuneration structures in firms and regulation preventing firms from paying staff for taking excessive risk. • Financial Crime: legislation covering anti-money laundering and international sanctions. • Capital, liquidity and financial stability: the manner in which banks are regulated and the capital that

banks are required to hold to prevent any systemic risk to the financial sector. This is generally grouped into macro-prudential and microprudential regulation. For African markets, these changes are not yet top of mind, and many remain behind in enacting the necessary legislation. Implementation of the regulatory ‘gold standard’, the Basel Accord agreements, for instance, lags far behind, with some markets only now implementing Basel I, more than 20 years after its development. As the pan-African banking sector develops, however, awareness is growing and progress is taking place. “There are varying degrees of sophistication in African markets, with only a small number of countries early adopters of international regulations. Others take a more cautious approach,” says Smith. According to Olumide Olayinka, partner and head of risk consulting at KPMG Advisory Services Nigeria, “Africa (ex-SA) is effectively 10 years behind Europe on the implementation of Basel II, which was implemented in Europe in 2004 and is only now really being adopted here.”

“Countries such as Nigeria where the Central Bank has released guidelines on the implementation of Basel II and III, and South Africa where the Reserve Bank has already introduced regulations dealing with Basel III implementation, are doing well. However, there are many which have fallen far behind,” affirms Keith Mukami, director at Norton Rose Fulbright. “Regulatory development takes time, and these markets themselves are at differing stages of maturity and development,” notes Fitch Ratings analyst, Mahin Dissanayake. While South Africa has the most developed regulatory framework and financial markets, Nigeria and Kenya are also making substantial strides, he adds.

International pressure In a process termed the internationalisation of legal requirements, there is a growing tide of developed market regulation with extra territorial effect. These include the Foreign Account Tax Compliance Act (FATCA), the UK Bribery Act, the European Market Infrastructure Act (EMIR) along with the Office of Foreign Assets Control (OFAC) and other sanctions-related regulations, and all present challenges for emerging market banks, says Mukami.

2843 SSP Risk Africa Ads.pdf

The FATCA, for instance, requires that all non-US financial institutions report certain information to the US Inland Revenue Service (IRS) for all clients that are deemed to be ‘US persons’ – a task requiring careful compliance processes and considerable data management capacity. “Mauritius, the Seychelles and South Africa are the only African countries to have signed an Inter-Governmental Agreement (IGA) with the US that effectively moves the onus on the individual firm from reporting the information directly to the IRS to reporting it to the South African Revenue Service for onward transmission to the IRS,” notes Smith. Noncompliant institutions face costly sanctions.

Does the shoe fit? The accepted wisdom is that the Basel Accord regulation sets – Basel I, II and III – applied broadly across the European and US markets

– is best practice as a framework for banking regulation. But there are some who question whether it is appropriate to simply transfer these into the developing market context.

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“Certain aspects of the Basel models can be transferred and applied easily in the African context, but in some areas there are different risks that need to be regulated for, that simply aren’t as much of a concern in Europe, or there are differences in the operating environment more broadly which need to be accounted for,” Olayinka notes.

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“In Nigeria for instance, the reliance of capital markets on commodities means that banks have to carry a particularly high level of liquidity to account for volatility. This means that credit principles differ from the European standard. The under-development of regulation across other sectors also creates problems which perhaps don’t need to be accounted for in Europe in the same way. Lax legislation and practices make identity theft, for instance, a more significant problem in Nigeria than it is in Europe.” For this reason, many African markets C are only adopting elements of Basel II or Base III depending on the nature M and sophistication of the banks and the banking system, says Smith. On the Y whole, Olayinka adds, the Basel modelCM remains the best model available and once African banks are compliant, theyMY will have all the advantages of a world-CY class management system.

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2014/11/05

For banks with a presence in multiple markets, and for those looking to expand beyond a home market, this regulatory divergence presents significant challenges, and increases costs and risk.

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“Africa as a region is more complex than Europe or the US, even without a different and intricate regulatory regime in every market: we have more countries; inadequate access to information and data; and restrictive, expensive intra-continental flight options for travel,” notes Olayinka. “Managing the complex and changing array of guidelines and regulatory requirements across markets is a nightmare for compliance risk officers and is a serious obstacle to effective oversight and accountability,” he continues, noting that despite some attempts at regional integration, for the most part, there is not enough being done to develop regulatory cohesion. “Rather, what seems to be happening is that markets are adopting Basel I, II and III independently, and in their own time,” he observes.

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2843 TheCheeseHasMoved

“The requirement to comply with these will not only increase the risk positions for banks, but will also put a squeeze on margins in terms of costs. Banks in emerging markets will need to develop different risk cultures in order to deal with the risk of noncompliance of extra territorial legislation,” Mukami comments.

– a particularly significant challenge, says Dissanayake. a Olayinka emphasises the skills shortage as a pressing concern. “We do not have enough people with thorough knowledge and understanding of Basel II, let alone Basel III. So, we definitely need to build risk management capacity. For KPMG, we see massive opportunity in this, but it is not something anyone can change overnight.” The ‘brain gain’ phenomenon created by the returning African diaspora is some help in this, as there are professionals returning with working knowledge of these systems. But this alone is not enough to solve the capacity issue, he says.

Management response “The first thing is, you have to have some kind of structure to identify the risks and the compliance or response measures required for each,” explains Olayinka, adding that this is an area that compliance risk officers in Nigeria are becoming increasingly alert to.

Encouragingly, Fitch Ratings reports that regional integration and communication has increased over the last two years, driven by the regional growth of pan-African banks beyond their home markets, forcing greater communication between central banks. “We have seen positive steps in cooperative development, but there remains a lot that could be done in this regard,” says Dissanayake. The challenge is exacerbated by the tendency for rapid policy changes and reversals in some markets, which create additional uncertainties around requirements across countries, Olayinka adds. “This, combined with the different business languages employed in different countries, as well as a lack of skills and infrastructure (which may mean that the latest versions of relevant legislation, or case law,

are not always easily accessible), may render compliance across all jurisdictions particularly problematic, exposing an organisation to increased regulatory risk,” Smith notes. There is also a significant cost burden to tracking and managing different regulatory systems in each market of operation, as well as a barrier to labour and skills mobility, as there is a significant learning curve and lag time for employees moving across markets, even in the same region.

Capital and capacity As regulatory requirements develop, the key challenges for banks are around implementing new systems, accessing skills and meeting higher capital requirements

“In our experience, compliance risk officers work with a ‘rule book’; a compendium of legislation and steps required for compliance. Ideally, there needs to be a system procedures and reminders to ensure things happening as and when they should. This should create automatic reminders for reports and paperwork submissions, and create warnings that ensure thresholds aren’t exceeded, for instance,” says Olayinka “To manage multiple compliance frameworks, most financial firms apply the stricter of local policy, or their own group policies throughout, which will tend to follow the regulatory environment of the country in which the parent is based. There is a perception that this makes the local business of the bank less agile and less competitive, due to the sometimes onerous requirements of the parent,” says Smith.

