Tips for insuring ‘out of favour’ risks
Local businesses are turning to alternative risk transfer (ART) mechanisms as their brokers and underwriters encounter challenges in securing sufficient insurance capacity for global programmes, and struggle to find cover for risk types that are ‘out of favour’ among reinsurers.
The risk transfer evolution
“The makeup of risk transfer is evolving,” says Alicia Goosen, head of commercial risk and chief broking officer at Aon South Africa. “Buyers are faced with decisions around how to manage an ever-expanding and complex risk transfer need, and it has never been more important to focus on the total cost of risk rather than risk transfer or premium cost”. She notes that challenging and unpredictable insurance market conditions have forced insurance buyers to focus on the value, structure and overall cost of their insurance programmes.
Goosen’s comments coincided with the release of the Aon 2024 Insurance State of the Market Report which offers insights into global and South African non-life insurance market trends. It singled out grid collapse exclusions; inflation; natural catastrophe-related coverage exclusions or restrictions; and reinsurer-led requirements for granular data as major considerations for brokers and firms conducting business at the southern tip of Africa. “Securing sufficient insurance capacity from local and global insurers continued to be challenging, especially for global programmes and for risk types that were not preferred,” the report states.
The report also revealed that “the requirement to provide granular information such as geo-co-ordinates and value splits between property damage and business interruption (BI) remained burdensome and challenging for clients”. This requirement is not surprising in the context of insurers and reinsurers attempting to limit their extreme weather exposures, and there are already rumblings about location-based flood risk exclusions and restrictions being applied more often. These steps are in addition to the grid collapse exclusions that are now “fully embedded in underwriter placement terms” in South Africa.
Resilience is a global re/insurance buzzword
Resilience emerged as a buzzword for the global insurance and risk community in 2023, as stakeholders sought to navigate the tough trading environment. “Economic inflation; a slow supply chain recovery; rising labour costs and persistent natural disaster activity pressured property loss costs and extended recovery periods,” Aon wrote, before commenting on a regulatory environment that has become “more complex and focused on addressing matters related to insurer solvency, cyber incident disclosures and the use of generative artificial intelligence (AI), amongst many other issues”.
Aon reflects on a number of key areas that will shape the global non-life insurance market over the coming years, starting with cyber security. The firm commented that cyber attackers will continue to exploit vulnerabilities over the coming years. “Insurers experienced an uptick in ransomware losses in 2023 compared to 2022, with ransomware events increasing in each quarter … there was, for example, a 205% increase in ransomware incidents in Q3 of 2023 compared to Q3 of 2022,” they write. “In addition to seeing an increased frequency of events, a number of high severity ransomware incidents hit insurers’ books”.
Brokers and corporate risk managers will have to keep a close eye on five cyberattack-related trends including an intensification of ransom and extortion attacks and rising insider risks. The third trend is that “cyber accountability, including regulation and representation of security controls, may require an increased investment in cyber security”. Fourth, the adoption of artificial intelligence (AI) and other emerging technologies will introduce new cyber security-related challenges, and fifth, Aon expects litigation, especially related to data privacy, to increase.
SA cannot afford another July 2021
The report dedicates a couple of pages to political, terrorism and strike risks which “loom large” as South Africa prepares for its 29 May 2024 National Election. One of the consequences of the July 2021 riots in KwaZulu-Natal and Gauteng “has been the hesitancy on the part of both local and international insurance markets to provide cover to this line of business,” Aon writes, adding that the premiums now payable for riot cover, either through Sasria SOC Limited or the International Property Terrorism and Strikes (PTS) Insurance market have increased significantly. They noted that Sasria premiums were up 47% on the back of a 600% hikes in its reinsurance costs.
The PTS market could go one of two ways over the coming year. If South Africa experiences a peaceful election, then the underwriting regime may soften. However, if there is a significant deterioration, it is likely insurers may withdraw entirely or introduce further, onerous exclusions or restrictions. PS, the Aon report also commented on implications to large corporates following Sasria’s decision to reduce its coverage limits from R1.5 billion to just R500 million. “For many large corporates, these limits may be insufficient and will require additional cover in the form of a ‘riot wrap’ policy,” they wrote. “Structuring of insurance programmes around riot and political risk needs specialist broking experience of both the local and international insurance markets”.
Other areas highlighted by the report include the ongoing acceleration in the energy transition and the rising demand for parametric covers. This newsletter will not offer further comment on developments under these headings, opting instead to give a brief overview of the macro factors affecting the reinsurance market early 2024. The first observation in this section of the report was that between 2017 and 2023, aggregated global insured natural catastrophe losses are approaching USD1 trillion, with 60% of this total attributed to so-called secondary perils that include flood, hailstorms, severe convective storms (SCS) and wildfire.
SCS dominate global NATCAT losses
Aon estimated insured losses due to natural catastrophes reached USD118 billion last year, making this the eight most costly year on record. “Losses from primary perils were relatively low at USD17 billion despite above-average tropical storm and hurricane formation [compared to] losses totalling USD101 billion from secondary perils, including SCS losses totalling USD58 billion alone”. Finally, the report lamented that while economic inflation was showing signs of abating, loss cost inflation remained elevated. Reinsurers are thus wrestling with two tough questions: Is today’s pricing staying ahead of loss cost trends, and are prior-year reserves still adequate?
“The current market dynamics create unique opportunity, incredible uncertainty and risk that is increasingly connected, and more severe,” Goosen says. She adds that brokers intent on negotiating successful renewals must encourage their clients “to be proactive and differentiate their risk, with the current, selective underwriting environment calling for detailed disclosure and business profiles as well as a description of risk management and mitigation efforts”. Risk modelling tools can give you an edge, as will ensuring that you leave sufficient time for underwriters to review your clients’ renewal proposals.
Resilience: a fundamental enabler
The Aon 2024 Insurance State of the Market Report identified “robust underwriting information and risk differentiation [as] key drivers of superior renewal outcomes”. It also pointed to evidence that suggested that investment in corporate responsibility initiatives was having a positive impact on underwriting decisions. In this context, “resilience will become a fundamental enabler of business strategies in 2024”. The report concluded that many of the economic, geopolitical and humanitarian events that shaped 2023 would continue to evolve this year.
Writer’s thoughts:
The rising frequency and severity of climate change-related extreme weather events are causing brokers, insurers and reinsurers many sleepless nights, with continued threats of cover exclusions and restrictions. What risks have you found to be ‘out of favour’ among underwriters during 2024 renewals? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
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