Saddling up for a year of increased liability

Reggae icon Bob Marley once famously said that if you know your history, then you will know where you are coming from. If we take this prophetic statement and use it in tandem with Benjamin Franklin’s quote where he said, “If you fail to prepare, then you must prepare to fail,” we can see the true value of foresight and the advantage that it can offer companies.

In addition to it being financial year end, the beginning part of the year allows companies to look back at the year that was and the elements that had an influence on their business. Gari Dombo, MD of Alexander Forbes Insurance, points out that cybercrime and catastrophic events have had a significant impact on the short-term industry.

Burning embers

At the beginning of March, the Western Cape, particularly the Cape Town area and surrounding suburbs, were hit by a sting of major fires which caused significant damage throughout the province. While the cause of the initial fires has not been released, Dombo points out that climate change is playing a role in catastrophes such as this because of the gradual increase in global temperatures.

“There needs to be an awareness on the role that firefighting plays in risk mitigation. The insurance industry needs to see how it can assist councils and municipalities in increasing their readiness to respond to an incident. By doing this, we are galvanising support around them and we can see how we can direct funding to facilitate this.”

The insurance industry went through 2014 expecting a major catastrophic event as there was one in 2012 and in 2013, while they were relatively happy about the fact that they came through the year relatively unscathed, the Cape Town fires shows that insurers need to seriously be prepared for these events to occur on a yearly basis.

Dombo points out that the major role player in this is that companies need to look towards their reinsurance arrangements and where their concentration of risk lies. “Companies can then map their country to their book in order to spread their funds accordingly. Yes, there will be underexposure in certain areas, but insurers really need to look at the likelihood of a catastrophic event happening in those areas as opposed to a highly developed urban area where the majority of their risk is concentrated.”

Insuring the virtual business

Traditional insurance is done on a tangible basis whereby insurers insure what they can see. But with the growing technological age, businesses are moving from the tangible (bricks and mortar) towards the intangible (businesses over the internet).

Herein lies the challenge. How do you insure against risks where you may not physically see the damage? Dombo points out that Alexander Forbes has partnered with Stalker Hutchison Admiral (SHA) in order to develop a cybercrime product which will protect businesses.

The main thing that needs to be protected is data. Research from the Cyber Forensic Forum of South Africa shows that 2.8 trillion gigabytes of data was created in 2012 and it is forecasted that this will grow by 46% on a yearly basis. While the engagement with SHA is ongoing, the product currently covers the material theft of data, the interruption of activities while the data is recuperated, and the reputational damage caused by the attack.

Currently, Alexander Forbes only has comprehensive cybercrime insurance for businesses, the individual is only covered for identity theft. “This needs to change. We are seeing increased instances where the bank accounts of private individuals are being hacked into, so there needs to be a product that protects the individual on a similar level as a company,” says Dombo.

The fickle exchange rate

By now South Africans are used to the exchange rate and the competitiveness (or lack thereof) of the Rand against international currencies. However, this is having a significant impact on the insurance industry.

Dombo admits that we have had some respite in terms of volatile currencies when the oil price was hitting record lows at the beginning of the year. But this has not forced food prices down. And with future petrol price increases looming large, the public will be facing tough times balancing their cheque books.

“When this occurs, insurers need to look to address critical issues in the industry as insurance is unfortunately one of the areas where the public looks to cut back on when they are looking for extra income,” says Dombo.

One of these areas is in the auto repair space where costs are being driven sky high by the adoption of a replacement industry over a repair industry. This strategy has obviously made original part manufacturers happy, but has left many people in tough positions because of the costs associated with using these parts.

“We need to partner with auto repair shops, car companies and part manufacturers to get approval on the use of manufacturer approved generic parts in motor repairs. This will bring down costs and will not put the public in a position where they decrease their short-term cover,” says Dombo.

However, he adds that it is imperative that these parts are manufacturer approved, or else the insurer ends up taking on the majority of the liability. Another challenge will be to convince the public that a generic part is just as good as an original part.

Editor’s Thoughts:
Identifying trends is one thing, but putting systems and processes in place to address these trends is another thing. Broker engagement will once again be an important industry function in 2015 as the key role player in convincing the public about the value of generic parts would be the broker. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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