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A different take on short-term insurance risk

07 February 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

The South African short-term insurance industry must take a fresh look at the risks at play in the environment. Debbie Donaldson, GM: Strategy & Planning at the South African Insurance Association (SAIA) shared some of the organisation’s views at the rece

One of the organisations priorities is to consider sustainability in the short-term insurance space. To assist in this regard the SAIA has established a Strategic Risk Forum which meets once each quarter. The forum is tasked with, among other things, identifying the big risks facing the industry today. As we power through the 21st Century the risks impacting the industry are continually evolving. In recent years the topic of climate change has moved to the forefront of many risk debates. “We have become behaviour specialists rather than environment specialists,” says Donaldson. “Going forward we need to include the environment in our actuarial pricing decisions.”

Consider the cause and effect

Insurers spend too much time looking at the impact of assets (replacement value) and client behaviour on risk premium. Over time this focus will have to shift to the myriad external risks not previously considered. Flood damage is a perfect example. In the past insurers didn’t think about flood damage in relation to the destruction of wetlands, for example. Nowadays we can use satellite imaging (and stored data) to draw conclusions about the likely consequences of, and insurance risks associated with, such developments.

Donaldson observed that South Africa’s infrastructure issues will change how insurers view flood risk too. Poorly maintained or inadequate storm water handing facilities must be brought into the equation when calculating premiums. “We have seen a huge increase in flood damage related to poor urban planning and maintenance,” she said. The challenge to the industry is to become more proactive in its engagement with the stakeholders responsible for addressing such shortcomings. Poor infrastructure contributes to the number of deaths on our roads – and the cost associated with insuring road users – so insurers must take an interest.

Using technology to tackle risks

Among the major risks facing modern insurance stakeholders is information management. Using the short-term motor industry as an example, Donaldson noted that data collection efforts were concentrated at the wrong end of the transaction. Insurers have become slack when writing new business, failing to get critical information about the vehicles they cover. The result is that the insured struggles to meet the data requirement at claims stage. Had the insurer pushed for this data at an earlier stage – and assessed this information against other available records – many complications might have been averted. Imagine an industry where we know (with certainty) at underwriting stage that we’re dealing with a unique vehicle. A stronger industry-wide focus on data would go a long way to combating South Africa’s vehicle cloning scourge.

Donaldson believes that vehicle telematics could play an integral role in developing sustainable solutions for motor insurers too. One area where the technology could come good is in the provision of crash data. Imagine, for example, you could use the crash severity data gathered by the telematics device to determine a salvage code and then, based on this information, automatically move the salvage into the value chain in a fast and effective manager. It sounds far-fetched – but then a device measuring every movement your motor vehicle makes seemed far-fetched just a decade ago.

Thinking outside the box...

The modern insurer has to address risk on an integrated basis. “If we could improve the way we manage information around our clients and their driver behaviour we could have an impact on so many other parties in our value chain,” observes Donaldson. But there are other areas where short-term insurers can make a real difference.

South African businesses and households go through approximately 300, 000 water heating systems (geysers) each year. The insurance sector is responsible for approximately two thirds of these installations due to damages claims against short-term insurance homeowner policies. It makes sense, therefore, that one of the insurance sector targets adopted at a side event to the recent COP17 conference is for the industry to make a meaningful contribution to energy efficient geyser alternatives. If all industry stakeholders work together they should easily reach a target of a million energy efficient geysers over the next five years. “The challenge is how to place the consumer into a situation where they comply with the pending energy efficient building regulations without them coming off the grid or being put into serious debt,” said Donaldson.

The insurance industry is in a perfect position to create economies of scale in this market. If they succeed they will trigger huge improvements in local energy usage trends as well as making real differences to the end client – the insured. New technologies open new possibilities. As evidenced in the motor insurance sector technology can be used to change behaviours. Over time industry stakeholders will find many more applications for this product innovation.

Editor’s thoughts: We like the ‘out the box’ thinking discussion on insurance sustainability brings about. South Africa will definitely benefit if the private sector teams up with government to improve infrastructure and tackle environmental risks. Do you think the short-term industry can successfully implement a clean-energy geyser initiative? Add your comment below, or send it to gareth@fanews.co.za

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