Brokers to encourage clients to ‘own’ their flood, hail and wildfire risks

Climate change, crime, inflation and infrastructure failure top the list of sustainability challenges facing South Africa’s major intermediated insurance brands. As these and other constraints weigh on insurer and reinsurer profitability, traditional insurers are focusing more intently than ever on risk management and the role that their intermediated distribution channels can play to ensure profitability.

The future of general insurance decision making

Soul Abraham, Chief Executive: Retail Insurance at Old Mutual Insure, used the podium at the recent Insure Talk 40 event to set the scene for future general insurance decision making, especially in the context of insuring assets against the main natural catastrophe perils. “Climate change is a very fluid topic,” Abraham said, adding that it was difficult to predict how trends will play out over the next three-, five- or 10-years. Anecdotally, however, climate change related extreme weather events are wreaking havoc on domestic underwriting results. 

According to Abraham, there has been a notable shift in the availability and affordability of reinsurance coverage, with 2022 and 2023 being tough renewal years. “Internationally, there were lots of big catastrophe events that led to a significant change in the reinsurance market; there is no appetite [among global reinsurers] to participate in events that happen more frequently than one-in-10-years,” he said. In practise, this means that local insurers have to pick up the damages claims following the occasional mega-hailstorm, as happened in Gauteng, November 2023. 

This emerging reality has forced insurers and reinsurers to rethink their tried and tested business models and strategies, with a common question being whether extreme weather risks can still be priced on rolling one-year time frames. “Can you price for climate risk on a one-year view, or should insurers be taking a 10-year view on these risks,” Abraham asked. It turns out an insurer’s exposures to extreme weather events are almost impossible to predict; whereas forecasting one-year fire or motor accident exposures are somewhat easier.

Delivering sustainable underwriting

How do insurers underwrite sustainably in the context of the five main climate change related perils: drought; earthquake; flood; severe convective storms (SCS); and tropical cyclones? Citing an annual catastrophe loss report published by Gallagher Re, Abraham revealed the direct economic cost from last year’s climate change related events at USD$357 billion. This “scary number” partly exhibits in the frequency and severity of Old Mutual Insure’s SA claims experience. The insurer suffered 11 large claim events between 1980 and 2000; 22 such events between 2000 and 2012; and 36 between 2012 and 2022! 

Ignoring earthquake, SCS events accounted for the bulk of total global economic losses due to natural catastrophe in 2023. “Last year was our worst year from a convective storm perspective,” Abraham said. The historically benign peril weighed in with multiple loss events over the year, with the insurer often fielding total claims totalling R30 million and higher per event: three events topped R100 million. When converted to US dollars, these events do not even feature on the global catastrophe loss tables; but they still hurt South Africa’s relatively small insurance sector. Local insurers will not be able to insure for extreme weather events without a serious rethink about how risk is onboarded, and the acceptable level of on-the-ground property risk exposures. 

One of the innovations that Old Mutual Insure is working on is to clean up its geolocated flood data, and then using advanced flood risk modelling to map out its flood risk exposures. Abraham shared countless slides indicating how this modelling gave the insurer street level data on its insured properties, and how each of these properties was impacted by 10-, 20- and 50-year flood events. “This data combined with clear underwriting principles is critical to the sustainability of our industry,” he said. Insurers can no longer afford to blindly rate properties, nor onboard excessive risk in concentrated areas.

Insurers cannot manage climate burden alone

Challenges presented by the rising frequency and severity of extreme weather events will have to be borne collectively by the private and public sectors. “The insurance industry is obviously at the forefront of the climate change fight, but we cannot manage everything ourselves ... the burden cannot just be passed on to insurers,” Abraham said. At the extreme, insurers and reinsurers are simply walking away from risk. For example, it is now commonly reported that US-based insurers are walking away from wildfire risks in certain areas, saying “it would make them irresponsible” to offer said coverage. 

There are various steps that insurers and their reinsurance partners can take to limit climate-related risk exposures. Risk-based insurance pricing is one example. Case in point, the aforementioned flood modelling capabilities make it possible for an insurer to price differently for properties based on their unique flood risk, even if these properties are in the same suburb or even street. Commercial or personal lines insureds and their insurance brokers will also be expected to play a growing role in reducing insurer’s risk exposures, and there are growing arguments for the use of innovative technologies, including flood defence engineering, to mitigate risks. 

Exposure management is the new buzzword. “This is more about the conversation between an insurer’s chief underwriting officer and the reinsurer,” Abraham said. The focus of these conversations will be on geo-located risk exposures; new thinking in underwriting; and the careful matching of on-the-ground exposures under the flood, SCS and wildfire perils, to name a few. “The underwriting decision for a suburb with severe flood, hail and wildfire exposure will be different to one where only one of the three risks is prevalent,” he said. 

Collapsing infrastructure, inflation not helping

Turning briefly to the inflation and infrastructure topics, Old Mutual Insure commented that the cost of claims was placing huge pressure on insurers, and that South Africa’s myriad infrastructure shortcomings directly impacted the number and the quantum of claims. “If our infrastructure is poorly maintained, it will lead to more claims which makes insurance difficult to offer,” Abraham said. Likewise, emerging motor vehicle crime trends are forcing a rethink on the pre risk transfer mitigation requirements from vehicle owners, especially those who drive makes and models being targeted by criminal syndicates. 

The conversation closed with an interesting comparison of the direct versus intermediated distribution model. “Direct insurers have a very small portion of the market; but they make significantly more profit than the intermediated insurers,” Abraham said, noting that he fully supported the intermediated model. “The sustainability of the intermediated industry requires us to work together; ultimately, everyone in the value chain needs to win”. He mentioned that South Africa’s two largest direct insurers reported three times as much profit as the four largest intermediated insurers, despite the latter writing six times more premium. 

Agile, broad-based, real-time underwriting

To address long-term sustainability challenges, reinsurers will likely introduce capsulated limits, excesses and exclusions. Insurers, meanwhile, will have to consider product innovation to achieve wider insurance penetration and achieve more sensible risk exposures using geo-located risk ratings. Sharing of risks between insurers and insureds is non-negotiable, with insurance brokers urged to encourage their clients to take ownership of their risks. As climate change related risk concentrations rise, “agile, real-time underwriting will become more broad-based,” Abraham concluded. 

Writer’s thoughts:

The current insurance industry focus on limiting risk through exclusions, excesses and limits is commendable, but can sometimes leave your commercial and personal lines clients ‘hanging’. Is the exposure management conversation between insurer and reinsurer leaving your clients exposed? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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