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Brokers experienced 18% drop in revenue

01 February 2021 Myra Knoesen

Each passing year has brought with it changes in consumer awareness, litigation habits of the population, greater access to courts and an accelerated decline in the quality of risk management. This combination of factors invariably led to an increase in claims frequency and severity, said Gareth Beaver, Managing Executive of SHA Risk Specialists.

During the launch of SHA’s Annual Specialist Risk Review 2020, Quinten Matthew, Executive Head of Specialist Business at Santam said, “With Covid-19 and insurance, there have been humanitarian and economic losses. Society’s preparedness for, and resilience to systemic risks has been tested, and the financial loss exceeded financial resources.”

“The insurance industry responded with relief support. Designing for the future, and insurance solutions to address cover gaps came to mind, including the need to adapt and respond to customer changing needs,” continued Matthew.

Covid-19 on business

“While this is a general observation, the survey gave us some fairly in-depth insight into how businesses coped during the pandemic, as well as some indication of what the road to recovery is going to look like for many,” said Simon Colman, Business Head of Digital and Financial Lines at SHA.

Around 86% of company directors said they ensured that their shareholders were aware of the financial impact of Covid-19 on the business. Another 76% continued to have regular virtual meetings with fellow board members to discuss the impact of the pandemic, and 73% now have a contingency plan for dealing with pandemics and future lockdowns.

“Unfortunately, this still means that nearly a quarter of businesses do not have contingency measures in place. This could have serious consequences, particularly when considering the potential effect on the personal liability of directors and officers,” added Colman.

“One of the major exposures that was catapulted to the fore during the height of the pandemic, was cybercrime. Around 60% of businesses indicated that they had to deploy more digital technology. Around 28% of businesses indicated that they had experienced online connectivity or security problems in the new work-from-home-environment,” stated Colman.

The survey also shows that 40% of business respondents experienced a reduction of more than 25% in annual revenue. A staggering 19% of businesses stated that revenues and net profit had dropped by over 50%. Sadly, these losses translated in job losses as well, with 41% of companies reporting that they had to make staff redundant. Close to 75% of business owners also confirmed that because of the cutbacks in staff numbers, remaining staff had to perform additional duties to fill in the gaps.

Brokers have not escaped

“Of course, insurance intermediaries have not escaped the impact of Covid-19 either. Around 11% of brokers downsized their staff complement and experienced 18% average drop in revenue. On a positive note, brokers appear to have embraced the technological dynamics brought about during the lockdown, with just over 50% confirming that they would continue to consult with clients via video conferencing. Overwhelmingly, more than 75% of respondents in insurance confirmed that they would prefer to do training online, rather than in face-to-face engagements,” said Colman.

“Brokers will find that their role in advising clients on liability insurance has become far more important. They will have to conduct a thorough needs analysis on all their clients to ensure their existing cover is still sufficient as their insurer would have based their risk profile, and premium, on variables that may no longer apply. Most importantly, they will have to guide their clients in reviewing their policies and making the right decisions when they start to look for ways to cut costs,” added Colman.

Claims under the spotlight

“We can get a clear picture of what is happening in the liability space if we track the claims from 2016 to 2019. The highest claims frequency still resides in the liability and personal accident environments. Well over 70% of total non-motor claims fall into these categories. In reviewing the claims data for the various insurance lines, broadform liability stood out as it presented one of the larger shifts in claims value. We saw a significant increase of 41% in the average value if claims between 2016 (R577,000) and 2019 (R815 000). This statistic was largely driven by personal injury (slip & trip) claims. The average intimated claim just in this class stood at R172 600 in 2016 and shot up to R536 705 in 2019. These claims mostly occur at retail stores, grocery stores, pharmacies and shopping centers,” said Anton Meyer, Business Head of Claims at SHA.

“Looking ahead, broadform liability, in particular slip & trip, will present some of the biggest challenges for insurers. Product liability claims have increased on average from R1.65 million in 2016 to R2.7 million in 2019. This is an increase of 63%, well above the inflation rate over the same period. We expect these numbers to rise in 2021 as it has become clear that supply chain issues and quality control cutbacks due to the pandemic are expected to play a much bigger role,” said Meyer.

“PI claims against engineers in 2019 were the most frequent out of all the professions. The data shows 127 claims against engineers. This is lower than in the previous three years, with the average amount claimed being just under R2.4 million. Conversely, claims against architects went in a completely different direction. In total, 84 claims were reported to SHA in 2019, which is on par with 2018. Yet, the average intimated claim shot up from just over R1 million to R9.2 million – making architects one of the most exposed professions in our portfolio in 2019,” said Meyer.

“It is encouraging to see that 80% of the professionals surveyed do indeed have PI cover. Twenty percent of the respondents do not have a PI policy, over 50% stated that they did not need this type of cover. More than a quarter of the respondents (27%) said that they had PI cover because it was a regulatory requirement,” said Malcolm Padayachee, Business Head of Professional Indemnity and Liability at SHA.

“It was alarming to see that 31% of businesses surveyed use standard contract templates, with an additional 19% saying they do not use contracts at all. Around 55% of businesses said they conducted monthly quality control checks, and another 23% did their quality control at least once per quarter. The remaining 22% of businesses do quality checks biannually, annually, or never. In the survey, 34% of businesses noted a deterioration in the product or workmanship quality from key suppliers over the last two years,” said Manisha Chiman, Underwriting Head of Liability at SHA.

The trends to watch out for

“The trends to watch out for in 2021 are principal agents being held liable in the contracting environment, an increase in defamation lawsuits between professionals, a failure to properly apply due diligence during investigations by attorneys, undertaking professional work outside the specific field of expertise, and impractical and unclear contracts that don’t reflect the intentions of parties,” said Meyer.

“We foresee a possible spike in claims notifications for the year ahead and incurred amounts that will easily surpass the figures that we saw in 2018 and 2019. There are many factors driving up the quantum of claims. Litigation funding, contingency fee billing by attorneys and an increase in consumer awareness are all playing a part,” continued Meyer.

“The trick in building a sustainable business in our field is to make sure that risk selection, pricing and claims management follow in the same trajectory as the changing landscape,” concluded Beaver.

Writer’s Thoughts:
Customers are becoming more aware of their rights, and liability claims and claims costs are rising. As Meyer said, policyholders should take initiative and responsibility for minimising their risks beyond the mere purchase of insurance, and the risk management strategy of a business should include an element of risk transfer to an insurer, proper training, quality control, risk assessment and mitigation. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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