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Investigating a changing insurance market

ARTICLE BY

  • Terence Williams

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The insurance market is in the midst of its most consistent shift in a number of years. In certain countries, sectors and lines of business, buyers are experiencing rate increases, capacity shortages, and a more critical attitude from insurers towards risk selection. Understanding how this could impact your organisation, the steps that you can take to proactively manage the expectations of your business stakeholders and deliver an optimal outcome is crucial.

Business operates in a time of unprecedented volatility across economics, demographics and geopolitics and as these risks evolve, business leaders can no longer rely on traditional risk mitigation tactics. Risks exist beyond the traditional loss or theft of property, equipment and other assets, to devastating weather catastrophes, cyber hacks, riots, personal liability, fraud, organised crime and class action lawsuits. More than ever, risk managers must explore new ways to cope with evolving and heavily inter-related complexities.

Definitive risk trends are emerging, and sophisticated data and analytics models are providing powerful insights not only into historical patterns, but into the future risks facing the corporate sector. Successful companies will be the ones that prepare themselves thoroughly to anticipate future needs and undertake the difficult process of finding solutions to address them. 

What are the drivers of this change?

 

 

#1:  Unprecedented loss levels

For insurance buyers, the impact is starting to be felt in terms of rate increases, capacity constraints, tightening terms and conditions, and growing insurer scrutiny on risk management practices.

 
 

 

#2:  Evolving buyer demands

As organisations evolve through fundamental changes in their business models, it raises the question – are traditional insurance products keeping pace? Aon’s 2019 Global Risk Management Survey (GRMS) reveals that risk managers feel less in control than ever before; in part as a result of a changing political, economic and technological landscape and accelerated changes in market factors.

 
 

 

#3:  Changing exposures

Key risks are evolving towards brand, reputation, intellectual property, crypto currency, cyber and non-damage business interruption – challenging insurers to develop products for intangible exposures. People risks are also evolving with declining health patterns leading to increased non-communicable diseases and chronic conditions. The growing demand for Corporate Social Responsibility and Environmental, Social and Governance factors have impacted the industry and resulted in increasingly ‘ethical’ underwriting behaviour – for example, some insurers have ceased writing thermal power and coal risks.

 
 

 

#4:  Reinsurance pressures

On the treaty side, 2019’s January reinsurance renewals saw some territories less impacted than others when it comes to rate rises, and there was in general, less of a flow through to the direct market than initially expected. In recent years, some direct insurers have consolidated their treaties and taken higher net retentions to reduce their reinsurance costs. This has hit their profitability in the face of the high levels of losses they’ve had to carry without reinsurance recoverable. There has been a more pronounced and immediate change on the facultative side. Lloyd’s provides a significant amount of facultative support to global insurers and, given syndicates’ performance over the last two years, the focus on improving lower quartile business is directly flowing through to direct insurers.

 
 

 

#5:  Increased cost of doing business

The rush to updating and maximising the efficiency of working processes and leveraging data to innovate products, improve services and speed up claims settlements has started. Lloyd’s is the latest to comment on its vision focused on improving the ease of doing business and being a viable marketplace for the long-term. The cost of compliance, technology, digitisation and salaries has increased exponentially over the past years. With Insurers inherently being price takers and not the price maker means that they are forced to sell insurance at a price prevailing in the market. Hence, they can only become profitable if they control costs.

 
 

 

#6:  Political unrest/uncertainty

Violent service delivery protests spurred by service delivery failures, corruption and growing youth unemployment have become commonplace in South Africa– and virtually all exacerbated by criminal elements. Service delivery protests have become the number one tool for disgruntled communities to raise their concerns with municipalities and government officials. Businesses could find themselves severely out of pocket if their assets are damaged during a violent protest and they do not have Sasria cover in place.

