The cost of insurance catch-2022
The cost of buildings, household contents and motor vehicle insurance is forcing many South African households to reconsider their basket of non-life insurance covers at a most inopportune time. Ironically, the cost pressure on businesses and consumers are felt hardest when the economic and risk outlooks are at their worst; making it even more important to keep appropriate insurance covers in place.
Insurers resilient; consumers on edge
“The insurance sector has proven resilient [through pandemic] and the domestic short-term insurance industry continues to grow; but consumers are under increasing pressure,” said Precious Ndluli, Head of Marketing and Technical Marketing at Discovery Insure, during a presentation to the Insure Talk 22 Conference, held recently.
Her talk, titled ‘Trends shaping the world of insurance’, kicked-off with a quick overview of the GDP and inflation backdrop facing South African businesses and consumers early 2022. For local insurers, the challenge is to retain business and write new covers under the smog of erratic GDP growth, rising inflation, shrinking incomes and staggering unemployment.
The pool of insurance customers in both the commercial and personal lines sub-classes is under pressure for all the reasons just give. Even so, local short-term insurance premium has achieved an average 7.6% annual growth rate over the five years since 2016. The good news is that a study by the Mission Asset Fund confirms that insurance is valued by consumers for its role in ‘giving security in the face of uncertainty’, ranking behind income as the most important financial need. “Insurance cushions businesses and individuals [from large and unexpected losses] and forms a social protection mechanism; the industry plays an important role in the South African economy,” said Ndluli, who commented on two recent catastrophe events to illustrate the value of non-life insurance domestically.
Two major catastrophe loss events
First, the July 2021 riots that caused extensive damage in Gauteng and KwaZulu-Natal (KZN). Discovery Insure reminded the audience that countless consumer goods retailers and food outlets suffered major damage in the event which resulted in around ZAR50 billion in losses to the national economy. State-special risks insurer Sasria SOC Limited received claims totalling ZAR32.8 billion and has since received significant capital injections from its only shareholder, the South African government, aka you and I. Second, the April 2022 KZN floods which were estimated to have caused property damage totalling around ZAR10 billion as around 13500 homes were damaged or destroyed. Discovery said it had received car and home insurance claims from its personal lines insureds totalling more than ZAR80 million following the event.
Now that the scene-setting is taken care of, let us plough into the three trends that are shaping the global and local risk environment presently, discussed under the headings inflation, weather patterns and loadshedding. “The world is changing at an exponential rate, and with it there is an incredible change in the risk landscape,” said Ndluli. Entering 2022, insurers faced significant increases in repair and replacement claims due to a five-fold increase in global shipping rates; a global chip shortage contributing to supply side constraints in motor manufacturing; and aggregate car part inflation of 13.2% in 2021. To make matters worse, second hand car prices are on the move too, as shown by a 7% jump in TransUnion’s second hand vehicle index. Motor claims paid are inflating locally and globally, as evidenced by insurers’ worsening loss ratios.
Frequency and severity on the up
The media is full of reports about extreme weather events, with many blaming the increased frequency and severity of natural catastrophes on climate change. “Global warming is measurable and we have seen, and can measure, the temperature increases over time,” Ndluli said. “Climate change has impacted the number of natural disasters across several perils such as extreme weather, floods, storms and wildfires, to name a few”. This alarming trend is illustrated by there being 112 severe weather events worldwide in 2020, with another 84 in the first five months of 2022! From a South African perspective, climate change is likely to contribute to a greater volume of rain falling each year, but over fewer days.
Extreme weather events cause pain for insurers as claims flood in. Just consider the following recent comments from local insurers: Santam, ‘the very wet summer season also had a negative impact on the commercial and personal lines business’; OUTsurance, ‘the claims ratio increased as a result of wetter weather conditions, increased non-motor claim costs and the further normalisation of motor claims frequencies; and Old Mutual, ‘we do proactively track weather events, and noted higher rainfall figures and storm activity across the country during the last few weeks of 2021’. Loadshedding was mentioned in passing; not surprisingly given how ‘over it’ most South Africans are… The bottom line: severe loadshedding contributes to higher loss ratios and is devastating to insureds and insurers alike.
Seeking positive responses from insurers
Digitalisation and the widespread adoption of technology continue to give non-life insurers an edge in servicing their hard-pressed commercial and personal lines policyholders. For example, advisers and clients both benefit from the efficiency and speed of transacting over digital platforms. It is also clear that technology-backed improvements to data collection, storage and processing are giving insurers a far better understanding of the risks they underwrite, thus allowing them to prices these risks better. This, said Ndluli, was why a recent Deloitte report had indicated that insurers that make significant investments in digital will grow rapidly in 2022.
Discovery has, for many years, led the way in applying behavioural data to its personal lines motor pool. Its Vitality Drive programme continues to provide granular insights into the risk presented by different insureds. So, for example, the insurer knows that female drivers are better at adhering to speed limits and show more restraint when accelerating or cornering; male drivers tend to brake more smoothly, and spend less time on their mobile phones while driving. Another interesting data-based observation was that motor insureds aged 20 to 30 drive 20% less those aged 30 to 40; the youngsters also spend less time on the roads during peak time.
All that remained at this point, was for the presentation to close with a powerful pro-insurance message. And Ndluli did not disappoint: “insurers play an incredibly important role in terms of offering social protection; we can help consumers, through innovative product design, to manage both insurance and broader non-insurance costs,” she concluded.
Writer’s thoughts:
Spending on technology can help insurance brokers and insurers to service clients more efficiently, and to offer clients more appropriate risk products; but it cannot be seen as a cure-all for an ailing economy. Are you finding it more difficult to write life and non-life insurance business against the backdrop of inflation, poor GDP growth and staggering unemployment? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