What change brings Regulation should not be viewed as a

hindrance to good business, but rather as a facilitator of business with the potential to improve ratings and enable international growth and credibility, Smith emphasises. “While it is easy to view new regulatory requirements as a burden creating significant additional costs, most regulation can and should be viewed as improving the ability to conduct business and enhancing the protection of customers and other stakeholders, making it easier and more attractive for customers to transact with the financial firm.” Nonetheless, certain regulatory interventions have come with significant cost implications. Increased capital, for instance, is certainly healthy but is expensive. Another example is legislation related to money-laundering and international sanctions. These place an onus on banks to police their customers and customer transactions. “These costs have largely been borne by the financial services sector, but again, this legislation improves the sovereign rating and the investment grade of the country as a whole,” says Smith. These improvements

require effective enforcement of regulation, often achieved through penalties. “Regulatory penalties for non-compliance can significantly add to the cost base of firms and therefore provide an additional incentive for firms to comply. This has been prevalent in Europe and the United States where we have seen multi-billion dollar fines levied against financial institutions for non-compliance. “We are not seeing the same level of activity in Africa as yet, but as we move to the twin peaks model of financial regulation in South Africa, there is an expectation that the newly formed market conduct regulator will adopt a more intrusive supervisory approach that could potentially lead to non-compliance findings and higher penalties being levied,” says Smith. “Better regulations will absolutely lead to better growth and opportunity, and financial protocols will improve over time,” Dissanayake affirms, though change may be slower when it comes to ratings. “There are fundamental weaknesses which affect the ratings, the biggest of which are the operating environments of many of these markets. As volatile, commodity dependent markets diversify and in turn stabilise – as the process of market maturation takes place – there will be

enormous opportunities. But this is the longterm scenario – it won’t happen in one year, and it won’t happen in five years.” African banks have enjoyed unparalleled rates of growth over the past decade, with little impact from the global financial crisis. Banks have also enjoyed strong capital and liquidity positions, says Mukami, adding that despite pressures and costs brought on by regulatory change, Norton Rose Fulbright sees this growth continuing, though at a slower pace. “No doubt, the changing regulatory landscape will mean increased costs and declining profits, and the recovery of developing markets will see capital flows challenged too, but there are still many opportunities for African banks to explore, and they will continue to grow.” Indeed, as African banks are forced to reign in risk appetite in response to regulatory requirements, growth is bound to slow, but, stresses Olayinka, $100 million a year in growth is nothing if it is built on short-term gains which embed risks for the future. “We need to chase growth that will keep us in the market forever.”

Engineering consultants:

Are the

risks really covered? By Robert Appelbaum and Lisa Swaine

Determining who is best placed to carry risk is one of the fundamentals of negotiating any contract in the engineering and construction industry. Employers, contractors, consultants and suppliers pit their respective negotiating powers against one another with a view to shifting risk from themselves. 18

isks in the engineering and construction world are big stakes â&#x20AC;&#x201C; they are often long-tail and carry major liability implications, making risk assessment, management and transfer critical for all businesses and professionals involved. However, in an industry obsessed with assessing, managing and mitigating against risk, a blatant and very real risk seems to have passed unnoticed and under the radar of most participants in the industry. At the early stages of most large scale projects, employers and engineering, project management and specialist

Like any professional, consultants take out professional indemnity insurance (PI) to cover any negligence in the performance of their professional services. What, however, happens when the lines between the consulting services and legal advice begin to blur? Can a consultant rely on the PI to cover advice negligently rendered that is, by its very nature, legal advice? Ordinarily, a consultantâ&#x20AC;&#x2122;s PI provides cover for claims arising out of negligence or error in the performance of the professional services. The professional services are more often than not defined in the policy. For example: professional activities and duties that the consultant is engaged in or contracted to perform with regard to design, specification, technical information, management and supervision relating to a particular project. This definition, in its various forms, may result in the consultant being exposed to liability for an uninsured claim if, in the preparation of or advice on contractual documentation, legal advice is intentionally or unknowingly rendered. This begs the first question: how often do consultants actually advise on the legal aspects of the project contracts and documents? It is common practice in the industry for consultants to provide particular conditions to standard form contracts in order to assist employers and contractors in distributing risk during the negotiating phase of the project. Amending a standard form contract may expose the parties to legal risks, such as interpretation issues that may be caused by poor drafting. The second question then is: Why should the employer be concerned? The simple answer is that the result may be contrary to what was intended and the consultant may, for want of the required legal qualification and skill, be without PI cover.

technical consultants meet to compile tender documents, the form of contract and the supporting technical documentation. Following this, each tender is ordinarily adjudicated and a contractor is appointed based on the contractorâ&#x20AC;&#x2122;s response to the documentation prepared by the consultants. Most often a negotiation phase with the contractor predates the signature of the principal agreements after which the project proceeds on the basis of the agreed contracts. This simplified example of the contracting process is common to most participants in the industry but it is during

this period that employers and consultants may be exposing themselves to risks not contemplated in the negotiation process. Here, the lines between engineering and construction advice on the one hand and legal advice on the other can become blurred. The risk to the employer lies in the reliance placed on project contracts and documents that may be technically sound but legally challenged. The risk to the consultants is in their advising on or their drafting of the project contracts and documents that is a task more appropriately entrusted to, or at least shared with, legal practitioners.

Without recourse to the PI cover, the consultant may be at risk of being liable for a claim that is not insured. As providers of professional services with their greatest asset being their human capital, consultants may lack sufficient funds to satisfy a large claim, which could quite easily tip a consulting firm into insolvency. Nobody wins when insolvency is declared. To cover the risks, it would be prudent for employers and consultants to consult with lawyers at an early stage, to perform the legal professional services required in relation to the project contracts and documents. It is, after all, another way of distributing the risk in an already risk-averse industry. Robert Appelbaum (partner, sector group head: construction & engineering and head: South Asia Group) and Lisa Swaine (partner: insurance and legal liability), Webber Wentzel

Disruption

is the industry ready for it?

come. This kind of disruptive innovation in distribution will be no different in the insurance space.

2 Stephen Cross, chief innovation officer and chairman, Aon Global Risk Consulting

he short answer is that, in general, the industry is absolutely not ready. Both insurers and brokers have had a tendency to be providers of product and not necessarily of solutions. This creates opportunities for other forces to create disruptive innovation in our own back yard. In the insurance brokering industry, I believe we face three key risks in the short to medium term.

Disruptive innovation in distribution

We’ll be facing disruptive innovation in the distribution system within the next three to five years. There are multiple companies with access to tremendous distribution channels. Consider: 10 years ago Amazon was essentially a book seller, now it sells almost everything. It took the concept of distribution and moved it from its primary product, books, to a whole range of diverse consumer products. Think of the impact that Amazon’s innovation has had on the traditional consumer retail space, and what’s still to

Technology

Distribution risk will in turn be compounded by technology innovations. The broking industry is challenged with legacy technology which, at best, has been patched and bolted onto over the years, instead of moving to newer platforms without the redundancies inherent in outdated technology. New entrants in the space have the advantage of modern, better systems and platforms that avoid the risks and limitations that come with redundancies in older technology.

Capital from non-traditional sources

The third risk is the traditional capital that’s coming in from non-traditional sources. This additional capital can be disruptive as well as highly portable. In other words, it can enter the risk business and then leave it just as quickly. Disruptive capital is also a risk that brokers face, although it can equally be an opportunity.

Innovating to embrace disruptive change Turning from the industry in general to Aon specifically, let me comment on the actions we have taken. The biggest investment Aon made in response to planning for the above mentioned risks is in data and analytics. Today, we have two innovation centres in Ireland and Singapore. We track all the limits, the retentions of our clients

and have about $85 trillion worth of limits captured in the system. This allows us to get into the predictive technology space by using the data analytics, employing data scientists to look for colorations and opportunities in the risk profiles and data, in order to innovate and develop newer, robust solutions for clients. Essentially, this kind of data and analytical capability allows us to de-risk our business to a large extent, and keep our focus on our clients, to meet their needs and exceed expectations. Fundamentally the knowledge and opportunity that can be extracted out of big data allows clients to maximise any opportunity that the risks discussed bring to bear. Simply put, we must remain relevant in meeting our clients changing needs. Brokerages without the capital to invest in innovation across data and technology are in a tight spot. Markets are constantly changing and clients get replaced by new buyers with different needs and buying behaviours. Competing in such a rapidly changing environment, especially where so much of our business relies on ongoing investment in innovation and data analytics capability, requires capital. Ultimately, all businesses, irrespective of size, will be challenged to compete against new and disruptive players in the market place, which are going to turn distribution on its head. This is why taking steps well in advance to innovate and reinvent your business, in anticipation of disruptive change, will be the only key to survival. After all, we are in the risk business so need to manage the risks to our own income.

