I came across an interesting product this week by a South African start-up called InvestSure. The company claims to offer the world’s first insurance product to cover shareholders from loss caused by allegations of management fraud and dishonesty.
It was founded by some young South Africans about a year ago and enables the investor to request insurance when investing in shares online. If the share price drops by more than 10% due to the management of the company acting fraudulently, the insurance automatically pays out.
From its website it seems that this fraudulent activity does not have to be proved. Rather, the only triggers that determine whether the investment fraud insurance policy will pay out are a) allegations of wrongdoing by director surface via multiple reputable sources and b) the share price moves more than 10% down from the opening price on the ‘News Date’ or the day after.
The company says it has already paid claims to investors for fraud accusations on EOH, MTN, Tongaat Hulett, Nepi Rockcastle, Fortress B and Glencore.
Its only available on the Easy Equities platform but the company says it plans to extend its reach to all South African investors through other local investment platforms.
The product costs 0.60% of the value of your purchase. This translates to a cost of 60 cents for every 100 rand you invest. Its underwritten by a large re-insurer so that means it should be able to cover losses appropriately.
What do I think of it?
I think it’s a clever product and I like to see South Africans being innovative and entrepreneurial.
It’s not something I would use as I don’t trade individual shares much. I like to get my protection from diversification via actively and massively managed funds and ETF’s. Even when it comes to funds, I don’t believe in putting more than 5-10% of my assets in any one fund.
It also kind of irks me that it’s come to the point where we need this kind of product because we can no longer trust corporate executives and auditors not to fleece shareholders.
It feels like another form of double tax that we South Africans have become so accustomed to (think private security, healthcare and schooling). It’s not InvestSure’s fault – they are merely responding to a gap in the market.
Given what we have seen from corporate South Africa over the last few years, I would say that if you are an online trader in SA equities and tend to take big bets on individual stocks, this might be worth a closer look.