Catastrophe insurance: the collaborative advantage

The Insurance Apprentice team recently launched TIA Talks, a podcast series featuring former TIA contestants and industry experts. These episodes delve into critical industry issues and offer valuable insights.

In the first episode of The Insurance Apprentice podcast, Muzi Dladla, Executive Manager of Stakeholder Management at Sasria SOC Ltd, introduced the concept of “Collaborative Advantage” as a crucial strategy for the insurance industry. Dladla’s discussion highlighted how traditional competitive tactics may no longer suffice in the face of heightened risks.

Instead, fostering collaboration among insurers could be the key to enhancing risk management and overall industry resilience.

In this newsletter, he explores how embracing collaborative approaches might reshape catastrophe insurance and bolster the industry’s response to South Africa’s growing challenges. 

Competitive advantage in an era of escalating risks

The efficiency and effectiveness of these individual insurers in remaining profitable and a going concern is justified by their competitive advantage and knowing how to manage the risk better than competition for their place in the market. 

This is important for their survival and fulfilling their shareholder obligations in retaining earnings. However, given the increase in the number and severity of these risks from natural and anthropogenic disasters, particularly in South Africa, the ripple effect of incidents like floods, droughts, fires, social unrest, and violent protests, challenges not only the social fabric but also the very pillars of the insurance industry. Within this chaos, private insurers, although driven by profit motives and the necessity to remain sustainable, have struggled to maintain their footing.

Disasters, risks, and the insurer's response

South Africa's insurance market, characterised by perfect competition, has witnessed private insurers enduring the most of these multifaceted risks, from the Knysna Fires in 2017, social unrest in 2021, to the floods in 2022. As these insurers vie for a dominant place in the market, their ability to manage risks better than competitors determines their success. This prowess is not just about financial muscle but understanding and navigating the treacherous waters of ever-evolving risks.

But as the frequency and severity of these risks escalate, due to factors beyond control and a dwindling risk mitigation framework, a critical question emerges. Can the insurance industry, in its current form, continue to be the safety net?

From competitive to collaborative advantage

Traditionally, the success of insurers has been attributed to their competitive advantage. This advantage not only lies in having the resources to strategically position themselves but also in their superior risk management capabilities compared to their competitors. Such proficiency is crucial for their continued operation, meeting shareholder expectations, and safeguarding retained earnings. However, given the increase in the number and severity of these risks, which is equally due to factors outside the control and management of the risk and factors affected by degradation of risk mitigation that make the insurability of risk worthwhile and unforeseen. Literature has begun pointing towards the 'collaborative advantage' – a concept where entities combine their strengths to confront a shared challenge, making the industry more resilient as a whole.

Some might argue that collaboration can dilute the essence of perfect competition. However, if the focus remains on bolstering risk mitigation, this synergy can bring numerous benefits: from reducing volatility and making risks more unpredictable to emphasizing risk prevention over mere asset replacement for the improvement of the risk landscape.

What does this mean for South Africa?

Let us delve into a practical example. Sasria, an entity insuring properties against damages resulting from violent protests, terrorism or strikes, collaborates with multiple lines of defence like communities, police, and the army. Now, consider a hypothetical scenario where a local municipality fails to empower its firefighting unit. A subsequent protest erupts due to their inability to combat massive fires, leading to a spike in Sasria's claims. This situation is not just Sasria's problem. If the fire engulfs an entire city, every private insurance company insuring properties in that region becomes vulnerable. In this scenario, collectively strengthening and capacitating the fire department becomes an ideal solution for all insurers. This collaboration not only minimizes damage but also makes the risk more unforeseeable and insurable.

The path ahead

In an era defined by uncertainty and heightened risks, the insurance industry stands at a crossroads. The time is ripe to embrace the ethos of collaborative advantage, where collective actions can pave the way for a more resilient and robust insurance landscape. For South Africa and the world at large, this approach might just be the beacon of hope we need in these tumultuous times. 

During the podcast, Muzi, along with #TIA contestants Temwa Nyirenda and Rhein Schnetler, covered a range of topics. One of the topics was the role of Emotional Intelligence (EQ) in achieving success. Rhein’s insights reinforce the argument that success comes from a blend of strong personal attributes and the ability to communicate and connect with others. You can read his article here. Building on the podcast discussion, Temwa also offered an introspective look at overcoming imposter syndrome and embracing self-belief in his article, which you can read here. 

Writer’s Thoughts

The insurance industry stands at a pivotal moment. As risks evolve and intensify, it’s clear that collaboration rather than competition may hold the key to a more resilient and effective response. By working together, insurers can better safeguard against the growing challenges and ensure a more stable future for all. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.