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COMPLIANCE RISK MANAGEMENT PRACTICE MANAGEMENT BUSINESS INTELLIGENCE

The moment of truth in insurance:

claims By Sarah Bassett

Claims short tail is the name for lines of business that are perceived largely to have losses with a short lifecycle. In some cases, however, these losses have a far longer life cycle than expected.

n these cases, says Dr Andreas Shell, global head of claims (short tail) at Allianz Global Corporate & Speciality (AGCS), it is service that will inspire client trust, and define the future for both insurer and broker. Dr Shell was sharing claims insights with delegates gathered in Johannesburg. When Superstorm Sandy hit New Jersey and New York in October of 2012, the impact of overall insured losses reached $18.8 billion. For Allianz Global Corporate & Speciality, net claims amounted to $169 million. First payment on account of $1 million made five days after the superstorm. Of the insurer’s 805 marine claims (for cargo, inland marine and hull), 374 losses could be closed within an average of 55 days after the event. The rest took a little longer. As at the end of January 2014, there were 84 files still pending. “A big risk in dealing with claims is that perception is reality – you can be right and right again, but if others don’t share the view, that will be what counts. This is why managing expectations and communicating effectively before a loss event and throughout

the claims process is so critical for both broker and insurer. AGCS procedure is that processes are discussed with clients in advance, ensuring that – in a potential crisis – all parties are familiar with the procedures,” Dr Shell emphasised. With the anniversary of 9/11 having just passed, claims related to the World Trade Towers were another pertinent example. AGCS was a major corporate insurer for the Towers, Dr Shell revealed. “Over 50 per cent of claims were settled within the first five years. The challenge with these claims was, in many cases, factual – many businesses in the World Trade Towers thought that keeping their business records in the other tower would be adequate protection, they never dreamed that both might be destroyed. So, a lot of time had to be spent on factual investigation and location – and then it got down to negotiating. Eighty to 90 per cent of the claims were closed after seven years. The final cases were slowed by difficult negotiations. And the final phase has been the property insurers going after the aviation insurers because the airlines were responsible for the security checks on their planes, which video footage has revealed to have been below standard.”

Pre-loss preparation Pre-loss preparation can do a lot to ensure rapid and smooth claims processing in the event of a claim. According to Dr Shell, organisations should meet with appointed

claims experts prior to a loss event. “Discuss with your claims expert the extent of cover provided for your specific risk scenarios and discuss market loss experiences to help you identify your most likely scenarios.”

Steps to mitigate loss 1. Emergency response Organisations should notify key stakeholders and form a crisis management group. Emergency plans should be communicated to all employees. If data recovery is required, it is important that qualified specialists be used.

2. Document the damage Organisations should evaluate, document and photograph damaged property before clean-up and make sure to preserve any evidence and obtain the contact details of any witnesses.

3. Clearing of the damage For certain claims, clients should be aware that a certified professional might be required by law for clean-up operations. For example, qualified persons should be appointed for toxicological investigation, assessing environmental damage and health protection. Clients should store all affected property until permission for disposal has been obtained from the insurer.

Plain

sailing Now at the helm of South Africa’s largest marine underwriter, Associated Marine, David Keeling has found the meaningful change he was looking for, and is settling into his new role as chief operating officer of the Santam marine division. By Christy van der Merwe and Sarah Bassett

t has been a busy few months since Keeling took over in April 2014, with much analysis and development – adding that he has the utmost confidence in the team at Associated Marine – a division that has been running for 20 years, now with a staff complement of approximately 40 people. “Some of the practicalities and systems are new, but there are no major changes required. I am happy with the staff and the approach taken, and I think the clients are being served well,” he adds. “Growth outside SA will far exceed local growth, a major contributor being infrastructure growth,” he notes and with Santam’s distribution relationship with Sanlam Emerging Markets cemented, increasing Africa growth is on the cards.

Described as a respected and knowledgeable admiral of the marine insurance industry, Keeling’s maiden voyage in the business of marine underwriting was at his home-base in Liverpool, in the early 70s, with the Sun Alliance Insurance group. By the late 70s, Keeling had moved to South Africa and started working for Protea Assurance Company. After a brief float in Durban, he returned to Johannesburg and worked for Concord Insurance (Now Ace Insurance) until 2000, and then opened the UMS Johannesburg office.

David Keeling

In 2012, UMS and FMA merged to form Horizon Underwriting Managers, which is where Keeling was until seeking a new challenge at

the start of 2014. Over the years, he played an active role on the Association of Marine Underwriters of South Africa, a division within the South African Insurance Association, and has been a part of the South African delegation to IUMI since 1995.He has also been the Master of Ceremonies at the Marine Forum for almost 20 years. Marine insurance is one of the best established and most traditional markets in the industry. While the basics remain, this does not mean that things are not changing; constantly evolving technology and criminal tactics keep marine underwriters on their toes. “Technology is certainly the most rapidly changing aspect of the business today. It has an impact on our response times, meaning we can be instantly in contact. The speed and efficiencies brought in with technology give us a competitive advantage, and mean that we can generate more business,” explains Keeling. He adds that the increasing mobility brought about by technological advances means that people no longer need to be tied to their desks, and can spend more time face to face with clients and out in the field, understanding the risks and issues. While the major risks for goods in transit remain the same, it is the nuances that change, and particularly with high-value goods, the criminal element wishing to appropriate these goods continually alter their modus operandi. Hijacking of high-value cargo is a concern that requires daily attention. One of the major issues on this front is that there is no access to worthwhile statistics. There are general statistics reported, however, these cannot be drilled

down into, to reveal more valuable information. Companies tend to work with the information they receive internally, making it difficult to get an industry-wide picture. Trucks holding consumables or any reasonably valuable cargo, from copper to cellular phones, are a target for hijacking. Hijackers have proven their prowess at taking vehicles, disabling tracking devices, disguising vehicles, and disposing of goods rapidly. “In fact, if all containers at terminals could be packed and unpacked at the speed used by criminals, the productivity of the maritime industry would increase immeasurably,” quips Keeling. He explains that many of the insurance underwriting risk management and risk control techniques emerging are linked to technology to combat crime. New safety and security products are continuously under development, and as well as being able to track cargo, being able to get it back is a top priority. Often it seems as if criminals have their own research and development departments and keeping ahead of them means that there is no time to rest easy. “Our number one priority in terms of risk management is to ensure that the product arrives safely, and the client’s interests are served,” reiterates Keeling. Associated Marine works with clients to mitigate risks as much as possible to proactively prevent claims. It will look at the client’s history, and examine systems and security, and assess whether there is a low, medium or high risk. Gaps and weaknesses will be identified and remedied where possible. Static surveys, including fire risk for storage areas are commonplace, and

recommendations will be put forward to clients to implement and improve risk ratings. On open waters piracy is a concern, and one that Associated Marine watches and pays attention to, however, it has not yet had much of an impact on South Africa and generally the cargo destined for the country does not traverse the routes known for piracy, such as those passing Somalia. Recent activity on the West African coast, and a few incidences around Southern Africa have not been widely publicised. “Cargo owners wanting to protect their interests from the treat of piracy face challenges as, risk management is virtually impossible from their perspective. The measures are those taken by vessels themselves and, in most instances, the cargo owner does not even have control over the vessel on which his cargo will be shipped,” Keeling explains. “The steps taken internationally to protect vessels, and the loss of the pirates’ mother ships, has reduced the frequency, and distance from shore, of attacks off the East coast. West coast attacks are more limited in their nature, though are still potentially lethal. The pattern on the West coast is more theft of partial cargoes, from bunkers and valuables from vessels rather than the actual theft and ransoming of the vessel itself.” Having in-depth knowledge on matters beyond South Africa has always been important as Associated Marine needs to be aware of restrictions and sanctions in foreign countries that could impact the handling, regulation and transportation of cargo. This is becoming ever-more important as around 10 per cent of Associated Marine’s business is now written outside of South Africa’s borders. This extends even beyond Africa, where Santam has an international presence through Sanlam Emerging Markets. The prospects for growth in Africa and other emerging markets are very exciting, says Keeling. “My top priority is to ensure that Associated Marine continues to be the major marine underwriter it has become over the years – with the largest footprint, product offering, and premium driver of marine insurance in South Africa,” he concludes.

