Insurance industry in volatile and unpredictable world

It is not easy to be in the insurance industry in today’s volatile and unpredictable world. The global economic climate has never been more complex and connected while businesses still try to respond to and recover from the aftermath of the challenges posed by the pandemic.

According to the Aon South Africa 2022 Insurance State of the Market report, the myriad direct and indirect impacts of the unfolding geopolitical events in Eastern Europe have been profound and are expected to continue with rising commodity prices, inflationary pressure on fuel, decreased demand dampening global trading and global supply chains suffering further disruptions.

Over the past year, the local insurance industry suffered two direct shocks, with the unrest in July last year and the floods in April this year, with another disaster looming in Gqeberha, where people are waiting for Day Zero when their taps dry up.

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Large local losses

The South African Special Risk Insurance Association (Sasria) recorded losses of about R33,8 billion due to the unrest and looting in KwaZulu-Natal and Gauteng, followed just a few short months later by devastating floods in KwaZulu-Natal in what is called the worst natural disaster to hit South Africa according to the South African Insurance Association (SAIA) due to the devastation and loss of lives it caused.

The result of the floods already exceeds R35 billion in losses. 

Now the drought in Gqeberha has reached alarming and crisis proportions. The ongoing drought started in 2015, in the Eastern Cape, and has become one of the worst droughts in the region’s history. Resulting in government declaring the region a “disaster area” in October 2019. Nelson Mandela Bay municipality is teetering on the edge of Day Zero.

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Insurers are changing terms and conditions

Alicia Goosen, chief broking officer at Aon, says insurers are trying to manage volatility and already began modifying coverage terms and conditions, including those related to cyber, terrorism, pandemics, sanctions and war, as well as coverage territories.

“At the same time, business challenges and new risks continue to emerge from climate change and environmental, social and governance (ESG) pressures, talent or skills shortages, struggling economies and socio-political unrest. Large-scale losses due to natural catastrophes loom large and are adversely impacting lives and businesses.”

Goosen says the world is watching anxiously as economic impacts develop, while the risk and insurance industry watches carefully, ready to respond to further impacts on exposures and risk profiles.

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Key trends in insurance industry

Key local insurance market trends for 2022 include:

Sasria reviewed all its rates in October 2021, following the losses from the political unrest which resulted in structural rating changes and rate increases to certain classes of business from 1 January 2022, for new business and will be applicable for existing policies on renewal or anniversary of the policy.Sasria also announced in March 2022, that it will no longer offer cover for Excess of Loss (XOL) due to the challenges of securing reinsurance partners with the appetite to continue with this facility.A knock-on effect on the property terrorism and sabotage market locally and in the UK. Violent events in South Africa resulted in a significant number of claims in the political violence (PV) space, with reports estimating a figure around US$1 billion. As a result, the PV market has been inundated with requests and enquiries, which in turn has resulted in the increase in the use of finite aggregates which caused rates to increase dramatically, in some instances up to a 500 – 600% as capacity becomes limited.The Covid-19 pandemic highlighted the need for insurers and re-insurers to re-evaluate their risk exposure to large-scale events, particularly regarding business interruption cover and non-physical damages extensions. As a result, reinsurers and insurers advised they will no longer provide capacity for any non-material damage-related incidents on this kind of cover.Due to weather related losses locally and internationally, insurers are starting to pay careful attention to weather-related risks, particularly flood risks, on property portfolios. This is driving premium rating and affecting deductible levels in relation to these risks. In some instances, cover is being sub-limited for weather-related claims.Material shortages experienced across the construction industry with no reassurances from suppliers or manufacturers of when things will improve is another trend. These shortages affect estimated delivery dates for core materials with lengthy delays. This continued pressure is increasing material costs, with significant delays greatly affecting clients’ commercial asset and business interruption values. In the last 12 months, material damage sum insured values have increased approximately 10 – 20% due to increasing replacement cost estimates and a reforecasting of inflationary provisions.

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Focus on cost of insurance

Goosen says challenging and unpredictable market conditions, combined with emerging risks not considered previously have refocused buyers on the value, structure and overall cost of their insurance programme.

“The makeup of risk transfer is evolving. In most cases, buyers will be faced with decisions around how to manage an ever-expanding and complex risk transfer need. It has never been more important to focus on the Total Cost of Risk (TCOR) rather than risk transfer or premium cost.”