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Downside risks plague global recovery

01 April 2017 FAnews

Since the Global Financial Crisis (GFC) in 2008, world economies have experienced a proverbial roller coaster ride when it comes to economic recovery.

This has had a pronounced effect on the insurance industry which has also seen its fair share of volatility during this period. Are the challenges that keep insurers up at night going to persist going forward?

SA promise, insurer response
While South Africa will be under S&P’s microscope this year, the credit ratings agency believes that there may be some growth in the market, albeit very modest.

This is good news for insurers who are looking to diversify their client base. Matthew Pirnie, Director of Financial Institutions Rations at S&P Global Ratings, reported that if there is going to be any growth in the local financial services sector, it will be in specialist lines (liability) insurance.

“The M&A activity we have seen in the market has been deliberate as larger insurers are buying specialist line insurers in an attempt to build up their skills as well as their diversified capital base,” said Pirnie.

The coming storm
While Pirnie admitted he is a recent convert to the intermediated model of insurance, he said that technology will see the growth of direct insurance, particularly among digital natives, the sector of the population who is born with access to technology that previous generations never had.

“Self-insurance and structured insurance will take centre stage. Therefore, insurers need to build and adapt their models around this in order to remain relevant in an ever changing world. It is no longer acceptable to sit back and ride out the storm,” said Pirnie.

The world today
We have seen many fragile economies struggling for survival in the hope that they would avoid an outright economic recession.

However, trade has been limited; therefore, recovery has been somewhat muted in most cases.

Yankee uncertainty
While there are signs that the US economy is stabilising after the shock vote of Donald Trump into the nation’s highest office, the US still presents the biggest uncertainty to global recovery.

The one sector of the US economy that is not being adversely affected by the global economic climate is the technology sector. Start-ups in the insurance industry are changing the game and forcing those with established models to rethink their relevance.

Lemonade is one such company. Though artificial intelligence, the company was able to accept, asses and settle a motor claim within 60 seconds of the incident occurring. According to many commentators in the industry, this is the next big thing in insurance which will change the industry.

The next form of ownership that will threaten traditional models is the ability to purchase insurance on a on a turn on turn off basis. Chatbox is a newly launched product in the US where people can get advice, and insurance, by having a conversation to an app on the internet.

For example:
John Doe: Hi Chatbox, I need to travel to Africa for business
Chatbox: How long will you be going for?
John Doe: A week.
Chatbox: I can offer you travel insurance at $10 a day.
John Doe: Perfect. Thank you.
Chatbox: Where in Africa will you be travelling?
John Doe: Nigeria.
Chatbox: This is a high risk area. Would you like kidnap and ransom insurance for $5 a day?
John Doe: I hadn’t thought of that. Yes please.

While the following conversation is not dissimilar to one a client will have with his broker, the conversation above happened in the comfort of the client’s home in an environment that he felt comfortable in, with a computer app, so no skewed messages were presented, just the facts.

While there will always be a place for the intermediated model, brokers and insurers need to grow with technology to remain relevant in society.

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