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Did South Africa’s non-life brokers miss the grid failure exclusion shock?

06 May 2023 Gareth Stokes

Year-to-date 2023 has been tough for South Africa’s non-life insurance brokers and their commercial insurance clients, with new business and renewal negotiations soured by a range of measures introduced by insurers, often at the insistence of their reinsurance partners, to ensure the long-term sustainability of the sector. The bottom line is that premiums are on the rise while perils on cover and sums insured are contracting. Case in point the grid failure exclusions announced by traditional insurers recently, and difficulties in obtaining cover for flood.

Revisiting brokers’ macro views

The question that formed while perusing this year’s short-term insurance media releases is whether South Africa’s short-term brokers could have seen the grid failure exclusion coming. As the author of Everything you need to know about non-life insurance in South Africa, this writer can turn to the 2022 Stokes Media Broker Perception Study, conducted March-May 2022 for answers. The discussion on brokers’ macro views, which are shared in Chapter Six of the book, leads with an observation that “non-life insurance brokers, insurers and reinsurers are dependent on economic growth to underpin their individual performances, though it remains possible to grow in tough environments by winning market share from competitors” before tackling some ‘big picture’ issues. 

Early 2022, brokers were concerned about the overarching global macroeconomic challenges posed by rising inflation; the Russia-Ukraine conflict and associated war risks; global supply chain constraints; and soaring oil and gas prices, to name a few. Locally their concerns centred on lacklustre economic growth, policy uncertainty and unemployment, with rising youth unemployment and poverty causing concerns of social instability. Insureds were responding to the economic challenges by taking steps to reduce costs, including cutting insurance premiums. In this context, although non-life insurance brokers did not necessarily lose commercial clients to insolvencies and liquidations, they were impacted by businesses going into survival mode

Eskom, electricity and grid failure were ‘absent’

You might be surprised to learn that the words Eskom; electricity; and grid failure did not feature in the publication, though the survey was completed in the first half of 2022, before the extent of Eskom’s woes were properly understood. So, what was ‘top of mind’ among South Africa’s large brokers 12-months ago? Here are a couple of the concerns raised, plus a few anonymous quotes that made it into the copy: 

  • Lacklustre economic growth. Both commercial and personal lines brokers felt that growth would come from shifts in market share rather than new business. The survey participants also speculated that low growth would contribute to consolidation in the broker market in coming years. Broker’s view: “South Africa Inc has shrunk, and that leaves competitors in the broker and insurer segment competing for a dwindling market”. 
  • The pass-through effect of regulation. One of the major gripes from 12-months back is that brokers had to deal with their own compliance load in addition to new requirements being sent down from insurers. As one broker commented: “The audits that we have from large underwriters; the back and forth of information between broker and insurers; and the continuous changing of agreements and documents adds an enormous burden on top of our own compliance requirements”. 
  • Risks in proportional regulation being introduced in COFI. This was interesting observation made more relevant as the Conduct of Financial Institutions (COFI) Bill implementation draws near. A broker explained the problem as follows: “This law fundamentally changes the rules by taking away decades of legal precedent [with the resulting situation akin to] local brokers and insurers re-learning the rules as they play the game”. 

No joking about hardening insurance market

The brokers who participated in the 2022 Stokes Media Broker Perception Study were well-informed about their operating environment. And though they missed the grid failure exclusion curveball, they were spot on in forecasting today’s (still) hardening insurance market. The brokers who participated in the survey agreed that insurance and reinsurance markets were hardening, and that premiums were going up across the board: “And although capacity was broadly available, brokers were finding that they needed to go to more underwriters to get their slips filled, especially for complex and large risks”. 

Then, like today, brokers faced premium increases, capacity constraints, cover restrictions and higher retentions across insurance classes. As one broker observed: “For the first time, the local market and Lloyd’s are in lockstep: both are increasing prices; both are restricting terms; both are restricting coverage in varying degrees”. There were complaints about renewal periods being extended as brokers went in search of capacity and of insurers’ risk mitigation requirements being “impractical”, among others. Brokers complained that reinsurers were introducing onerous risk mitigation requirements with the likelihood that brokers would struggle to find cover for certain industries and sectors. This observation proved prophetic because although grid failure was not mentioned by name, it is the exact response that brokers warned of. 

The line of ‘insurer relevance’ questioning that we included in the 2022 survey seems relevant today too. Back then, we interrogated brokers on whether or not underwriters could remain relevant in the context of a growing list of cover exclusions; the industry’s response to business interruption (BI) claims through pandemic; and emerging systemic risks, among others. The participants took a pragmatic stance, saying that reinsurers had no choice but to manage their businesses sustainably. Brokers were just as insightful when quizzed on how the industry should meet climate, cyber and other systemic risks. 

Cyber liability flagged as the next Black Swan

At the time, brokers warned that the next Black Swan loss event could occur in the cyber liability space; that solutions for pandemic cover may have to be structured at government level; that insurance was truly international, with losses in the US or Asia filtering into Africa markets and elsewhere; and that systemic risks need to fall squarely within the clients’ risk management function. As a large national broker noted: “Insured risks are typically only 15% of an organisation’s risk profile; if there is no insurance available, then there are a range of alternative risk transfer (ART) solutions to consider”. 

As you read the 2022 Stokes Media Broker Perception Study, you will discover that the challenges brokers face today are exactly as expected 12-months ago. Furthermore, most of the concerns raised at the time remain relevant midway through 2023. To conclude, although brokers did not name grid failure as a likely future exclusion, they were accurate in predicting that insurers and reinsurers would take difficult decisions to protect the industry. The writer’s parting plea to brokers is to be on the lookout for your invitation to participate in the 2023 study. 

Follow the writer on

LinkedIn: https://www.linkedin.com/in/gareth-stokes-media/

Twitter: @stokesmedia

Comments

Added by Beldo Sambo, 25 May 2023
Interesting read, but as the market hardens insurers and reinsurers can only take measures to protect themselves and sustain the industry. Very good insight that brokers were in the know of the tough exclusions that would be implemented.
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