This Armageddon-like claims environment will cost you

Global insurers and reinsurers and the brokers that rep their innovative insurance solutions to clients worldwide must be having sleepless nights of late. You see, dear reader, the world is stumbling from one Armageddon-like catastrophe loss event to the next, leaving the insurance industry reeling. The evolving risk landscape requires agents, brokers and intermediaries to have tough conversations with clients about what is and what is not on cover.

From drought, to fire, to flood

Over the weekend the news wires were chock full of horror stories from Maui, Hawaii, as the usually serene tourist destination was devoured by flames. Residents and tourists alike were forced to seek safety in the sea as an out-of-control wildfire spread into business and residential districts, exploding motor vehicles and laying waste to everything in its path. The historic Lahaina beach town was raised to the ground, as was a 150-year-old banyan tree at the ‘heart’ of that town. Per the latest news update on Independent.co.uk, the fire has claimed 93 lives, with that likely a low estimate. Already branded as the state’s worst natural disaster ever, the fire reportedly resulted from drought-related dry conditions combined with high winds. 

Meanwhile, 11000 kilometres to the East, in Norway, torrential rains caused dams to burst and rivers to break their banks, forcing some 4 000 civilian evacuations across southern Norway. Commenting on the event, website Crisis24.com noted “disruptions are ongoing across parts of southern Norway and southern Sweden … due to the passing of Storm Hans through the region”. Heavy rainfall from 7-13 August caused flooding and landslides, and, quite frankly, chaos. The storm caused the partial collapse of a hydro-electric power plant on the Glama River, and resulted in major roads in the affected areas being closed, and rail services suspended. South Africa is quite familiar with these fire and flood scenarios: think 2017 Knysna fires and April 2022 flood along the KwaZulu-Natal coast. 

The state of the insurance market

Brokers and reinsurers lead the way in reporting on manmade and natural catastrophe loss events. Case in point, the Aon South Africa ‘2023 Insurance State of the Market Report’, released midway through 2023. This report takes a deep dive into various market events and factors, including the energy crisis in South Africa, tough January reinsurance treaty renewals, adverse weather conditions and geopolitical events in Europe. You can turn to the report to learn more about how the evolving risk landscape is affecting insurance and reinsurance markets across the Property and Casualty (P&C); Riot, Strikes and Terrorism (RST); Motor; and Cyber insurance categories. 

“Insurance markets have been heavily impacted by three overarching local and global events in the form of South Africa’s ongoing energy crisis, the far-reaching impact that natural catastrophes, as well as rising geopolitical tensions including the Russia-Ukraine war, through to South Africa’s looming 2024 elections,” explained Alicia Goosen, chief broking officer at Aon South Africa, in a media release introducing the firm’s latest research. “These [risks] were all reflected in the January 2023 reinsurance renewals which marked a turning point for the reinsurance market, signalling a new and tougher reality for insurance buyers; it was the most challenging January renewal in a generation, as the reinsurance market underwent fundamental shifts in pricing and risk appetite, especially for property catastrophe risk”. 

The Aon report contained some chilling news for local insureds. Reflecting on insurance trends in South African markets, it revealed that the P&C market “continues to see reduced capacity on risks, making it challenging to secure coverage with carriers”. This is of particular concern to large commercial insureds seeking cover for natural catastrophe, with reinsurers introducing a number of cover restrictions. To illustrate how this works in practice, Aon wrote that “flooding is now sub-limited or totally excluded in certain instances following the KZN floods, [though] some underwriters consider topography and may consider coverage in some areas”. 

Higher punitive deductibles becoming the norm

Reinsurers are also applying “higher punitive deductibles … to outstanding risk recommendations or [implementing] total cover restrictions where such recommendations have been outstanding for a lengthy period of time”. In plain English, cover will be restricted if the insured refuses, for example, to install a recommended sprinkler system to mitigate fire risk. Overall, “increased treaty renewal rates are filtering through to insurers [and insureds] while inflation is also impacting the underwriting and claims process,” wrote Aon. They acknowledged that 15% rate increases for “good clean risks” were common locally, up to April 2023. 

Turning to the dominant motor insurance class, Aon noted that increases in interest rates and exchange rates made it more expensive to repair accident damaged vehicles. Unfortunately, the domestic market also struggles with a large proportion of its motor fleet being uninsured, making third party recoveries following an accident increasingly unlikely. Other issues facing local motor vehicle underwriters include deteriorating road infrastructure that contributes to the frequency and severity of damage claims; increases in the frequency and severity of high value vehicle theft and hijacking; and shrinkage of the pool of rental vehicles. In this context, insurers have little choice but to make tough underwriting decisions, including homing in on insureds that pose greater risks based on business activity, location and cross-border exposure. 

Goosen concluded that interdependent economic and geopolitical factors were having a significant impact on business risk profiles and market conditions. Insurers, insurance brokers and risk professionals will, therefore, have to seriously rethink their risk management strategies and risk transfer objectives. “It is highly pertinent for business leaders and risk managers to challenge and re-set their risk tolerance, appetite and strategy, and to align risk management programmes accordingly,” she said. The Aon report provides insights into how to leverage solutions such as data-driven decision frameworks, risk transfer capacity and innovative insurance cover. 

Innovative risk transfer for drought, fire and flood losses

Parametric insurance was held up as one example of emerging insurance innovation. It is a solution that deconstructs traditional risk transfer by unlocking capacity via an independent, event-based trigger, that is suitable when third party data sources exist that can serve as a proxy for a risk event. When the event occurs, the independent data responds, triggering the policy, giving the insured quick access to capital. Keeping things simple, one example of parametric insurance is a low premium policy that is put in place and paid for when subsistence crop farmers purchase their seed, is specific to a geographic region, and pays out automatically if a weather-related trigger such as low rainfall or higher-than-average temperatures is exceeded. 

According to Aon, parametric solutions are particularly well-suited for risks associated with natural catastrophe and weather perils, but innovations in this space are expanding these concepts into new areas. PS, these solutions are usually put in place in collaboration between governments, NGOs and risk capital providers. 

Writer’s thoughts:

The detailed news coverage of drought, fire and flood catastrophe events will leave most insurance professionals reeling. Here is a two-part question for readers active in the short-term insurance broking space. First, can you confirm significant increases in premium for 2023; and second, does the doom and gloom catastrophe risk environment help you to explain these increases to clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za