1.INTRODUCTION

Mandate from the DOE and Marsh / APPETD undertaking

This facility has been developed because of the DoE requirements for guarantees from various (non governmental) educational institutions providing training courses to the "post matric" market.The DOE has approved the guarantee facility as developed by Marsh, as one of the forms of financial security required for accreditation, where tuition fees are paid in advance. Marsh and APPETD in turn undertake to the DOE that the principle terms of this guarantee facility will not be changed without the prior approval of the DOE.

Guarantee requirement and Marsh concept

• Each APPETD member providing annual courses (+-50 to 100 entities) is required to provide a guarantee for the annual value of these course fees for the benefit of the respective students, as required by the Dept of Education
  
  
• The guarantee is required to protect students who have paid tuition fees, where the training institution has failed to deliver the course / balance of that year's course / course materials
  
  
• The APPETD members have had difficulty in providing the required guarantees from traditional sources, because of their limited balance sheet capacities (banks usually require the full amount of the guarantee on deposit as security for guarantees)
  
  
• MARS (a division of Marsh) has the exclusive mandate from APPETD to develop the guarantee facility in conjunction with the placement of PI and Fidelity cover, which will protect the guarantee facility from insurable risks
  
  

The main difference in the MARS approach, compared to the normal security based conditions required for guarantees, is to assess the potential for losses over the medium term and develop a customised insurance program to support the cover that the DoE requires.

As a result, MARS has created a multi-year premium based Guarantee Facility, based on strong risk management principles, in order to alleviate the need for matching securities in support of the guarantees.

MARS can also provide guarantee facilities based on cash collateral or a combination of the insurance and collateral based guarantees, to reduce the costs to APPETD members.

2.COVER STRUCTURE AND INDEMNITY TO STUDENTS

The DoE will receive a confirmation of cover for the applicable APPETD members as a combined risk pool, from a highly rated cell captive / short term insurance company in South Africa.

The quantum of the cover will be less than the sum of the suretyships that would normally be required, indicatively R20 million for the sum of the members requiring suretyships up to R50m, per an initial list from APPETD. Should the overall value of suretyships required from members grow substantially, we expect the cover required by the DoE to increase as well.

The cover provided to each APPETD member will be the amount of the annual fees paid in advance {or such other amount as required and agreed by MARS and Ihe underwriters, limited in the aggregate to the overall limit provided to the DoE.

MARS is investigating and recommending the use of PI and Fidelity cover as part of the risk transfer capacity in the guarantee facility. Certain large APPETD members have a degree of Fidelity and PI cover in place, but the APPETD facility will need to become an insured on their policies, or separate cover will be arranged for a ll members by Marsh. The group cover should be cheaper than individual policies.

Fidelity and PI cover should be based on a standard limit of say R1 million per member, based on a group policy.

The students will receive a "User Guide" for fees paid annually in advance, which will explain that they have the potential for a refund of their course fees based on certain conditions:

• Proof of payment to the APPETD member
  
  
• If the course has been terminated* prior to the half year / mid term progress report, then the full fee is refundable less the cost of text books issued to the student (such costs to be a maximum of 20% of the course fee), subject to a confirmation that no student loan exists for that course.
  
  
• If the course has been terminated* prior to the half year / mid term progress report, and if another APPETD member can continue the course, the full fee is transferable to that APPETD member, because the maximum transfer value is being created to sustain the education process. Note that the transfer should be to a member in reasonable proximity to the "terminating" member.
  
  
• If the course is terminated* after the half year progress report and the student has passed that course, and if another APPETD member can continue the course, the full fee is transferable to that APPETD member less the cost of text books issued to the student, because the maximum transfer value is being created to sustain the education process. Note that the transfer should be to a member in reasonable proximity to the "terminating" member.
  
  
• If the course is terminated* after the half year progress report and the student has passed that course, but no transfer takes place, then half of the annual course fee will be refunded, subject to a confirmation that no student loan exists for that course.
  
  
• If the course is terminated* after the half year progress report and the student has failed that course, but no transfer takes place. then half of the annual course fee will be refunded less the cost of text books issued, subjec>t to a confirmation that no student loan exists for that course.
  *Termination is defined as the premature end of the planned / purchased course delivery as a result of
• The financial insolvency of the member
  
  
• Unavailability of lecturers and / or delivery facilities, for a period of month, except for any industrial action, social unrest etc
  
  

3.RISK FINANCE PRINCIPLES

Risk Finance is an approach which:

• Identifies the cover / indemnity required
  
  
• Customises indemnities to remove risk exposures that cause unnecessary concerns to underwriters
  
  
• Analyses the sources, root causes and triggers for claims events
  
  
• Prepares risk mitigation plans
  
  
• Statistically evaluates the potential claims scenarios
  
  
• Identifies and individually prices any additional costs needed to support the program
  
  
• Sources the appropriate insurance vehicle to provide the cover
  
  
• Sources specialised insurance markets for the cover capacity needed
  
  
• Develops the risk management processes
  
  
• Services the program from a client interaction and financial performance perspective
  
  

The benefit of this approach is that risk is seen in the context of realistic exposure, not the "failsafe" security that is normally required by banks. Thus the expected cost of claims (plus administration and reinsurance costs) where risk management is well applied, becomes the economic cost of risk transfer (insurance premiums to the pooled guarantee facility).