Lack of cultural intelligence could damage your business

The cultural intelligence quotient (CQ), introduced in 2003 by Earley and Ang, is defined as a measure of cross-cultural competence. CQ follows on from Alfred Binet’s intelligence quotient (IQ) introduced in 1905 and Mayer and Salos framework for emotional intelligence quotient (EQ) introduced 85 years later. Ryan Quan-Chai chief compliance officer, Marsh Africa

Leaders with higher CQ are deemed more approachable and experience more cooperation from fellow colleagues and less resistance. Ryan Quan-Chai delves into the adoption of cultural intelligence and how companies can use it to win.

lobalisation, cyber-business and the proliferation of crossborder trade has opened up the floodgates for businesses in Africa to take their goods and services global. With Africa on the map, businesses need to shift their approach to accommodate cultural differences. If not, they stand to lose business to people who can relate to their customers and talk their language.

In today’s global economy, your CQ level can mean the difference between the success and failure of your business, and it’s emerging as a key leadership tool to obtaining results in Africa. He says that integrating CQ into your business model to create authentic engagement with different cultural groups is particularly relevant in Africa, with its burgeoning trade routes and vastly different cultural preferences, 54 different countries, as many as 42 different currencies and, by some count, over 3 000 languages across Africa But are companies thinking about their cultural IQ as a key business tool both internally to address a diverse workforce and looking outward to potential new clients? Multicultural groups think differently, and often the subtleties of cultural difference may result in misunderstandings and may influence levels of cooperation. CQ drive is the level of willingness a person displays to engage cross-culturally, people who are willing to fling themselves into a new and different experience are the ones who are winning in this space. CQ knowledge refers to the level of understanding a person has of a region’s cultural characteristics and

can influence our approach to doing business in that region. In Nigeria, advertising billboards have been appropriated to serve in a far more practical way as roofing for shacks in a nearby township. In most of Africa, forms of bartering are a common means of exchange and there are many vendors where credit cards are not accepted. The shrinking of the Zimbabwean economy in the early 2000s has left many locals with a lack of faith in the banking system. Hyperinflation and soaring interest rates are common in a number of African countries, which has an influence on consumer spending patterns – something to consider for businesses trying to understand the nuance of the way people do business. Quan-Chai goes on to say that the ability to apply your understanding of these nuances defines how successful your CQ strategy is, and knowing what behaviour is appropriate to achieve your desired outcome is a well-practiced balance, struck between an effortless ability to glide through a cultural minefield, knowing when to push forward, and when to pull back. When understanding the subtleties of cultural difference across sub-Saharan Africa, you will learn that there are multiple perspectives on any given subject, so we should not be shocked when we realise that the actions, gestures, accents or attitudes we display across the region, could be subject to a wide range of interpretation and are likely to result in misunderstandings and may influence the level of cooperation we receive.

Success does not come from eliminating risk.

SUCCESS COMES FROM

MANAGING RISK FOR GROWTH.

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Catastrophe

RESPONSE By Luka Vracar

How can African states better battle drought and food insecurity when foreign aid usually arrives too late? The first catastrophe insurance pool for African Union member states has been established to provide disaster insurance in cases of extreme weather events and the subsequent humanitarian crises. Established by African Risk Capacity, the catastrophe pool will issue parametric insurance policies covering drought and each countryâ&#x20AC;&#x2122;s specific needs.

How Africa is fighting drought and famine

they are predictable. Agricultural production in many parts of Africa is affected by natural climate variability and is likely to be significantly compromised by climate change through the higher incidence of drought, erratic rainfall and damaging high temperatures,” says Robar. As previous and current systems for natural disaster response were slow and usually not as effective as required by those affected, as is the current case in the Horn of Africa, much of the cost is borne by the agricultural sector. According to Robar, international assistance through the appeals system is secured on a largely ad hoc basis after disaster strikes, and governments are forced to reallocate funds in national budget from essential development activities to crisis response. Only then can relief be mobilised toward the people who need it most – and it is often too late. Lives are lost, assets are depleted, and development gains reversed – forcing more people into chronic hunger, malnutrition and destitution across the continent. What this means is that ARC provides readily available funds to respond to climatic shocks, preventing budget dislocation for governments and loss of livelihood for vulnerable populations. “By shifting away from the old paradigm of treating the effect after a crisis occurs, Africa can move towards effectively managing its risks. Managing risks is more economical, more efficient, and saves more lives and livelihoods.

he announcement of the African Risk Capacity (ARC) catastrophe insurance pool is a milestone for the continent as it reflects its increasing self-sufficiency and in this case, the increasing ability to manage and mitigate its own environmental disasters. Beginning with drought and the food insecurity that results from it, Africa has become better able at disaster relief management than it was during the famine that lead to more than 400 000 deaths in Eritrea and Ethiopia in the early 1980s. While the pool will cover drought losses in only five countries initially, it plans to expand over time to include more of the African countries within the World Food Programme. The pool will cover only drought-related disasters during its initial phase; the ARC will expand the cover to include disasters relating to flooding and cyclones. Cyclone coverage will be made available from next year, and flood coverage in 2016. “The establishment of the ARC insurance pool is the first of its kind on the continent with an aim to reduce African Governments’ reliance on external emergency aid,” says Catherine Robar, communications and donor relations at ARC. “By merging the traditional approaches of disaster relief and quantification with the concepts of risk pooling and risk transfer, ARC will help create a pan-African drought response system that meets the needs of those affected in a more timeous and efficient way. It is a transformative initiative that provides an important step forward in creating a sustainable African-led strategy for managing extreme climate risks,” she adds.

Why is it needed? In the near future the ARC insurance pool will help populations like the one million people in Somalia who are currently facing acute food insecurity, and some 218 000 children under five

The aim of ARC is to catalyse a better risk management system for Africa and provide the capacity building support required to implement such a system,” says Rodar.

How it works

in the region who are malnourished, according to the UN Food and Agriculture Organization (FAO) food security report released in September.

The ARC insurance pool is an African-owned mutual insurance company, meaning that it is owned by its policyholders. In 2014, Kenya, Mauritania, Mozambique, Niger and Senegal have together taken out drought coverage for $134 million in risk, in exchange for premium payments from the governments totalling $17.5 million. The insurance pool had capital commitments and contributions from Germany (KfW) and the United Kingdom (DFID) who contributed returnable, no-interest equity.

Somalia is just one part of a drought-hit Horn of Africa that is experiencing massive displacement and food insecurity, with 14 million people in total under threat. Yet the region is not receiving the aid funds needed to battle the looming disaster.

Willis Re secured $55 million reinsurance capacity for the catastrophe pool. In total there are 12 reinsurers on the programme, including Africa Re, Hannover Re, Munich Re and Swiss Re, as well as Chaucer and Liberty Syndicates from the Lloyd’s market.

