The insurance sector is facing an escalating risk landscape, but with proper planning, these risks can be managed.
Insuring risk is not a modern-era concept. The age-old practice became a common business security instrument to the burgeoning English shipping industry in the 17th century, and the first insurance “contracts” can be traced as far back as Babylonian times around 133 AD. The industry has evolved and withstood centuries of evolving risks. Just as steps needed to be taken to address rapid urbanisation and international trade in the 1600s and 1700s, the industry is again facing an escalating risk landscape.
Modern risks
Climate change, infrastructure concerns and socio-economic challenges have created a tough environment for local insurers, who have a responsibility to ensure their business is strong and able to sustainably withstand the cost of the risks that are dominating the environment, and to protect the financial wellbeing of clients and the safety of communities.
The last three years have shown that South African insurers are no longer insulated against the large catastrophe experience of the Asia-Pacific, Europe and the United States of America. Globally, the 2020 Covid-19 pandemic rewrote the record books on insurer and reinsurer exposures to systemic risks. Locally, rioting and looting caused an estimated R50 billion in economic losses in July 2021, with the April 2022 KwaZulu-Natal flood losses estimated at R54 billion. Half that total was carried by the insurance industry. Climate change-related extreme weather events also dominated the insurance industry’s claim statistics in 2022 and 2023.
The growing number of large catastrophe reinsurance claims locally, coupled with rising global losses, has caused reinsurance premiums to increase significantly. This volatility in the reinsurance market will likely become the “new normal”.
Entering 2023, Santam added global geopolitical developments to its monitoring agenda, with a focus on determining how the BRICS expansion, China-US trade relations, and the Russia-Ukraine War will affect the global reinsurance market. More recently, the resurgence of Middle East conflict has also become a focus. There are concerns that global supply chains will be further impacted by these tensions, contributing to significant claims inflation, with the resultant cost of repairs further compromising the affordability of insurance in the years to come.
Another key area contributing to the increased volume of catastrophe claims globally is the impact of climate change. Changing weather patterns is evidenced by the number of fires, storms, floods and volume of rain – such as the KZN floods in 2022, and more recently in the Western Cape.
Addressing the risks
To address the risks posed by escalating climate shifts, we have aligned our approach with global standards such as recommendations set out by the Task Force on Climate-related Disclosures (TCFD) and are in the process of conducting climate risk assessments to guide our climate change response. An example is the adoption of geocoding technology to better understand our weather-related risk exposure by creating a risk-based view of property locations in South Africa. Climate-related data is mapped with coordinates to identify areas that have increased exposure to climate change – these are then managed accordingly through underwriting and pricing actions.
Additionally, attritional weather losses – weather-related claims that are not associated with a catastrophic event – also threaten the sustainability of the insurance industry. According to the 2022/2023 Santam Insurance Barometer Report, Santam experienced a spike in flood-related claims across all lines of business during 2022, and the trend continued into the first half of 2023, as the April 2022 KwaZulu-Natal (KZN) floods were followed by flooding along the Orange and Vaal Rivers in early 2023, and extensive flooding in the Western Cape around June.
Each of these events revealed an additional layer of risk in that South Africa’s infrastructure degradation increases the extent and severity of flood- related losses. This is a major challenge that will have severe consequences for not only the insurance industry, but the businesses and communities that rely on it. Worsening road conditions, fire-fighting capabilities, sewerage systems, and flood water drainage – to name a few – are becoming increasingly vulnerable to disasters. Damages following disasters are extensive, the cost of repairs exorbitant and downtime is lengthy. Most importantly, infrastructure that is not structurally sound also has an impact on the number of lives that are lost in a disaster. To ensure sustained insurability, significant focus and financial resources from government are required to turn things around, as well as a collaborative effort by the private and public sector.
One example of this collaboration is through our Partnership for Risk and Resilience (P4RR) programme – where we assist municipalities with firefighting, flood defence, and other risk mitigation efforts. The aim is to work together towards proactive risk management outcomes within municipalities countrywide.
In addition to increasing infrastructure degradation, load shedding also poses a major risk to consumers and businesses – including the insurance industry. For the full 2022 financial year we experienced an increase of approximately 67% in claims (compared to 2021) for damage of sensitive electronic items as a result of power surges across our personal insurance and commercial insurance portfolios, totalling R609 million. Although there is a strong correlation between the number of load shedding events and the frequency of these claim types, we still believe load shedding – as it pertains to power surge cover – is an insurable risk via a combination of cover exclusions, higher excesses, and a “repair rather than replace” policy for certain claim types.
Crime watch
From a socio-economic perspective, the steady increase in crime has also become a systemic risk we are tracking closely. According to the 2002/2023 Santam Insurance Barometer Report, South Africa is seeing a big shift in vehicle crime, with Santam’s Commercial and Personal Lines claims experience confirming a significant jump in high-value vehicle hijackings and thefts. Through our ongoing tracking of emerging risk trends, we were able to implement a number of corrective actions to ensure that these high-value vehicles remain insurable.
Additionally, the report found that a growing number of industry stakeholders believe cybercrime to be the next potential black swan loss event for the insurance industry – with a 12% increase in commercial and corporate respondents citing it as a top risk as compared to the 2020/21 report. Despite this, there seems to be an inertia in both risk mitigation and risk transfer efforts in this space. The challenge for insurers and insurance brokers is to offer more hands-on assistance to businesses at both the underwriting and claim stage.
The current high-risk environment presents many challenges for insurers who must prioritise ensuring they can carry these risks sustainably so that more people can prosper. A thriving insurance sector is a critical cog in a healthy economy as insurance empowers individuals and businesses with the freedom to be more resilient. It is therefore vital that we understand and respond to both traditional and emerging risks in an increasingly complex risk landscape.