Risk finance also properly separates the lower value, predictable claims from the higher value catastrophic claims.

In a guarantee environment, because the traditional wordings allow for the full amount of the guarantee to be called, all claims are "catastrophic". Thus the security for traditional guarantees is usually the same as their face value.

By creating a separate claims fund to deal with the smaller "once off" claims for course refunds, the likelihood of the full value of guarantees being called for the APPETD member is reduced substantially.

Thus it is important to note the principles of risk finance principles on which the APPETD Guarantee facility has been developed:

• 3 year minimum premium commitment to provide a stable cash flow, both for smaller claims and to give confidence to the reinsurance underwriters
  
  
• Careful analysis of the sources of claims, and high levels of information on the student / provider base
  
  
• Mitigation of claims by transferring students from one member to another at a fair price
  
  

4.INFORMATION REQUIREMENTS

To enable us to establish the facility for the benefit of all APPETD members, a comprehensive profile of the activities of each APPETD member is needed.

Marsh are contractually bound to maintain strict confidentiality standards regarding all information provided. A copy of the relevant agreement can be made available to you on request.

As part of the application process, members will also be asked for bank reference reports, as well as an authorisation to their bankers that MARS will be advised should there be adverse conduct (exceeding limits, RD cheques etc). The information requested below will also determine the premium payable by each APPETD member, as well as the general terms of cover required. Electronic format is highly preferred. Where 3 year information is not available, as much as possible should be provided:­

• Audited Financial Statements and the notes thereto for the past three financial years
  
  
• Forecasted Cash Flows for the next three years
  
  
• Reports on Business Bank accounts and monthly bank statements for the past 6 months
  
  
• History of the Institution and its track record if not included in the Annual Financial Statements
  
  
• Number of Students registered per course and a 3 year forecast
  
  
• Number and Names of courses being offered and a 3 year forecast
  
  
• Number of lecturers per course and a 3 year forecast
  
  
• Number and Names of Campuses and where situated
  
  
• Fees per course and a 3 year forecast
  
  
• Creditors and debtors aged analysis
  
  
• Funding agreements and/or contracts entered into for the foreseeable future (or next 3 years)
  
  
• Average stoff turnover per course and average employment period of staff members/lecturers per course.
  
  
• Description of previous incidents that would have created a claim under the cover provided -situation, disruption, cost etc, in the last 3 years or for as long as the institution has existed if less than 3 years.
  
  
• History of courses offered in the last 3 years -number of courses, number of students per course, type of course etc.
  
  
• Details of any other forms of insurance, guarantee facility in place or available to institution.
  
  
• Details of any expenditures that are currently in place (rent, salaries, interest covenants etc.) of which non-payment may lead to a claim under this facility.
  
  

MARS will continue to refine the information requirements, and expand the communication to APPETD members, by developing the Frequently Asked Questions document and responding to individual enquiries.

5.PREMIUM RATING GUIDELINES AND ACCEPTANCE CRITERIA

The key factors influencing the premium will be

• The amount of cover needed by the member {based on the annual fees paid in advance, or such other fees / turnover which requires a guarantee from the DoE) - a core range of 3% to 7% of the cover is being used at present, as the annual premium, adjusted for
  
  
• Business track record
  
  
• Inherent risk -being the nature of the courses, proximity to other APPETD members, and
  
  
• Financial strength of the business and the owners
  
  
• The influencing factors above will be rated as "low / medium / high" in the initial stages, and more refined ra tings will be developed as the quality of the data improves.
  
  

The premium ratings should not be compared to normal guarantee charges, because there is no need for additional suretyships or ceded assets in this pooled facility. Further, should there be a claim under the normal guarantees, that member will lose the full amount of the guarantee, compared to the premium cost in this facility.

The above guidelines are based on the assumption that the APPETD member's business has recently audited financial statement that show reasonable solvency and profitability, and that the shareholders have sound personal balance sheets with no financial judgements recorded against them.

There is no automatic access to the facility, as MARS and the insurance underwriters need to vet the information provided. MARS and the underwriters will also apply special conditions to the entry of non APPETD members, such as additional premium ratings, maximum claims / cover limitations and waiting periods before claims can be submitted.

6.NATURE OF / RIGHTS IN FACILITY

The facility is a blended insurance product, where the premiums are being used to back the guarantees, and to provide an attractive premium refund opportunity to participants who have had no claims, if the overall performance of the facility can sustain the refunds.

The insurer will receive all the premiums, pay the administration fees and buy the reinsurance cover. The insurer will operate an experience account for the facility, which ring fences all the income and expenses applicable to the facility, and this insurer will provide the confirmation of cover to the DoE, for those members that have been qualified under the facility.

Over time, it is expected that this facility will grow and be able to support broader financial services for APPETD members. Once sufficient reserves have been established, it will be possible to transfer the facility to a cell captive structure where APPETD and their members will have direct ownership in the underwriting results of the facility.

