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Brokers key to sustainable insurance

20 June 2024 Gareth Stokes

As governments and global think tanks go back and forth tackling the climate change phenomenon, insurers and reinsurers are struggling to keep up with the claims load arising from flood, hail, landslide, severe convective storm (SCS) and wildfire events.

A key message to emerge from the non-life insurance segment at the 2024 Elite Wealth Conference was that the debate around climate change has shifted from whether it is happening to how to deal with its consequences. A second, introduced by your writer, is that South Africa’s non-life insurance brokers will play an invaluable role in helping insurers to underwrite sustainably into the future. 

Sobering images of mega loss events

Carolyn Thompson, Head: Retail Product, Underwriting and Pricing at Old Mutual Insure, kicked off her presentation to the hybrid conference with a series of photographs from recent mega loss events, including flooding in KwaZulu-Natal (KZN), hailstorms in Gauteng and wildfires in the Western Cape. “South Africa has not been immune to climate change; this is not just something that is happening in the rest of the world,” she said, commenting specifically on global warming and its spin-off, extreme weather. Simply stated: the frequency and severity of large weather-related loss events seem correlated with increases in global temperatures. 

The underwriting and pricing specialist offered two graphs in support of her statement. The first was a three-decade long history of annual natural catastrophe losses sourced from global reinsurer Swiss Re. According to this data, the proportion of losses due to earthquakes were in decline compared to weather-related events. It also confirmed that the frequency and severity of other primary perils such as floods, hurricanes (including typhoons and windstorms) and tornadoes were on a steady upward trend. Old Mutual Insure has a similar experience, and your writer once again commends them for being so willing to share their catastrophe-related loss data. 

A 10x jump in average annual NATCAT claims 

Sharing its natural catastrophe (NATCAT) claims experience spanning 2000-2022, the insurer contrasted its average annual claims of R39 million for the period 2000-2011, with the R371 million average for the period 2012-2022. “Luckily, we have reinsurance in place to smooth out those big claims years and protect our balance sheet,” Thompson said. Unfortunately, the almost 10x rise in average annual claims means reinsurance is becoming pricier, and risks more difficult to place. 

By way of example, the insurer estimated that the portion of its gross written premium diverted to pay for these claims and purchase reinsurance had risen from around 0.5% to 1% in the early 2000s to between 6% and 7% today. “As the volatility and intensity of catastrophe events increase, the reinsurance is getting more and more expensive; and as reinsurance premiums go up, there is a knock-on impact on traditional insurers that has to be catered for,” Thompson explained. As reinsurers turn the screws, insurers can respond by hiking the premium they charge to clients, increasing their risk mitigation requirements or taking tough underwriting decisions to exclude or reduce on-the-ground risk exposures. They also, inevitably, end up taking a bigger portion of risk exposure on their own balance sheets. 

According to Thompson, Old Mutual Insure reported its “biggest ever net retention of NATCAT losses in 2023” as the combined forces of reinsurers’ risk appetite and the cost of reinsurance started to weigh. Put another way, the insurer was carrying or retaining a greater slice of the claims experience from each of the big loss events it experienced in that year, and there were many in the R50 million and higher bracket. Turning to mega weather-related claims, the presenter reminded attendees that insurers had paid out ZAR7.5 billion to policyholders for claims stemming from flood and landslide damage in KZN in April 2022. 

Flood and wildfire becoming uninsurable?

Local insurers are becoming concerned that mounting flood and wildfire losses could make cover for such perils unaffordable, especially in areas that are frequently affected. Commenting on California’s often reported wildfire losses, Thompson said United States-based insurers had recently given notice to around 72000 policyholders in over-exposed Zip codes, saying they were completely withdrawing fire cover. Up to 70% of policyholders in Pacific Palisades, and over 65% in Bel Air and Santa Cruz mountains, had been informed they were not on cover for fire due to elevated exposure risk. In this rising frequency and severity context, the challenge shifts from underwriting to sustainable underwriting, our emphasis. 

So, what can local insurers do? One shortcoming the industry is scrambling to address is the lack of long-term climate and wildfire data. “We have a lot of data that we are trying to work with, and a lot of different parties are developing models that we are starting to make use of,” Thompson said, adding that this data had to translate into a better understanding of geo-located flood and wildfire risk exposure. From a pricing perspective, the challenge becomes setting a premium that will allow the insurer to withstand catastrophe events without wiping out its balance sheet. And from an underwriting perspective, the insurer must balance affordability and exposure in such a way that it is able to pay claims across its book, irrespective of the loss experience. 

Elevating the role of insurance brokers

The insurer’s emerging underwriting philosophy will elevate the role of insurance brokers and risks managers, especially in the commercial segment. “Going forward, you are going to see a lot more risk sharing with the client, shifting the responsibility for risk mitigation to their side,” Thompson said. Gone are the days where businesses can approach their risk decision making with an ‘insurers will pick up the damages’ attitude. Instead, a proactive approach is indicated, underpinned by careful risk identification and a commitment to take the necessary steps to reduce same. 

The better South Africa’s climate and wildfire modelling becomes, the easier it becomes for insurers to forecast loss exposures. According to the presenter, recent rainfall modelling pointed to a reduced risk of flood in the western parts of the country. Unfortunately, there is a bit of a lose-lose situation developing, with bigger average increases in annual temperatures in that region leading to reduced flood risk and increased risks of drought and wildfire. “Wildfire is going to become a major problem; this is the big risk that we need to look out [and it will] heavily impact the industry going forward,” Thompson said. 

Insurers are increasingly turning to CHIRPS for precipitation data; and more recently, JBA Risk Management, which uses information about existing water courses alongside elevation, slope and soil conditions to forecast flooding, including floods caused by standing water. This is no doubt an over-simplification of what they do, but FAnews readers will hopefully get a sense of things. 

PS, an important observation was that insurers cannot rely on decades-old 50-year or 100-year flood lines to determine their risk exposures; these lines are fluid (excuse the pun) and ever-changing. New data models also make it possible for a more granular understanding of risk exposure. The key point is that flood exposures can vary between one building to the next, even if they are located in the same street or suburb. 

Exploring alternative risk transfer

The presentation closed with some thoughts on what insurance brokers and risk managers might do if their commercial clients get squeezed out of the traditional insurance market. “Where there are risks that we think are now uninsurable, we are looking at how to do it differently, and how to introduce a bit more risk mitigation and risk sharing in places that are heavily affected,” Thompson concluded. She said the insurer was taking a holistic approach to the evolving risk landscape and would take steps to adjust pricing and underwriting to ensure a sustainable insurance product across all divisions. 

Writer’s thoughts:

As extreme weather related risks increase, the role of insurance brokers in identifying and mitigating these risks becomes crucial. How can you help your clients better understand and manage their flood and wildfire exposures to ensure sustainable insurance solutions? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.

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