 

Key market trends 

 

 

#1:  Risk readiness is falling but volatility is growing

Businesses are slow to develop and implement new risk and insurance programs in the face of evolving risks such as cyber security and political risk. Yesterday’s solutions no longer address the risks posed by a technologically, economically and politically fraught environment, so a new lens is needed on matching specialised insurance solutions to these evolving risks.

 
 

 

#2:  A widening skills gap and widening social discontent

Uncertainty around politics and economics are likely to widen SA’s skills shortages as an exodus of skilled people takes place, placing companies under pressure to afford and retain top talent. SA’s alarming unemployment rate is also likely to drive growing citizen dissatisfaction, manifesting in violent protest/strike action which has historically caused significant losses to property

 
 

 

#3:  Political risks are a global challenge

Developed nations traditionally associated with political stability are becoming new sources of volatility and uncertainty that worry businesses. Despite the availability of more data and analytics, and more mitigation solutions, companies are less prepared for political risk than ever before.

 
 

 

#4:  Specialty

Capacity constraints, insurer withdrawals and consolidation are creating challenges in Financial Lines. The professional indemnity insurance market continues to deteriorate and has become severe for some industries. Increased claims activity and several large settlements have tipped insurer’s loss ratios to unprofitable. As the market hardens, underwriting agencies are becoming more relevant as they can provide quality capacity on the larger and hard to place PI placements. D&O insurance market conditions continue to deteriorate with premium increases needed to generate a sustainable rate level to cover. Demand for credit insurance continues to grow as trade becomes increasingly global. However, the market is clearly cyclical, with a strong correlation with GDP. Cybersecurity vulnerabilities are being addressed through tightened pricing and retention guidelines.

 
 

 

#5:  Weather catastrophes to intensify with climate change

Property-related and business interruption losses as a result of fire and weather catastrophes have increased dramatically in South Africa, with 2017 having the highest underwriting losses on record.  Storms, floods, tornados and fires increasingly account for the lion’s share of local property and business interruption insurance claims, yet businesses remain under-insured for the financial impact of weather-related and uncontrollable losses.

 
 

 

#6:  Business interruption risks intensify

BI has been on the Top 10 list of risks since Aon’s Global Risk Management survey started in 2007.  As supply chains become global, there is increasing interdependency among companies, which in turn is heavily affected by incidents that turn into unexpected disruptions. The focus on inventory reduction and lean supply chains has also amplified such potential. More importantly, the proliferation of cyberattacks has also added new urgency and dimension to BI – with Lloyd’s estimating that cyber-related business interruption could cost businesses as much as US$400 billion a year.

 

 

What does this mean for insurance buyers?

While the market cannot yet be called a hard market across all lines, it is entering a transitionary phase. The extent to which this transition impacts buyers will vary by line of business, and for some buyers it will already be making its presence felt.

  • Start preparing now – Renewal timeframes are generally becoming longer which means the whole process must start much earlier and with more preparation and detail.
  • Cover – companies in distressed sectors may struggle to get cover at an acceptable price.
  • Cost – Buyers are potentially being asked to pay more for risk transfer, as well as taking higher retentions and refocusing on the quality of their risk.
  • Improve risk marketability – The quality of the risk submission will become more important to ensure optimal renewal terms. Organisations will need to articulate to the insurance market how their risk is better managed than their peers.
  • Explore alternative risk financing options – The trend towards increased retentions will almost certainly lead to more extensive utilisation of captives, even from organisations that may have previously discounted this approach due to a lack of scale.
  • Justify the approach to risk – Companies will have to increasingly reconsider and justify their approach to risk and the degree of insurance cover that they have in place.
  • Review policy wordings – As insurers focus on the breadth of policy wordings, buyers need to carefully review the relevance of their wordings. When were wordings last reviewed? Is cover still relevant to the risk profile?
  • Refresh risk assessment processes – Bring the insurance buying function and enterprise risk management (ERM) team more closely together to better inform perspectives on risk profile and the control environment.
  • Stakeholder management – The risk management function may need to help the C-suite in their organisations to understand how this shift might affect the business from a cost and volatility perspective.

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