Insurers and reinsurers must find innovative ways to identify, mitigate and transfer the risks associated with climate, cybercrime, pandemic and social unrest, or face serious challenges to their long-term sustainability.
The mounting claims burden faced by South African insurers following Covid-19 and, more recently, the July 2021 outbreak of civil commotion in parts of Gauteng and KwaZulu-Natal, suggests that traditional ways of transferring risk could prove inadequate to cover the growing exposures that the industry faces.
The 2021 FIA Virtual Advice Summit, which was held to advise non-life insurance brokers on scaling for the future, concluded that future-fit brokerages would have to make risk advice a central component in their product and service offering, or risk becoming redundant.
Andrew Coutts, head of intermediated distribution at South Africa’s largest general insurer, Santam, said the insurance environment was ready for change. “We used to conduct business in a complicated world, where we relied on actuaries to almost predict the future based on the past,” he said. But the unpredictability of global risk events has shifted the industry’s focus from automation, efficiency and transactional speed towards robustness.
Robustness, it seems, is key for the industry to survive unanticipated events. Mr Coutts turned to the 2021 Santam Barometer report, which showcases the power of general insurance in underpinning sustainable economies, to share some lessons from the group’s 2020/2021 pandemic experience. One of the key report findings was that the behavioural changes inspired by national lockdowns and the resulting corporate shift to working from home had caused significant shifts in the risk landscape, most notably in asset use and rising cyber liabilities. According to Mr Coutts, aligning risk covers to meet evolving consumer behaviours creates significant opportunities for insurers.
Steyn McDowall, executive director at Indwe Risk Services, suggested that insurance was being approached incorrectly under the pandemic risk dynamic. “Insurance is complex in form, complex in its law and also complex in its process, whether the focus is on a bespoke asset all-risks programme placed globally or on delivering a personal lines insurance policy to a client,” he said, adding that recent catastrophe events had illustrated shortcomings in both risk coverage and industry’s operational capabilities. Ongoing risk coverage issues are starkly illustrated by the slow uptake of insurance covers for cyber risks, despite the exponential increase in such risk exposures due to widespread adoption of work-from-home.
Human resource-linked operational constraints are evident too. “South African insurers have [recently] seen a flood of pandemic-related business interruption (BI) and Sasria damages claims; and suddenly we found that we did not have enough people to handle those claims,” said Mr McDowall. He warned that the inevitable tug-of-war between premium and coverage that followed large insured losses was unsustainable. “The cost of risk is something that is going to be very important for us going forward,” he said. “As an industry, we may be good at increasing the price; but reducing the cover is not sustainable… we will have to focus on risk mitigation.”
Muzi Dladla, executive manager: stakeholder management at state-owned special risks insurer, Sasria SOC, identified economic resilience, climate risk, social inflation and untested insured events as headwinds facing global insurers, reinsurers and risk managers in the general insurance market. Insofar as untested insured events, he referred to the widespread court challenges launched in the wake of insurer’s initial responses to pandemic-related contingent BI claims, which resulted in the industry perhaps paying out more than it had anticipated for loss-of-profit covers subsequent to such event.
“Liability definitions are being challenged [in the courts] and expanding the value of claims that insurers have to pay,” Mr Dladla said, before adding that tougher underwriting conditions were inevitable in this context. This is because insurers and reinsurers price cover based on the value at risk as well as their understanding of the potential liability following an insured peril.
According to Mr McDowall, a pandemic and the resultant flood of BI claims had always been a possibility; but insurers and insurance brokers had done little in anticipation of the risk. “What did we really do about this risk? Was it really built into our solvency planning? Was it really included in our predictive models? And what mitigation strategies did we implement?” he asked.
One of the consequences of the 2020/2021 pandemic insurance experience is that pandemic risks are more difficult, if not impossible, to insure through traditional channels. Risk managers are thus seeking non-insurance solutions for pandemic-related risk transfers, including private public partnerships, special risks pools and cell captive arrangements.
“Self-insurance in these areas is going to have to grow, and the broking industry and the advisory industry are going to have to adapt their advice to make sure that clients are in a position to be able to identify, evaluate, control and mitigate certain risks,” said Mr McDowall. The new approach to risk management requires that everything possible is done to mitigate risk before transferring the remaining risk to the insurance industry. “There are some risks out there that we cannot just transfer and take on to the insurer or reinsurer; the shift toward prevention and management of risk comes through very strongly,” agreed Mr Coutts, who singled out cybercrime, pandemic and social unrest as the three dominant concerns among domestic insurance stakeholders.
These risks dominate country risk landscapes because they affect the resilience of an economy and present real challenges to insurers insofar as transferring risk at scale. The concern is that economic growth will be severely constrained if the insurance sector cannot find sustainable solutions to these kind of risks.
An ominous warning sounded during the 2021 FIA Virtual Advice Summit was that climate risk and cybercrime were no less systemic than pandemic. South Africa experienced a 33% increase in cybercrime in 2020, while a recent Standard & Poor’s report estimated that cybercriminals were extracting about $1trn annually from the global economy. Wind the clock forward to 2025, by which time the world will have more than 75 billion connected devices, and add in tough data protection regulations, and the insurance industry faces a ticking timebomb in cyber risks.
Mr McDowall observed that rising uncertainty, and the alarming potential for systemic failure during the pandemic, were leading to a renewed focus on operational risk management at organisations. “Going forward, the insurance industry alone will not have the resources financially, or from a staffing point of view, to assist with the increased indemnification for pandemics, natural catastrophes and cyber events,” he warned.
Mr Coutts concluded that although there were great opportunities for insurers to protect and manage risk in the cyber liability space, such risks posed real threats to the long-term sustainability of both the insurance industry and economy.