7.SERVICE PROVIDERS AND COSTS

Marsh Advanced Risk Solutions (MARS), a division of Marsh, are the appointed consultants and administrators to the Guarantee Facility. MARS performs all of the risk finance services as set out in part 2 above, in terms of a Service Level Agreement concluded between MARS and APPETD.

MARS has provided a fee structure to APPETD based on the gross premiums to be paid to the insurer, as follows

• 10% up to R5 million
  
  
• 8% from R5m to RlOm
  
  
• 6% from RlOm
  
  

It is necessary to provide for claims administration which will be handled by MARS and the Marsh broking team, quoted at 5% of the claims value per claim.

The student database will be held at Marsh in order to confirm the claimant details and independently verify claims, at a cost of 1% of premiums. APPETD will also be a service provider, at least as follows

• Management committee - monthly attendance
  
  
• Claims committee - immediate response to each claim and fortnightly review
  
  
• Facilitation of information requests
  
  
• Distribution of training materials for the facility
  
  

It is estimated that these activities will initially be costed at 3% of gross premiums, and that later on a full time representative of APPETD will be allocated to, and paid for by, the facility.

The insurer charges an administration fee of 9,75% of premium for their own overheads, and 6% premium for the required return on capital. Reinsurance is purchased by the insurer to limit its exposure to large individual claims.

The insurer will allocate a notional credit to the facility balance based on a rate of return of call funds to the experience account balance of the facility.

8.ADMINISTRATION & MANAGEMENT STRUCTURE

The success of the facility depends on tight administration and disciplined responses to the requirements. It cannot be over emphasised that underwriters are taking a leap of faith by granting substantial cover to APPETD members without requiring suretyships and collateral security.

The main support for this is the premium commitment over 3 years and the quality of information provided by each member.

MARS is making various representations and commitments to the underwriters that the Club Rules and all other procedures will remain in place - thus a breach of the rules will lead to a 30 day notice of cover cancellation. thereafter immediate termination of cover and a communication to the DoE that that member is no longer covered by this facility.

MARS will set up dedicated client files per APPETD member for their application details and premium rating criteria, and later on individual claims files will be maintained at MARS.

Monthly servicing will take place in the form of a management committee attended by APPETD executives, invited members, MARS consultants and the cell captive insurer. MARS will drive the agenda and follow up actions. The key issues to be reviewed at each meeting will be

• Membership status / take up of guarantees
  
  
• Product issues - cover needs
  
  
• Financial results
  
  
• Claims
  
  
• Risk analysis
  
  
• Administration
  
  
• General
  
  

This management process will be the main sustaining process for the facility, assessing the performance of the facility on objective terms and developing the policies and procedures on an ongoing basis. For example, the basis for setting the transfer credit from one member to another where a refund has been approved, is an essential part of the management process.

9.CLAIMS PROCEDURES

The claims will be handled on the basis of sustaining the education process in a structured monner, as follows

• Confirm student status on course fees paid, materia ls issued, interim progress certificate
  
  
• Identify appropriate alternative APPETD member. confirm transfer
  
  
• Offer transfer to student & refer any issues of concern to "Claims Committee" (Marsh & APPETD)
  
  
• Where bank / loan finance of course is confirmed, refund for courses that are not transferable will be to financier at value of course fee
  
  
• Other student refunds being a lost resort
  
  
• Claims data to be shared with APPETD and DoE quarterly, as part of a Management Committee for the facility
  
  

MARS will update the student and claims databases monthly.

Premium allocations will be adjusted annually based on the factors noted above, and in particular the claims experience.

10.COST / BENEFIT REVIEW & PREMIUM REFUNDS

We have conservatively estimated the average premium requirement per R 1 million of surety requirement, at R50 000 per annum. This premium may seem to be high compared to the average cost of issuing guarantees from a bank, being 1% or RIO 000 for the same value, but these guarantees require a counter indemnity from the client, and usually require cession of assets as security.

Thus the additional costs of a bank related guarantee would be

• The opportunity cost of being able to invest the R 1 million in various growth markets, earning at least 10% = R1OO 000 (R11O 000 in total), and / or
  
  
• The cost of refunding the guarantee claim to the bank, being R 1 million Thus the comparative cost advantage is about R50 000 or over R900 000. It should be noted that we only foresee claims on the guarantee facility in very rare circumstances, and the facility should not be used in a reckless or negligent manner. The submission of false information will allow the insurer to recover their claim in the normal course of commercial practice.
  
  

Assuming a 20% of premium claims ratio, it will still be possible to provide a 10% premium refund after 3 years and sustain the facility going forward. If there are no or minimal claims for 3 years, the refund premium is expected to be the full premium paid in the first year by those participants who did not have claims.

11.COMMUNICATIONS

APPETD members using the facility will receive copies of the monthly / quarterly management minutes, with confidential member information discussed in general terms only.

The financial status of the facility will be summarised on a quarterly basis and posted on the website.

The club rules and updates will be distributed regularly, in particular those courses which will be transferable amongst members.

The website will allow for queries on the facility and host answers in a FAQ format.

Annual meeting open to members will be hosted, and regional road shows with training / explanation workshops will be planned, based on the location of the members using the facility.