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Sizing up South Africa.

FOLLOWING THE lifting of trade sanctions against South Africa last July by the Bush administration, and the recently passed referendum supporting the reform process to end apartheid begun under President F.W. de Klerk, increasing numbers of U.S. corporations are looking there to reinvest. With a highly volatile political and socioeconomic climate, however, risk managers would be prudent to learn from the experiences of native South Africans concerning the challenges of managing risk in their country.

The effects of divestiture and the imposition of sanctions on South Africa were both good and bad propositions for the country's insurance industry. These events cut the country off from the rest of the world to a large extent, making international business difficult. On the one hand, this should have helped the domestic insurers become more self-sufficient. On the other hand, many Western insurance companies that "pulled out" did so under local management buyouts, remaining, in effect, in South Africa under different names. Thus, the removal of competition was for the most part illusory. "In the long run, it did American insurers more harm than it did us, particularly since we still had the European insurers," notes Des Vernon, group risk and insurance manager for Barlow Rand Ltd., a large industrial holding company in South Africa.

"Insurance has always been an international business as far as South Africa is concerned," according to Roland Hill, legal director for Rennies Group Ltd., a major player in the freight and travel industry based in Johannesburg. Thus, he doesn't believe that the lifting of sanctions will increase competition in insurance, a sentiment echoed by Denis Ternent, a divisional director for M.I.B. Group (Pty) Ltd., an insurance broking and risk management group in Johannesburg: "South Africans don't see a whole flood of new insurance companies coming into the country, partly because it is quite difficult to get an insurance license to underwrite short-term." Short-term insurance is what South Africans use to refer to the property/casualty side of the business.

As Mr. Ternent reports, corporations in South Africa may apply for permission to register an offshore captive. However, applications are being thoroughly scrutinized. Furthermore, the "remittance of premiums to captives is becoming increasingly difficult and, once again, permission must be sought from the authorities before premiums can be sent offshore," Mr. Ternent says. He adds that while there are moves to regulate captives, any amendments to the Insurance Act are not likely to be enacted before 1994. There are presently 22 known South African captives.

It is expected that some of the European insurers that have local representatives will institute more aggressive marketing policies. But that is all to the benefit of the corporations. Large corporations in South Africa, observes Michael Redgate, risk manager for South African Breweries Ltd. in Johannesburg, "tend to work on the principle of long-term relationships. They don't change their brokers, they don't change their banks, and they don't change their insurance carriers very easily."

A rising professionalism among risk managers and an acceptance of risk management as a discipline have developed in South Africa. Yet, Frank Butler, managing director of CRM Risk Control Consultants (Pty) Ltd. in Johannesburg, sees advancements in the practice being driven by the risk management industry rather than by corporate management demands. But he does acknowledge that management has become more open and enlightened to the discipline.

Specifically, risk financing and risk control have become important aspects of overall corporate management. Moreover, South African risk managers are going beyond pure risk to tackle balance sheet protection risks, including currency and investment-type risks. "They are looking after more global issues, dealing with acquisitions and divestitures. The insurance industry hasn't yet spotted that they are a part of risk management, not the other way around," Mr. Vernon concludes.

No big improvement in the political risk area has been discerned since the anti-apartheid reform process began. Although there have been far fewer bomb threats from both the left and the right wings, partially as a result of the suspension of the arms struggle, Mr. Ternent still sees a lot of political attacks occurring. He points out, however, that "we do find that the high degree of crime covers normal theft-type issues, not politically motivated ones as before." The prevalence of crime, Mr. Vernon adds, has been due in part to the society's raised expectations regarding the redistribution of wealth.

Crime and "motor" classes of claims have outstripped most corporations' old fire classes of claims, Mr. Butler reports. In fact, he has found that fleet claims can easily account for over 50 percent of a company's losses. "Our accident rate is four times higher than that in the United States," Mr. Redgate said, "plus we have a high number of vehicle thefts and hijackings." He also reported the presence of large organized gangs plaguing the country who steal cars that end up in Kenya, Angola and other neighboring states, and as far away as Europe and Australia. "We are now introducing vehicle tracking systems using satellites, but it is expensive and we use them only for large rigs," Mr. Hill adds.