Only half of the funds needed have been made available, according to a joint statement from Kyung-wha Kang, UN Assistant Secretary-General of Humanitarian Affairs and Mahboub Maalim, executive secretary of the Intergovernmental Authority on Development (IGAD).

“The underlying insurance policies issued by ARC Ltd are cutting-edge index-based coverage, with parametric triggers tailored to reflect each country’s specific rainfall data, which is used to objectively determine whether a drought has occurred,” said David Simmons, managing director of analytics at Willis Re, at the announcement of the pool.

IGAD reports that seven million out of 12.9 million people in South Sudan are under threat from food shortages, with four million people under severe threat, as a result of drought, as well as on-going violence and conflict. “For most weather events, although their exact timing and magnitude are uncertain,

“ARC is composed of two entities: the specialised agency (ARC) and a financial affiliate, ARC Insurance Company Limited (ARC Ltd), which is domiciled in Bermuda. The agency is a cooperative mechanism providing general oversight and supervising development of ARC capacity and service;

providing capacity building to individual countries; approving contingency plans and monitoring their implementation. ARC Ltd is the financial affiliate that carries out commercial insurance functions of risk pooling and risk transfer,” added Rodar. In order to track and analyse data more effectively than in the past, the ARC agency will use an advanced satellite software system called Africa RiskView (ARV) that monitors in-season crops. The system estimates the country’s drought risk, manages the risk pool and triggers early disbursement of readily available funds to African countries hit by severe drought. Similar flood and tropical cyclone systems will be made available in the future. The ARV software application, which was developed by the UN World Food Programme, allows decision-makers to track and analyse the progress of the season more effectively. This software tool is made available to in-country experts of participating member states who are also provided with training so they are able to use the software. By organising satellite-based rainfall data and overlaying this with a drought index and a vulnerability and cost layer, the software is able to provide a meaningful indicator of the number of people affected and the cost of response. This tool can provide valuable indicators to be used by decision-makers.

Benefits “As an insurance risk pool, ARC’s objective is to capitalise on the natural diversification of weather risk across Africa, allowing countries to manage their risk as a group in a financially efficient manner in order to respond to probable but uncertain risks,” says Rodar. The catastrophe pool will also bring down insurance rates: “By capitalising on the natural diversification of weather, ARC Ltd provides a cost-saving risk transfer option for participating governments. This benefit is transferred to participating governments through lower premiums,” explains Rodar. While this is the first time a catastrophe pool of this nature is available for African countries, similar systems have been successful in other parts of the world. The Caribbean Catastrophe Risk Insurance Facility (CCRIF) became the first multinational catastrophe pool when it was launched in 2007 to service and offer earthquake and hurricane cover to 16 governments. Currently, there are a further two catastrophe pools in plan, one for Central America, and another for members of the Association of Southeast Asian Nations (ASEAN). The catastrophe pool will not only offer indemnification to affected governments in Africa, but ARC will also encourage a greater level of risk awareness among the participating member states. In order to join the programme, countries have to spend at

least one year setting the parameters of the cover and deciding what levels of attachment and policy exhaustion they want to commit to. Not only does this instil a sense of awareness of the risks the country may need cover for, but also develops an intricate understanding of the ARC contract and how it works.

Aon Benfield

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9/3/14 4:44 PM

AGCS AFRICAN MARKETS ROUNDTABLE

retaining knowledge

from growth By Sarah Bassett

“Innovation is no longer a developed market phenomenon,” said Africa Re group managing director and CEO, Corneille Karekezi. “There is a kind of a flattening of ideas and opportunities. Any company can aim at improving its risk management, and its standards employed; anyone can meet with the highest global standards. Ideas are on the Internet, and experts are everywhere. What is usually lacking is only the will.”

e was speaking as part of the Allianz Global Corporate and Specialty (AGCS) Africa Market roundtable, hosted by Allianz Africa CEO, Delphine Maidou, and also including Aon Benfield Africa CEO, Simon Chikumbu.

For the moment, I think nothing can stop the trend we’re on. We have resources, youth and every service (healthcare, education and so on) is in demand and undersupplied. Everything indicates a long period of strong growth,” Karekezi noted.

Panellists confirmed a positive outlook for African growth. “All indications and analysis point to long-lasting economic growth for Africa and, in turn, for the insurance industry.

“At Allianz, we have certainly experienced the impact on industry growth first-hand,” Maidou agreed. “Since 2012, when Allianz began its increased focus on the

continent, we’ve more than doubled our broker business. What’s been important for us is ensuring that we are growing in South Africa, but also diversifying our portfolio across the continent. We went from having roughly two per cent of our [Africa] business outside of South Africa, to 25 per cent today. To be sustainable, we think the split should be 30 / 70 for the next few years.”

According to Karekezi, the other good news from the continent is the improvement in political governance. “There remains much to be done in this regard, but if you compare where we were in the 80s, we’ve come an enormous way in terms of free and fair elections and decreased corruption and expropriation. As a result, the flow of business is ever-more open across the continent.”

skills, the people we have on the ground are very good. When the continent is able to fully insure big infrastructure or oil and gas projects more often, perceptions will start changing quickly,” she said. “I don’t think we are yet fully harmonised as insurance companies, brokers and reinsurers.”

Critically, he continued, the insurance industry needs to ensure that this period of growth leaves a sustainable impact in terms of premium retention, skills, and expertise. “Regulators need to target the retention of knowledge on the continent as a major focus.

The number of African companies prioritising and investing in risk management is improving slowly, said panellists, but that for most, it remains more cost-effective to rely on international skills in this area, when required.

If we do not train and empower African insurers, the losses in the long term will be massive. With technology at speed, African service providers could become irrelevant. A foreign service provider could do to us what Amazon did to libraries,” Karekezi said.

“I think sometimes there are quite large companies that still just see insurance as a commodity. We were recently approached by a large African company, with a presence in 30 African markets, looking for a property programme, a liability programme and a financial lines programme for the whole continent without a broker.

Commenting on the global perception of Africa as not being as competent or credible as its international counterpart companies, Maidou suggested that greater industry cooperation was needed to increase premium retention. “The more we work together to keep premium in Africa, the more we will show the world that there is enough capacity here, and that while there may be limited

Risk management in Africa

We were given a tender document and 10 pages of information, and the expectation was that we’d put together a premium prosposal in three weeks. We told them no international insurance carrier would be prepared to put together such a programme without a broker. That quite surprised me – that a company of that size to have so little understanding. So,

in terms of risk management, we still have some work to do.” For insurers, there has been progress says Karekezi. “You didn’t used to find insurance companies employing risk managers or engineers, but now more or less every insurance company does have someone who helps them on the insurance side to advise the insured on their risks.”

Infrastructure impact While Maidou confirms that infrastructure investments and large projects are driving significant growth for AGCS in Africa and for the industry more broadly, there remains a big financing gap. “The African Development bank has been quite open about this. There is a $45 billion funding gap – and the bank is still looking to raise that capital.

Inclusion critical Karekezi stressed that while the growth predictions for the future remained strong, issues of inclusion, and of social economic transformation, remained a critical concern for the nature of development going forward. “We need to ensure that the lowest income categories can be included in the continent’s growth, otherwise there may be serious social disturbances which could stop that growth,” he warned.

The game of risk IRMSA conference 2014

The annual Institute of Risk Management South Africa (IRMSA) Conference 2014 offered an impressive and packed two-day programme of diverse topics and critical industry discussions. By Sarah Bassett

opics covered included a look at the risks and consequences of the Ebola virus on the tourism sector; the critical need to combine strategy and risk information; business interruption and how to prevent its knock-on effects; and effective response strategies to global risks.

