The current economic inflation in South Africa has yet again put a spotlight on the South African insurance landscape and how social inflation will, in the medium to long term, continue to be a burning issue for the industry, as the fraternity works out a recovery path since devastating events such as the Contingent Business Interruption claims, the floods that hit KwaZulu-Natal, and the looting that happened last July.
The Concept Of Social Inflation
So, the question is, what is social inflation? It is the unexpected and unforeseen risk in insurance claims that drives compensation costs over and above economic trends, largely driven by social trends and views towards litigation. This is not a new concept in insurance, however, the increased shift in economic trends, pandemic outbreak and pressure on businesses has led to rise in claims costs, which threatens coverage affordability in the long run.
We have seen an increase in litigations with broader definitions and redefining of policy response and liability at the time of claim, which does not allow for adequate risk profiling and risk rating. A great need exists to balance insurance corporate accountability and the reasonability of financial liability expectation. This is mostly required to change the general anti-corporate sentiment or view of insurance companies as looking for reasons to reject claims. This sentiment goes back as far as the 2008 financial crisis and, to date, natural disasters, the pandemic and social unrest are fueling the same.
The greater good
President Cyril Ramaphosa has been rallying fellow government colleagues, business, civil society, and the entire citizenry to get involved in what has been termed a social compact. Like all concerned South Africans, as willing stakeholders, the insurance industry should be eager and willing to support the government in this drive. We should do so because the consequences of a starving nation are deadly, and they can be in perpetuity if not adequately addressed.
If our country’s social cohesion is declining, we then need to have pointed, solution-driven conversations on how we are going to address this and adequately respond, with appropriate measures at the given time.
Social compact talks of the creation of employment opportunities. As an industry, we have an opportunity to play a key and notable role, such as offering internship programmes and bursaries. We are a pivotal sector when it comes to granting opportunities to the less fortunate – and ultimately empowering them as they seek to build valuable careers in our industry. We should not lose sight of this. We should be mindful of the key role employment plays in averting poverty, crime, and ultimately our biggest concern, social unrest.
Responding to threats
The country faces fiscal threats and the macroeconomic risks associated with factors such as GDP, inflation, unemployment, and interest rates. Currently, consumers are feeling the pinch of rising food prices, high and unstable electricity costs, and less cash in their pockets, to name a few. These are worrying, but they should propel us to act by adopting the best possible scenarios, in line with the realities faced by consumers.
South Africa is prone to both special risks, man-made and natural disasters. We live in a country that regularly sees labour action strikes, service delivery protests or trucks blocking a key economic artillery such as the N3. Besides regular load shedding, residents of Johannesburg have been dealing with water cuts. These speak to how we need to look at climate change, and actively take part in conversations around the just transition.
In 2021, the World Economic Forum’s Global Risks Report mentioned warnings about “knock-on economic risks.” WEF says these are now here and are “present dangers’’. Supply chain disruptions, inflation, debt, labour market gaps, protectionism and educational disparities are moving the world economy into choppy waters that both rapidly and slowly recovering countries alike will need to navigate in order to restore social cohesion, boost employment and thrive.
The above is equally key and, in fact, more relevant to South Africa. Our fraternity faces climate and transition disorder and increased cyber vulnerabilities. It’s such challenges that call on us to unlearn, relearn and learn about new norms on social inflation and its associated consequences. We have a role to play as the insurance industry, and it’s a bigger one that extends well into the growth of our economy.