Dynamic brokers will be rewarded
Non-life insurance loss events on the back of the COVID-19 pandemic, looting and rioting in parts of Gauteng and KwaZulu-Natal (KZN) in July 2021 and the flooding along the KZN coastline in April 2022 have forced local insurers and reinsurers to rethink the business of insurance. The catchphrase this writer has chosen to introduce today’s discussion is evolution or redundancy because refusing to evolve your financial or risk advice business is akin driving a late-1950s, Russia-manufactured T-55 battle tank into a 2024 drone battle.
Step-change in reinsurance outlook
“There has been a massive proliferation of large loss events over the past three- to five-years,” said Iain Macindoe, CEO at reinsurance and financial solutions provider, Resilea, as he kicked-off of a ‘trends and challenges in global and local reinsurance’ presentation to the latest Insure Talk 39 webinar, held February 2024.
His opening observation was the global reinsurance industry had historically seen South Africa as a non-catastrophe accumulating territory due to a paucity of major in-country loss events. “Yes, there would be the occasional major hail loss in Gauteng but overall, the severity of such events was not bad,” he said. Since 2020, the outlook has changed dramatically. To get to grips with the local reinsurance landscape, one must first consider the global context.
Over the last few years, global reinsurers have struggled to meet shareholders’ return expectations. In response to pressures on their bottom line, “reinsurers started to reduce capacity substantially, particularly in the property classes,” Macindoe explained. “There was also a fundamental shift out of property as they sought to rebalance their portfolios”. This shift exhibited as reinsurers expanding going beyond mono-line commercial property lines into areas such as aviation, marine and liability, to name a few.
Addressing the risk exposure imbalance
At around the same time, reinsurers set out to restore the risk exposure imbalance that had developed between the insurer and reinsurer markets. “For too long, the reinsurers had been taking on larger risk and catastrophe losses, thus landing themselves in poor loss ratio position; in their analysis the insurers had been making good money [over the period 2015-2022] while reinsurers were making losses,” Macindoe said. To address this, reinsurers have taken corrective actions such as a drop in commission and a proliferation of exclusion clauses. A lot of the terms and conditions in reinsurance treaties have changed too!
In the South African context, reinsurers have become more insistent on setting commissions and premiums in line with the loss ratios achieved by their insurer and underwriting management agency (UMA) partners. “If the insurer or UMA cannot produce a decent loss ratio [it impacts the reinsurer’s] ability to run their business; the reinsurers reacted by increasing their margins because they had been trading in a loss position for too long,” Macindoe said. He added that the present day reinsurance marketplace was working on addressing the profitability issue alongside restoring the ‘scale of justice’ to ensure that all stakeholders in the insurance and reinsurance chain were taking on a reasonable share of the losses.
Slicing and dicing a property reinsurance book
From the reinsurer’s perspective, the typical property account is divided between commissions to the retail broker (20%); the reinsurer’s margin of between 7.5 and 10%; and around 15% to cover the cost of capital and reinsurers’ operating expenses. This leaves just over 57% for the insurer or UMA to ‘play’ with; if they write business where losses exceed this amount, they end up having to cut business costs or eat into their own margins or capital. The bottom line is that all stakeholders in the insurance industry need to keep loss ratios in check. PS, the above commission breakdown did not consider situations that might arise if binder arrangements were in place.
According to Macindoe, insurers and UMAs can get an edge over the competition by partnering with intermediaries or solution providers that give them an edge in areas such as data analysis, generally, and extensive modelling of address-specific risks. “Our risk rating models are geocoded [to offer a more accurate view of risk] and bespoke to each of the clients that we do business with,” he said. “We also have earthquake, flood and other hazard models that can be differentiated to reveal what the risk landscape looks like”. The more data available, the better your understanding of SA-specific catastrophe exposures becomes.
Price is not the deal clincher it once was
There is a growing realisation among South Africa’s retail broking community that price is no longer a competitive advantage. “The view has fundamentally changed, and insurance and reinsurance can no longer be done on that basis,” Macindoe said. Instead, retail brokers are seeking growth through ensuring that underinsured risks are appropriately mitigated and transferred and that costs are kept in check through, for example, efficient procurement arrangements. It is also imperative that brokers’ insurance and reinsurance partners can provide information on average cost of claims, claims type, incident rates and multi-claimants, among others.
Risk mitigation has become a major sticking point in the South African insurance landscape due to many insureds failing to implement the risk recommendations set out in their surveys. Macindoe said that in the past, it was quite common for risk recommendations to be noted in a survey and simply not carried out. For example, a warehouse might be placed on risk with a recommendation to install a sprinkler system, then suffer a loss three years down the line without any follow through. “These recommendations have thus turned into warranties,” he said. And insureds have no choice but to be more hands-on in the risk mitigation area.
Better risk mitigation begets capacity
Another observation shared during the presentation was that today’s insurance and reinsurance landscape is dominated by capacity rather than price. “If you cannot find the capacity, then price becomes irrelevant,” Macindoe said, before adding that reinsurers’ appetites for risk were influenced by the risk management metrics of their insurer or UMA clients. Furthermore, capacity is flowing (sic) to those who have better long-term track records of mitigating risk.
One of the consequences of this trend is that reinsurers are taking bigger slices of South Africa’s well-managed large retail brokers’ books. By taking larger broker-centric exposures, these reinsurers improve their own profit and loss accounts and achieve greater efficacy for the class of business these brokers bring to market. In Resilea’s experience, these types of partnerships combined with improved data analysis lead to quick improvements in loss ratios.
“There needs to be a big drive for brokers, insurers, reinsurers, UMAs and wholesale retail brokers to come together and to communicate more on how we can help each other,” Macindoe concluded. “We need to rethink the various distribution channels to be in a position where we can assist each other in producing better loss ratios, better margins and better underwriting results to the benefit of the overall industry”.
Writer’s thoughts:
Brokers, insurers and UMAs cannot navigate the local risk landscape without knowledge of global reinsurance trends. Are you comfortable with reinsurers’ recent underwriting interventions in local markets, or are they making it too difficult to renew or write business? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