Ebola South African Chamber of Commerce and Industry CEO, Neren Rau, shared insights on the risks and consequences for Africa of the Ebola Virus outbreak. He noted that epidemics have great potential to create social disruption, with labour affected by illness, social isolation policies implemented in response, and the potential for widespread panic. “Critical networks could be affected, causing disruptions in transport, utilities and payment systems. International trade may be disrupted. Consumption is likely to be badly affected, especially in tourism, entertainment and durables. Investment may also be postponed. However, if the epidemic is characterised by a rapid recovery, postponed consumption and investment would also recover rapidly,” he explained. Effective national and regional epidemic response strategy is critical, however, national and sectorial contingency plans

will fail if they are not complemented by effective institutional continuity plans, Rau emphasised. “At the institutional level, the onus is on companies to have effective business recovery plans. Establishing partnerships with other organisations that have similar responsibilities and staff with similar capabilities might be an important supplemental element in back-up plans,” he suggested.

Labour relations For employers willing to champion constructive engagement in labour relations, impactful work can be done in improving the state of relations and ensuring that negotiation do not end up in stalemate and months long strikes. This was the message from Nerina Kahn, director of South Africa’s Commission for Conciliation, Mediation and Arbitration (CCMA), who addressed the topic of devolving labour relations in the South African economy. “We are on the wrong track in SA in terms of industrial relations management. But this can change,” said Kahn firmly. “2014 will be a year remembered for the celebration of 20 years of democracy as well as the longest strike in South African history – the 84-day platinum mine labour strike.” There has been an increase in inter-union

rivalry, unprotected strikes and the accurrence of longest strike in SA history, she noted “The fractiousness of the labour market has been exacerbated by the intervention of interested but inexperienced parties.” According to Kahn, inadequate awareness of internal and external labour market dynamics, along with ineffective management of industrial relations and an absence of meaningful engagement has led to a breakdown of trust within the labour market and loss of confidence in the mechanisms of the labour market. Kahn stressed that organisations need to urgently make changes at a strategic level in order to change the devolving situation. “Employers must entrench an industrial relations risk conscious culture into organisations and support representation in the highest executive structure to ensure meaningful consideration of industrial relations risks in executive decision-making,” she said. “Engagement on industrial relations issues is required at every level of your organisation. The risk is real at all levels.” There is a need for optimally capacitated and resourced industrial relations functions. “Industrial relations is currently often outsourced to consultants and human resources. This needs to change. Managers do not build respect and trusting relationships

if they outsource relations management,” she said. “The best risk management for industrial relations is to ensure you have continuous engagement, that you understand the issues.”

markets while some developed markets face diminishing population numbers. Life expectancies are expanding globally.

The risks of tomorrow

With the rise of emerging markets, global competition is changing with new global players rising.

“It is difficult to predict the future, but this will not deter us from preparing for it,” noted IRMSA president, Sheralee Morland, opening her presentation on considering the risks of the future. Though the past is not an indicator of the future, individuals and organisations learn from mistakes of the past and can ensure the best preparation possible by taking the time to thoroughly understand the risks of today and consider how their actions today can ensure better tomorrows, she emphasised.

The rapid pace of technological innovation is another area of fast-changing risk and opportunity. “Is your organisation successfully integrating technology? Is it hamstrung by legacy systems? Are the risks of cloud computing understood? Have you considered these? Does increased use of technology create shifting consumer preferences and new risks to consider? The list goes on and on. The risks and associated degree of uncertainty in this area requires significant attention from organisations.”

Today’s risks

The wake of the Global Financial Crisis has brought an onslaught of tougher regulation across global markets, presenting cost and compliance risks and challenges for organisations the world over, as well as greater standardisation of products in each market and increasing exposure to global regulatory heterogeneity. “Since 2009, there has been a 215 per cent increase in the number of new regulations impacting banks,” Morland noted.

Climate change and extreme weather events are increasing in frequency and intensity. The world is seeing increasing terror activity and conflict. The globe is in a time of critical demographic shifts in core markets – creating new opportunities along with new risks and competition. Globally, urbanisation is increasing at rapid pace, and the demographic dividend is shifting, with rapid growth in emerging

“Critical to understand is that the trend in regulation is that the customer and their

protection is top of mind – as is clear from recent local introductions, including the Consumer Protection Act and the Protection of Personal Information Act. In an increasingly interconnected world where trust in global organisations is eroding or has already been significantly eroded, the penalty for breaching trust is immediate and severe. Often trust is never regained,” Morland noted. “With the advent of easy to use technology, consumers and businesses want simplicity, transparency, quick and timely transacting and value for money. Simplification will require innovative solutions and a focus on client centricity – seeking to please what the consumer or business wants rather than business deciding what the customer or business needs. Significant investments will be required in technologies to meet speed of delivery and a wide choice of delivery of such services on digital platforms,” she concluded.

Board exams IRMSA’s Gillian le Cordeur and Nthabiseng Mdhlozini shared insights on the IRMSA Risk Management Board Exams. Designed for the members, by the members, the qualifications will officially be rolled out in March 2015 and are set to even the playing field for skills across the industry.

By Sarah Bassett

GIB Africa Alliance Conference

Delegates from across Africa and the globe gathered in Johannesburg for the 2nd Annual GIB Africa Alliance Conference, a gathering of members and associates of the largest independent broker network in Africa.

frican delegates shared insights into their home markets and discussed opportunities for growth, while delegates from Germany, the United States and China shared thoughts on global network co-operation and the lessons and experience gained from building these now long-established networks in other markets.

poor communication on expectations and requirements,” she explained. Schneider added the significant potential role of technology in building this ease of communication, as well as ensuring consistency of service standards, records and efficiency.

Founder and deputy chairman of the GIB group, Dennis Gamsy, noted the exceptional growth achieved since the official launch of the alliance in September 2013. Membership now spans 44 countries, with partner networks in China, Europe and the United States enabling global placement of business.

CEO of Debtsource, Frank Knight, shared insights on the significant opportunity for trade credit insurance growth on the African continent.

Event sponsor, AIG, shared insights on the diversifying market opportunities of African markets, noting that while currently 81 per cent of premium income in Africa is derived from South Africa, by 2040, it is predicted to reduce to 60 per cent as markets grow. Representatives of partner networks shared lessons and experiences learned in the development of these networks. The panel comprised Paul Lam of Jiang Tai International Associates (China), Peter Schneider of Funk Alliance (Germany and Europe) and Sherry Gonzalez of Gallagher Global Alliance (US). Gonzalez emphasised the critical importance of trust, communication and strong relationships for the growth and development of broker networks. “When issues arise across network contracts, the origin is usually

Trade credit opportunity

“In the last decade, technology has driven a shift in balance sheets: cash and stock are no longer held for long periods and for many companies globally, debtors will be the largest asset on the books – making the management of that credit risk critical for the continued success of any business – and credit transfer is a critically important step in managing this risk,” said Knight. “It’s important that we have this conversation at this point in Africa, because companies are now in this process of following the global trend to become more credit driven. That creates a lot of risk,” he continued. “The last global financial crisis was really a credit management crisis. There were toxic loans that should never have been granted. In South Africa, this has happened again with African Bank.” Debtsource, which provides services to support all areas of credit risk management, finds that medium sized companies in

Africa tend not to have credit management structures – this represents a significant risk to business in Africa, and an opportunity for growth in managing and transferring this risk. “Increasingly, these customers are demanding services and support around and beyond simply an insurance product – and this is where an informed broker can add tremendous value. If you haven’t had a discussion with your clients about how they manage credit risk, it is a bomb waiting to happen,” Knight concluded.