Occupational Hazards

ANOTHER BIG area that has seen a massive increase in claims is in what the South Africans term "fidelity" (employee loyalty) matters, such as staff embezzlement. According to Mr. Ternent, "this has been escalating at a very rapid rate over the last few years and it's moving more away from a blue collar worker that is involved to a white collar worker."

In a country with a history of political, economic and labor unrest, risk managers must gauge the likelihood of work stoppages and business interruption. While the number of strikes in South Africa has grown substantially, one should realize that they generally tend to be of short duration, averaging under five days apiece during the 1980s. The Labor Relations Act provides that any labor disputes arising in an industry governed by an industrial council must be referred to that council for collective bargaining. Only after a council declares that it is unable to settle the dispute are lock-outs or strikes legally permissible.

Other laws risk managers should be cognizant of include the 1983 Industrial Court ruling that no worker may be dismissed by his employer for taking part in a legal strike. Under the Wage Act, lockouts and strikes are not permissible during the first year of a new wage determination by the Wage Board, which lays down minimum wages and employment conditions for specific industries. The Machinery and Occupational Safety Act of 1983 covers every employee in the country, even domestic servants. It is based on the U.S. Occupational Safety and Health Act as well as Great Britain's occupational code. Mr. Redgate reports that the law has led to thousands of criminal court cases. But if the injured party disagrees with the outcome, a civil suit can be filed, which is what has occurred increasingly over the years. "In this respect," Mr. Redgate adds, "we are becoming more like the rest of the world."

The litigious nature of the South African legal system and the society, overall, is still relatively docile. And the fact that "the court awards in South Africa are minuscule compared to the awards we see in the United States, Canada and elsewhere," says Mr. Ternent, will not induce a change in this trait any time soon, which is good for business.

Green Movement

ACCORDING TO Otto C.E. Hempel, the pension fund and group risk manager for Pretoria Portland Cement Co. Ltd. in Johannesburg, his company has few product liability claims, but does have two areas of exposures in particular where it seeks coverage, the first being business interruption, the other area being environmental. (The company creates huge holes in the earth when it quarries limestone.) Mr. Hemple's company policy is just one example of the change in the risk manager's focus in the South African market toward environmental issues, although the country still lags behind much of the Western world in this area.

Although the pollution laws are not very onerous, South Africa does have a developing green movement. "Stricter and stricter laws are going to be introduced that may be retroactive. "If so," Mr. Redgate cautions, "all risk managers have got to be very mindful of the hidden pollution issue."

Major dumping incidents over the past few years have further heightened public awareness on the environment. "A lot of external pressure from international groups has emerged this past year," says Mr. Butler. In response, his company now offers services in environmental protection.

The South African risk manager tends to place less emphasis on workers' compensation because the Workers' Compensation Act established a compulsory employer-contributive fund that compensates all workers up to a certain earnings level for work-related injuries. Compensation includes medical expenses, wages lost during a temporary disablement, lump sums or pensions for partial or total disablement, and pensions for dependents in the event of death.

But that does not mean that workers' compensation does not have to be managed. For example, "group personal accident insurance" is an additional benefit that companies can take out to cover all of their employees. In the past, this 24-hour coverage was restricted to senior employees. But stronger labor union action, Mr. Ternent reports, has caused this coverage to "embrace all employees of the corporation, and the benefits for senior management are identical to those for basic manual labor employees. So a lot of that discrimination is now falling away."

Many South Africans are bullish on the long-term prospects for the economy, as are many European companies who have established a stronger presence in the region. "There are still a lot of unknowns, but events are moving in a positive direction," Mr. Hempel said. However, they do admit that the first thing they have to do is get the economy going again and become an integrated part of the world community again.

Since the lifting of sanctions, Mr. Butler has noticed an increase in trade, communication and contact, but not in badly needed investment. He feels that the West is still waiting to see some stability signals. Those positive signals may be just around the corner, with the violence and crime rates starting to show signs of flattening out. As Mr. Redgate asserts, "South Africa is naturally part of the world community and insurance and risk management is a worldwide issue. The fact that we were excluded to a degree in the past was a negative, but it's good to be back."
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Title Annotation:end of apartheid will not create opportunity for risk insurers wanting to invest in the country
Author:Kurland, Orin M.
Publication:Risk Management
Date:Jun 1, 1992
Previous Article:The essence of hazard control.
Next Article:The growing demand for managed care.

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