ABSA increases risk financing despite soft insurance market
South African financial services group ABSA increased its risk financing at its November 1 insurance renewal, despite continued soft market conditions, as growing digital exposures and other factors drove up the cost of managing risks retained on its balance sheet.
“We have seen the persistent soft market conditions,” Jakes Makakabule, head of group corporate insurance at ABSA Group, told delegates at the Africa Captive Conference on Thursday (November 12).
“However, for those losses which we insure within our balance sheet, we have seen that we had to increase our financing from that perspective as well,” Makakabule said, pointing to the growing digital functions within banking institutions as one of several factors behind the increase.
He said corporate insurance buyers were increasingly having to look beyond premium savings and consider the total cost of risk, including the cost of retaining and financing high-frequency losses.
“Although insured external insurance capacity may be abundant and pricing competitive, the group’s total cost of risk is increasingly influenced by the routine claims, captive performance, claims inflation, emerging technologies, and the effect of preventative controls,” he said.
The strategy for ABSA is to retain predictable, financially manageable losses through its balance sheet and captive, Makakabule said, while transferring larger and less predictable exposures to the commercial insurance market.
The group’s wholly owned captive, based in the Isle of Man, was established in 1996 and has expanded from crime and professional indemnity to include property, violence and terrorism, cyber and property damage risks.
Makakabule said the captive had proved valuable in navigating different market conditions, particularly during periods of hardening rates when the group had to stretch its capital to retain certain exposures.
“Predictable and financially manageable losses may be retained through predictable self-insurance and accounting, while higher severity and less predictable losses are transferred to the commercial insurance market,” he said.
This approach was intended to reduce unnecessary premium expenditure while protecting the group’s financial position, he explained.
However, retaining more risk also requires sufficient capital and liquidity to meet claims, alongside investment in robust risk management programmes and suitably qualified personnel, Makakabule noted.
Makakabule said the objective was not simply to minimise premiums, but to ensure insurance delivered economic value to the group and that its entities remain adequately protected across the territories in which it operates.
“By intelligent financing, there’s a capital allocation strategy. It enables businesses to plan and reduce volatility,” he said.
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