African co-operation Managing director of GIB Insurance Brokers, Dudley Sanders, commended the alliance on its rapid growth. He emphasised that the beauty of the network broker model is that it is built on entrepreneurial businesses – a network of entrepreneurs who come together to service the continent-wide and global needs of their clients, while retaining the flexibility, personal commitment and service standards of a small business. He noted that risk managers around the world need to be certain that all their risks will receive consistency in service standards and product offerings. As the network grows and consolidates, this will be critically important to get right. It is unusual, inspiring and hugely exciting to see this kind of continent-wide co-operation and business development in action. RISKAFRICA, for one, is excited to see what the next year will bring for the GIB AA.

China Africa

Business Forum By Sarah Bassett

“Chinese enterprises are going global, and paying more attention to the African market,” noted Counsellor Rong Yansong of the Chinese Embassy in South Africa. He was opening the Frontier Advisory China Africa Business Forum 2014, held at the Henley Business School, Johannesburg, in September.

he annual one-day conference brought together leading decision-makers from both Chinese and African companies. The programme featured a diverse range of high-level speakers and pertinent discussion topics, ranging from the rise of China and its impact on the global economy, to insights on dispute resolution and arbitration from the perspective of the Chinese investor, to how Chinese and African entities can prepare their leaders for building relationships of trust. “As China’s political-economy changes, so will its relationship with Africa,” noted Dr Martyn Davies, CEO of Frontier Advisory, in his opening remarks. “As China de-industrialises, will Africa industrialise? This is a key question of African opportunity and development right now,” he continued, noting that China as an economy is moving towards a service-driven model, leaving a major opportunity for Africa. “As China’s economy moves towards a service model, jobs shifting out of China will move first into Southeast Asia, in particular,” said well-known trade commentator, Peter Draper, director of Tutwa Consulting. “For Africa, coastal countries with infrastructure offerings are best positioned to take advantage of the Chinese job exodus.” “Ethiopia, Kenya and other parts of East Africa are now leading on export infrastructure to support the private sector,” added Dr. Michael Power, strategist at Investec. Discussing the Chinese development model, Dr Davies noted that South Africa in particular has much to learn from how China has enabled the entrepreneur as the productive driver of its economy. “The economic development zone model, as was implemented in China, is currently working best in Ethiopia and Kenya where the low wage, high employment and production model has been implemented,” he added. The private sector now accounts for 70 per cent of the Chinese economy and is the most dynamic growth driver, said panelists.

Making it in China Discussing opportunities and strategies for African companies in China, Colin Coleman, managing director of Goldman Sachs, noted that South Africa’s BRICS membership is worth more than just sentiment. “When we go to China as a member of BRICS, the doors do open more easily,” he said, adding that successful, seamless deals such as those between Jinchuan-Metorex, Discovery-Ping An and ICBC-Standard bank, prove that there is nothing preventing South African and African companies from successfully entering the Chinese market. Managing director of Hollard International, Frans Prinsloo, cautioned that local partnerships are critically important for success, and for the protection of intellectual property. “If you don’t have local people and good local partnerships, you won’t succeed in China.” “One strategy we used successfully is not to compete with large state-owned companies, but to enter China innovatively, and use existing channels to build scale,” Prinsloo said. “You have to be patient. Stick with it, build trust and you’ll do well.”

Trust “Culture, fundamentally, is a framework for decision-making. Building shared ChinaAfrica values as a framework for decisionmaking is key to the process of trust building between regions and business leaders alike,” commented Alan Hilburg, founder of Hilburg Associates. “There is an urgent need for Africans to develop Chinese language, culture and history knowledge in order to promote effective business relations,” added Margaret O’Connor, head of strategic marketing, communications and business development at Hilburg Associates.

Further speakers included: Martin Habel, principal financial officer of the International Finance Corporation ; Peter Wonacott, Africa bureau chief at the Wall Street Journal; Dr. Li Feng, executive vice president of the Bank of China, Johannesburg; Des Williams, chairman of Werksmens Attorneys; and Du Wenhui, chief operating officer of Zendai Development South Africa.

NEWS New risk protection for

mega-infrastructure projects As part of its strategic African expansion partnership with Sanlam Emerging Markets, Santam Specialist Business has launched a seamless specialist insurance solution offering comprehensive risk protection for mega-projects across Africa. The development of infrastructure is the primary driver of economic growth in East, Central and West Africa. Mega-infrastructure projects include dams, transport infrastructure and renewable energy projects and plants. These projects require innovation, a high level of underwriting expertise and the special technical knowledge of a large insurer to effectively mitigate risk. Santam’s Seamless Specialist Insurance solution is aimed at corporations involved with complex projects in the infrastructure development, energy and related industry sectors. “Mega-projects have specific insurance needs requiring the highest level of technical expertise and experience,” says Karl Bishop, head of niche business at Santam. “We have partnered with our niche underwriters to offer a Seamless Specialist Insurance policy targeted at large and mega-infrastructure projects both in South Africa and the rest of the continent.”

GraySwan partners with EM Applications GraySwan, a South Africa-based provider of independent investment and risk advisory services to more than R28 billion of assets, has announced an agreement with EM Applications Ltd (EMA), a leading supplier of investment risk solutions. GraySwan will use EMA’s risk analysis system to support its provision of independent investment advice to institutional investors and private client investors in South Africa, Botswana, Swaziland and Namibia. EMA has developed a risk model specifically targeting the Africa region and has made a commitment to supporting clients in the region. Consequently, GraySwan have decided to appoint EMA as their preferred provider for such risk analysis to complement their internal proprietary performance risk monitoring systems. After a comprehensive due diligence exercise we concluded that EMA had demonstrated a particular commitment

to the South African and African markets, and have decided to integrate their system with our other proprietary technology to complement and support the risk analysis aspect of our service to our institutional and private clients. EMA will, therefore, be an integral part of our offering to investors in the region. We have found that clients are increasingly interested in understanding investment risk and are pleased to be able to have the support of Dr Costas Stephanou who we have known for many years,” commented Duncan Theron, Chief Executive Officer.

UK firm enters Kenyan insurance market UK-based insurer, Prudential PLC, has bought out Shield Assurance, making its first entry to the Kenyan insurance market. Initially, the company will continue to operate under Shield Assurance name. “The announcement is an important milestone for Prudential and represents our first step towards the creation of a new business in East Africa,” comments Prudential Africa CEO, Matt Lilley. Kenya is the second African country the company is investing into after Ghana. With operations in Asia, the UK and US, Nairobi will become the headquarters of a planned new East African division.

Metrofile expands into Zambia JSE-listed Metrofile Holdings Limited has increased its African footprint through the acquisition of 60 per cent of Zambian records management company, FlexiFile Limited. “As part of the group strategy, Metrofile has been looking for opportunities to acquire existing business in African countries, rather than going with the green fields approach for a number of reasons,” comments Richard Buttle, executive director of Metrofile Holdings. The FlexiFile business previously offered only the archiving and storage of documents, in addition to a small amount of scanning. Following the acquisition, the service range will expand to include the full range provided by Metroplex Records Management including: active records management; image processing that involves converting physical records into digital images; data protection and storage; data backup. “We are confident that the acquisition of FlexiFile will contribute positively towards our active African expansion strategy. Metrofile will continue to seek promising acquisition opportunities in other African countries to further grow its presence across the continent,” Buttle concluded.

Metrofile expands into Zambia

Swiss Re buys LeapFrog Investments’ stake in Kenyan insurer LeapFrog Investments, the specialist investor in financial services in Africa and Asia, has sold its minority stake in Apollo Investments Limited to Swiss Re. Apollo, through its wholly owned insurance subsidiary, APA, is one of the top three regional insurers in East Africa, providing a broad array of insurance solutions across Kenya, Uganda and Tanzania. “Our experience with both Apollo and Express has shown that investors with specialist skills and intimate knowledge of the market can add tremendous value to local businesses. The resulting growth and profitability benefits customers, management and shareholders, and contributes significantly to job creation,” commented LeapFrog partner, Doug Lacey, who led both investments.

