Written by Danniella Bresler, Indwe Risk Finance and Business Interruption Specialist
During a global pandemic, it is extremely important to put an emphasis on reducing risk where possible. With the effects of COVID-19 and the subsequent lockdown implications, it is inevitable that the direct and indirect effects will result in economic strain, both during the initial stages of the pandemic, right through to the recovery thereof.
As a first step, it is important to understand the impacts and the exposure of possible losses and the likelihood of their occurrence. In addition, performing a risk-bearing capacity analysis will assist in quantifying the risk exposure and determining the capacity at which an organisation can absorb risk and recover from unexpected losses. In short, the risk-bearing capacity is the financial loss your organisation can withstand without causing financial distress, such as insolvency.
During a time of uncertainty, the involvement of stress testing through a risk-bearing capacity analysis will contribute towards understanding the result of possible loss scenarios, ensuring that sufficient crisis management and business continuity procedures are in place. The risk-bearing capacity of an organisation can further be assessed, with reference to the ability to obtain secure external financing with favourable terms during a national pandemic. This in turn may have a material effect on key performance indicators.
Organisations may be faced with financial vulnerabilities when their risk exposure is greater than their risk-bearing capacity. These financial gaps can be addressed through risk financing and risk transfer solutions. However, most organisations have not foreseen such a disaster and so minimal risk financing solutions are currently in place.
South Africa is currently facing a financial gap of R119 billion for the three-week lockdown period, which could increase to R354 billion if it is extended to nine weeks. On the other hand, it is of no doubt that South African businesses are facing significant financial gaps. In order to relieve these financial gaps, ex-post financing approaches may include:
- Budget reallocation and consideration – The key to managing unexpected costs is to determine the variable and fixed cost structure of your organisation and how these costs are impacted during a time of complete shutdown. Understanding and evaluating the continuous costs of your organisation provides a basis to better mitigate these expenses and increase cost savings. Where the exposure to disaster risk is greater, external risk financing solutions such as contingency funds and loans, may be more feasible.
- Internal/external financing – Where risk financing techniques were utilised prior to losses, financing can be obtained internally through draw down of internally generated funds/reserves.
- Taxation relief – Whilst South Africa is yet to finalise its Disaster Management Tax Relief Bill, certain tax reliefs (for qualifying participants) have been announced which include an expansion on the Employment Tax Incentive (ETI), for SMEs an Employees’ Tax Deferral of 20% and Provisional Tax deferral of 35%.
Identifying and measuring your risk exposure is indispensable when assessing and obtaining an understanding of the extent of expected losses, as it assists in determining an appropriate response to financing requirements and leads to cost-effective risk reduction measures that can be implemented going forward.
Furthermore, risk quantification, through performing a risk-bearing capacity analysis, should be one of the first steps before any loss and post-loss to determine the best risk financing solutions to either put in place or draw down upon. A risk-bearing capacity analysis needs to be assessed with specific financial and risk information, in order to gain maximum value of the exercise. It is expedient to speak to your risk financing specialist about performing your organisation’s risk-bearing capacity.
Indwe is an authorised Financial Services Provider. FSP: 3425