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Investigating a changing insurance market

16 January 2020
Terence Williams, CEO of Aon South Africa

Terence Williams, CEO of Aon South Africa

The insurance market, according to Terence Williams, CEO of Aon South Africa, is in the midst of its most consistent shift in a number of years. “In certain countries, sectors and lines of business, buyers are experiencing rate increases, capacity shortages, and a more critical attitude from insurers towards risk selection,” said Williams.

A time of unprecedented volatility

“Business operates in a time of unprecedented volatility across economics, demographics and geopolitics and as these risks evolve, business leaders can no longer rely on traditional risk mitigation tactics. Risks exist beyond the traditional loss or theft of property, equipment and other assets, to devastating weather catastrophes, cyber hacks, riots, personal liability, fraud, organised crime and class action lawsuits. More than ever, risk managers must explore new ways to cope with evolving and heavily inter-related complexities, added Williams. 

“Definitive risk trends are emerging, and sophisticated data and analytics models are providing powerful insights not only into historical patterns, but into the future risks facing the corporate sector. Successful companies will be the ones that prepare themselves thoroughly to anticipate future needs and undertake the difficult process of finding solutions to address them,” continued Williams. 

What are the drivers of this change?

According to Williams, the drivers of change are: 

  1. Unprecedented loss levels. For insurance buyers, the impact is starting to be felt in terms of rate increases, capacity constraints, tightening terms and conditions, and growing insurer scrutiny on risk management practices.
  2. Evolving buyer demands. As organisations evolve through fundamental changes in their business models, it raises the question - are traditional insurance products keeping pace?
  3. Changing exposures. Key risks are evolving towards brand, reputation, intellectual property, crypto currency, cyber and non-damage business interruption – challenging insurers to develop products for intangible exposures. People risks are also evolving with declining health patterns leading to increased non-communicable diseases and chronic conditions. The growing demand for Corporate Social Responsibility and Environmental, Social and Governance factors have impacted the industry and resulted in increasingly ‘ethical’ underwriting behaviour - for example, some insurers have ceased writing thermal power and coal risks.
  4. Reinsurance pressures. On the treaty side, 2019’s January reinsurance renewals saw some territories less impacted than others when it comes to rate rises, and there was in general, less of a flow through to the direct market than initially expected. In recent years, some direct insurers have consolidated their treaties and taken higher net retentions to reduce their reinsurance costs. This has hit their profitability in the face of the high levels of losses they’ve had to carry without reinsurance recoverable.
  5. Increased cost of doing business. The rush to updating and maximising the efficiency of working processes and leveraging data to innovate products, improve services and speed up claims settlements has started. The cost of compliance, technology, digitisation and salaries has increased exponentially over the past years. Insurers are forced to sell insurance at a price prevailing in the market. Hence, they can only become profitable if they control costs.
  6. Political unrest/uncertainty. Violent service delivery protests spurred by service delivery failures, corruption and growing youth unemployment have become commonplace in South Africa– and virtually all exacerbated by criminal elements. Businesses could find themselves severely out of pocket if their assets are damaged during a violent protest and they do not have Sasria cover in place. 

Key market trends

According to Williams, the key market trends are: 

  1. Risk readiness is falling but volatility is growing. Businesses are slow to develop and implement new risk and insurance programs in the face of evolving risks such as cyber security and political risk.
  2. A widening skills gap and widening social discontent. Uncertainty around politics and economics are likely to widen SA’s skills shortages as an exodus of skilled people takes place, placing companies under pressure to afford and retain top talent.
  3. Political risks are a global challenge. Developed nations traditionally associated with political stability are becoming new sources of volatility and uncertainty that worry businesses.
  4. Capacity constraints, insurer withdrawals and consolidation are creating challenges in Financial Lines. The professional indemnity insurance market continues to deteriorate and has become severe for some industries. Increased claims activity and several large settlements have tipped insurer’s loss ratios to unprofitable. As the market hardens, underwriting agencies are becoming more relevant as they can provide quality capacity on the larger and hard to place PI placements. D&O insurance market conditions continue to deteriorate with premium increases needed to generate a sustainable rate level to cover. Demand for credit insurance continues to grow as trade becomes increasingly global. However, the market is clearly cyclical, with a strong correlation with GDP. Cybersecurity vulnerabilities are being addressed through tightened pricing and retention guidelines.
  5. Weather catastrophes to intensify with climate change. Property-related and business interruption losses as a result of fire and weather catastrophes have increased dramatically in South Africa, yet businesses remain under-insured for the financial impact of weather-related and uncontrollable losses.
  6. Business interruption risks intensify. BI has been on the Top 10 list of risks since Aon’s Global Risk Management survey started in 2007. As supply chains become global, there is increasing interdependency among companies, which in turn is heavily affected by incidents that turn into unexpected disruptions. 

What does this mean for insurance buyers?

“While the market cannot yet be called a hard market across all lines, it is entering a transitionary phase. The extent to which this transition impacts buyers will vary by line of business, and for some buyers it will already be making its presence felt,” said Williams. 

“Start preparing now. Renewal timeframes are generally becoming longer which means the whole process must start much earlier and with more preparation and detail. Companies in distressed sectors may struggle to get cover at an acceptable price. Buyers are potentially being asked to pay more for risk transfer, as well as taking higher retentions and refocusing on the quality of their risk. The quality of the risk submission will become more important to ensure optimal renewal terms. Organisations will need to articulate to the insurance market how their risk is better managed than their peers,” added Williams. 

“Explore alternative risk financing options. The trend towards increased retentions will almost certainly lead to more extensive utilisation of captives, even from organisations that may have previously discounted this approach due to a lack of scale. Justify the approach to risk. Companies will have to increasingly reconsider and justify their approach to risk and the degree of insurance cover that they have in place. Review policy wordings. As insurers focus on the breadth of policy wordings, buyers need to carefully review the relevance of their wordings. When were wordings last reviewed? Is cover still relevant to the risk profile? Refresh risk assessment processes. Bring the insurance buying function and enterprise risk management (ERM) team more closely together to better inform perspectives on risk profile and the control environment. The risk management function may need to help the C-suite in their organisations to understand how this shift might affect the business from a cost and volatility perspective,” concluded Williams. 

Writer’s Thoughts:
The risk landscape is evolving and continues to do so. As Williams mentions, successful companies will be the ones that prepare themselves thoroughly to anticipate future needs and undertake the difficult process of finding solutions to address them. Risk managers must explore new ways to cope with evolving and heavily inter-related complexities. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Paul , 16 Jan 2020
Seems to me that IT and the computer industry are the cause of most of our problems both criminal and health(sorry biotec,you are excluded!).
Maybe filing cabinets and dial phones were actually the answer?
However kids cant be wrong can they?
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