Sanlam expands insurance business in Ghana South African financial services group, Sanlam Emerging Markets (SEM) has added short-term general insurance services including vehicle and household insurance, to its life insurance business in Ghana.

“The underserved market for insurance, savings and payments is especially vast on our continent. We believe that the hundreds of millions of emerging consumers in Africa present a tremendous opportunity for financial services businesses. Visionary businesses that provide sustainable solutions to their customers, at scale, will transform many lives and deliver top-tier returns to investors,” concluded Dominic Liber, partner and actuary at LeapFrog.

This was made possible following a 40 per cent shareholding acquisition of Ghana Stock Exchange (GSE)-listed Enterprise Insurance Company (EIC) for $21.4 million (R240 million). “The transaction brings together two great financial services players with nearly 200 years of doing business in Africa and holds much promise for the future of both groups,” said Trevor Trefgarne, Enterprise Group Chairman. Prior to the new insurance investment, Sanlam already owned a significant stake in Enterprise Life and Enterprise Trustees. The acquisition is still subject to regulatory approval.

INTERNATIONAL

NEWS

Lloyd’s of London warns of

aviation losses

The shooting down of Malaysia Airlines flight MH17 and attacks at Tripoli Airport in Libya could contribute to more than $600 million in claims for the insurance industry, which has been stung by a number of aviation losses, the leaders of Lloyd’s of London has warned. “The global aviation hull war market accounts for around $65 million of premium per annum; yet already in 2014, claims could exceed $600 million for the insurance industry. In a period when premium rates have generally fallen, most notably in the reinsurance space, this is a reminder of why pricing must reflect the underlying risks which are being written,” chairman John Nelson and chief executive Inga Beale said in a joint statement. The Lloyd’s of London bosses cautioned that pricing continues to be under pressure from the additional capital coming into insurance from investors looking for higher returns in a period of historically low interest rates. They said the market has reacted well to the competitive environment, demonstrating underwriting discipline with overall premium growth being restrained. Conflicts in Russia, eastern Ukraine, Libya and the Middle East have not triggered big losses so far at Lloyd’s, but business from those regions has decreased. Companies are increasingly insuring themselves against cyber-attacks and are asking for wider coverage and bigger limits. Lloyd’s said weather incidents, including cold weather in the US and Japan, windstorm Ela and flooding in the UK, were unlikely to cause big losses for its insurers.

Rising competitiveness in US and Japan Switzerland has been named the world’s top economy for the sixth year in a row by the World Economic Forum (WEF), according to its annual ranking published in Geneva. Singapore was in second place with the United States third. The US overtook Finland and Germany when compared to last year’s ranking, relegating them to fourth and fifth place respectively. The US came in third because of its innovative companies and strong institutions, said the WEF, also clarifying that improvements in the area of innovation was one of the reasons why Japan had climbed up three places this year from its sixth place position in 2013.

Security breaches rising The annual Global State of Information Security Survey from PricewaterhouseCoopers reveals that the number of reported information security incidents globally rose 48 per cent in 2014, to 42.8 million, the equivalent of 117 339 attacks per day. Detected security incidents have increased 66 per cent year-over-year since 2009. As security incidents become more common, the costs of managing and mitigating breaches are also swelling. Globally, the estimated reported average financial loss from cybersecurity incidents was $2.7 million – a 34 per cent increase over 2013. Big losses have been more frequent in 2014, with the number of organisations reporting losses in excess of $20 million nearly doubled. Despite this, the survey found that global information security budgets actually decreased by four per cent compared with 2013. Security spending as a percentage of IT budget has stalled at four per cent or less for the past five years, the survey revealed.

Civil unrest increasing in high-growth markets Civil unrest is rising in key supply chain and many high-growth markets, according to political risk analyst, Maplecroft. In the last quarter, civil unrest has risen in 20 per cent of the 197 countries monitored by Maplecroft. Hong Kong and Liberia have seen the biggest increase in risk, although many high-growth markets have seen mass demonstrations, labour protests and ethnic or religious violence. Maplecroft’s Civil Unrest Index also shows increased risk of civil unrest in China, Mexico, Kenya and Nigeria. Maplecroft in fact identifies 69 countries considered ‘high risk’ for the continuity of business operations, including the Asian manufacturing hubs of Thailand (16th), Indonesia (23rd), Vietnam (24th), China (26th), India (28th), Cambodia (32nd) and the Philippines (35th).

Ascot, AIG launch catastrophe reinsurance platform Lloyd’s of London company, Ascot Underwriting Ltd., and AIG have announced the creation of AIG-Ascot Re, a Bermuda-based reinsurance platform scheduled to begin writing business on 1 January 2015. Ascot Underwriting will serve as managing general agent of AIG-Ascot Re, which will write catastrophe reinsurance business on behalf of American International Reinsurance Company, a wholly-owned subsidiary of AIG. The companies said that Simon Kimberley, formerly an underwriter with Ascot’s London Treaty team, has transferred to AUB and will begin writing business for the platform in Bermuda. “The operation will complement Ascot’s Lloyd’s syndicate, providing clients with a broader scope of strong capacity and solutions for all facets of their catastrophe program,” Ascot Underwriting CEO, Andrew Brooks, commented.

Germany Concerns about deflation spread Due to the negative state of its inflation rate, Germany is close to becoming part of an ‘exclusive club of nations’ that will be able to borrow money for ten years at less than one per cent interest rate. Market inflation prospects are decreasing, and the refinancing rate is at a record low even after negative deposit rates and targeted lending were introduced. Benchmark 10-year yields are at 1.06 per cent. Investors are uneasy as a negative yield means that they will receive less in return than they paid for the security.

SA risk managers:

A new professional certification Official launch of the Institute of Risk Management South Africa (IRMSA) board exam certification will roll out in March 2015. By Sarah Bassett

he certification aims to professionalise the industry and create a level standard for skills and experience across the industry.

â&#x20AC;&#x153;The qualifications have been designed by the IRMSA members, for the IRMSA members, with the development committee made up of both public and private sector members,â&#x20AC;? IRMSA chief executive, Gillian le Cordeur, told delegates at the annual IRMSA Conference 2014, in Johannesburg. The institute was excited by the enthusiastic response from members so far, said training and development manager, Nthabiseng Mdhlozini, encouraging all risk managers in the country to sign-up and become certified. In the coming years, it will be the designation required by employers everywhere. The initial pilot examination process is scheduled for 25 November 2014 and will be

written by 40 IRMSA members from across the private and public sector to reflect as broad a representation as possible. Once officially rolled out in 2015, IRMSA will offer two certification levels, with risk managers passing the first eligible to write the second. The first will give risk managers the Certified Risk Management Practitioner designation (NQF level 6) and the second level will be the Certified Risk Management Professional (NQF level 8). The exam content has been benchmarked against other professional bodies to ensure correct standards. One of the clear aims of the professionalisation process noted le Cordeur, is that it should enable all risk managers, regardless of original education, to write the exam and achieve the certification, as long as they have the necessary experience in the risk management field.

Mdhlozini emphasised that another key outcome of the qualifications was to enable mobility across sectors, ensuring that risk managers in the private sector could move across to the public and apply the same skillsets and competencies â&#x20AC;&#x201C; and vice versa. The examinations will be open to IRMSA members only, and there will be a log book and work experience requirement for both certification levels. Seasoned risk managers will be eligible for certain exemptions against the first exam, but no exemptions will apply for the second level. The exam curriculum will be aligned with the new IRMSA Guideline, which is aligned with the international risk management standard, the ISO 31000: Risk Management as well as the third King Report on Governance for South Africa (King III, 2009).

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