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The broker’s commandment: know thy client’s risk!

22 March 2022 Gareth Stokes

Non-life insurers that respond to new risks by simply adding exclusions or other restrictions to their policy wordings face the very real risk of becoming irrelevant. This frank assessment of the state-of-play in the post-pandemic insurance market was offered by Frans Prinsloo, Head of Lombard Mobillity, during a panel discussion at the recent Insure Talk 19 event. “A lot of insurers are becoming purely balance sheet providers, and not looking for new solutions for their customers,” he said. This trend will likely accelerate as insurers cotton on that what used to be one-in-200-year risk events are set to occur more frequently.

The more things change…

The conversation took place under the tagline ‘Same old, different new’, a play on words to describe the conditions under which South Africa’s insurance brokers and insurers are trading circa 2022. The ‘same old’ part of the title focuses on the valuable role that insurers play in an economy, something that has not changed much since the first insurance arrangements were entered into at the Lloyd’s Coffee Shop in London in the mid- to late-17th Century. “Insurance is still a promise,” said Prinsloo. “We make a promise to our customers, the end-insureds, that we will put them in the same position they were in before a peril happened”. 

‘Different new’, meanwhile, acknowledges the incredible pace of technology-backed innovation that is impacting on firms in the financial services sector, and especially in insurance. “Different new refers to how we understand risks; big data and data analytics give us a much deeper insight into risk and allows us to improve our risk rating methodologies, among other aspects,” explained Caitlin Lancefield, Business Developer at Lombard Partnerships. FAnews readers will be quite familiar with the investments being made by insurance brokers, insurers and reinsurers into digital platforms as well as the ongoing flow of capital to new opportunities in fintech and Insurtech. 

Combining insurance best practice with innovation

The conversation turned towards the role that diversity played in the business development function. “We conduct business in a changing world [with] different demographics, cultures and generational issues; it is important to have a good mix within your team, because diversity fosters creativity,” responded Prinsloo. By way of example, the insurer’s business development team includes individuals with engineering, insurance and legal backgrounds. This approach allows for analytical, creative and critical thinkers to collaborate with dreamers and innovators on new solutions, tempered by inputs from those who have “deep connections in the industry and an understanding of how insurance works”. 

Diversity within teams is just one of the components needed for successful insurance innovation. It is also important for insurers to realise that they cannot be experts across the value chain. “An insurer cannot do everything on its own; so we approach partners across the value chain to get involved,” said Prinsloo. What followed was a common sense plea to stakeholders to ‘stick to their knitting’. In other words, focus on your strengths and cocreate or collaborate with partners in other areas. An insurer’s main calling might be to underwrite risks and set-up insurance policies; but its excellence in these areas is eroded if it fails at administration, distribution or claims. For example, Prinsloo acknowledged that intermediaries are very important from a distribution perspective

Flipping the switch on regulation

Many financial services providers see regulation as a hindrance or obstacle to growth and innovation. “We have experienced [this] over the course of the last two or three years, putting together what we think are really innovative products [only to come up against] the hurdle of regulation,” commented Obakeng Moloisane, Business Analyst at Lombard Partners, who moderated the discussion. The challenge is to flip the switch on regulation by seeking out opportunities for innovation where your competitors see problems. 

It is also important, according to Prinsloo, to keep in mind why regulation exists. “Regulation is necessary to make sure that stakeholders treat customers fairly and in a proper manner,” he said. This is part-and-parcel of selling and delivering on the insurance promise referred to in the opening paragraphs of today’s newsletter. 

Parametric insurance was help up as an example of how collaboration between the insurance industry and regulators might, over time, lead to affordable and sustainable insurance solutions to emerging markets. For those not familiar with the term, defines parametric insurance as ‘a non-traditional insurance product that offers pre-specified pay-outs based upon a trigger event’ 

In a Sub-Saharan Africa context, such products are often encountered in the informal agriculture sector, where they are linked to weather-related indexes such as average rainfall. All the farmers in a community could, for example, pay a small up-front premium to cover their input costs in the event of crop failures due to poor rainfall. If the rainfall in an area is below the threshold on the parametric insurance agreement, then each insured farmer would receive an immediate pay-out. 

Putting parametric in the regulatory sandbox

“This type of insurance [shows how] the regulator and industry are partnering and running [regulatory] sandbox initiatives to better understand how we can overcome the unknown, working together to protect the customer,” said Lancefield. There is also a growing realisation that some categories of risk will have to be carried in partnership between the public and private sector. This aspect was not expanded on during the debate, but is increasingly evident in conversations around how the insurance industry will respond to future pandemics. 

In closing, the Lombard Partners panel discussion turned to one of the key underpins of the non-life insurance sector: risk management. “There has been a shift within the insurance industry in recent times towards better management of risk as opposed to merely insuring it,” said Moloisane. This was a pertinent comment given how non-life insurance brokers are struggling to place fire risk cover for their large commercial clients. Insurers are taking a no nonsense approach to such risks, with the common refrain being that clients must implement extensive risk mitigation steps before the insurer will even consider insuring buildings against the fire peril. 

What goes around, comes around

Holistic risk management has never been more critical. “Risk management is something that we take very seriously,” noted Lancefield. “We have to stand in our customers’ shoes [to get a clear understanding] of what risks they face, up and down the value chain”. 

There is an idiom that holds: what goes around, comes around… And nowhere is this better illustrated than in the world of non-life insurance, where today’s shortcuts in assessing and mitigating an insured’s risk will return to ‘bite’ the insurer and insurance broker in the form of tomorrow’s deteriorating claims ratio. The solution is to identify risks and find creative ways to manage them, before transferring any residual risk by way of innovative insurance solutions. We conclude with Prinsloo’s words: “It is important to drive shared outcomes [in] partnership between the underwriter, the intermediary and the client”. 

Writer’s thoughts:
The opening comment in today’s newsletter, although not the focus of the piece or the panel discussion it reflects, is certainly worth unpacking further. Are you concerned that the list of perils your insurer refuses to place on cover is growing? And do you agree that if this trend continues, insurers risk becoming irrelevant? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].


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