Commercial: The impact of recession

With renewal time upon us, FAnews asked the short-term experts to shed some light on how the recession will impact commercial sums insured and premiums.

During a recession, it becomes even more important for brokers to ensure clients are correctly and adequately insured, because they are less likely to cope with large financial losses during such trying times, notes Justin Naylor, manager of Etana Insurance's Pretoria branch. 

Russell Spring, Chief Underwriting Officer, Compass highlights directors' fiduciary duties in this regard. "One of these duties is to ensure that the company has sufficient insurance capacity to cover the assets of the company, so that if a loss occurs, the company is not negatively affected by an event that can be covered by insurance."

Impact in practice

"With the recession, goods and services have not increased with the traditional inflationary increases," says Santam. "In some instances, labour costs have reduced, and this resulted in the sums insured in respect of plant, machinery and equipment, as well as stock, not increasing substantially. The result is that premium levels have remained static.

"However, the reduced turnover in certain market segments necessitated the reduction of stock and premium levels have reduced to reflect the reduction in exposure."

"In order to reduce insurance costs, business owners also tend to reduce the limits in respect of crime classes, as these sections tend to attract higher rates. Reducing the first loss limits results in a reduction in the premium levels, but also in greater risk exposure for the business."

Santam further notes that the motor market declined with second hand motor vehicles becoming more affordable. "This has a negative impact on the average sum insured on motor vehicles. However, as insurers still need to pay the repair costs, the premium levels need to be maintained, but on a lower sum insured, resulting in the average rate increasing."

HIU says that production has dropped in response to a reduction in demand, and this has a direct influence not only on the stock sum insured, but also on the Business Interruption sum insured.

Compass notes that inflation, the effects of the expected foreign exchange movements and increased costs of replacing buildings and production must be taken into consideration as sums insured are revised at renewal. Companies also need to be aware of the trends in turnover over the past 18 months as the economic downturn has affected businesses in all sectors.

Industry under pressure

Leigh Friend, Regional Manager of MUA notes that, "Brokers will in all probability try to negotiate agreed values on some items, or specifically exclude certain items from the insurance contract, or call for deposit premium clauses subject to declarations to mitigate premium increases, or a combination of all three. Naturally, rates will come under pressure. In addition, the impact of the economic recession may very well have forced some clients to skimp on their maintenance programmes and on their risk protection requirements, resulting in more hazardous exposure for the insurer."

"I expect there to be an opportunity for insurers to put premium increases through. We hope that all insurers will see the benefit in turning their books around, so that the market can become realistically priced for the future as we move out of a soft market with the right price being charged for the right risk," says Spring.