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Protecting your clients from pandemic, riot and war

31 March 2022 Gareth Stokes

The last 24-months have brought countless opportunities to illustrate both the limitations and strengths of South Africa’s non-life insurance industry. Local general and special risks insurers, with support from their reinsurance partners and shareholders, have made good on contractual obligations to their insureds following significant pandemic- and riot-related claims. They have paid out billions of rand to settle claims in 2020, 2021 and year-to-date 2022.

Dynamic business and risk environment

Towards the end of Q1 2022 insurers and insurance brokers and their individual and commercial clients were getting ready to ‘make hay’ from the country’s post-pandemic economic growth prospects; but alas, Russia had other plans. So, instead of powering ahead, we are plying our respective trades against the backdrop of constrained supply chains; global inflation; and the real threat of the Russia-Ukraine conflict spilling over into the rest of Europe. Russia launched what it insists was a “special military operation” within Ukraine’s territories around 24 February 2022. Sadly, the news footage reveals a massive military incursion that continues to cause death and injury to innocent civilians and untold damage to infrastructure to this day. 

“It is often said that change is the only constant, and nothing has made that more apparent than Covid-19; between the pandemic and the losses caused by the July 2021 political unrest, it has become clear that failing to prepare is preparing to fail, especially from a risk perspective,” writes Edward Gibbens, Executive Head: Commercial and Personal Lines at Santam, in an article examining the changing nature of risk. He adds that the ever-changing risk landscape requires businesses to take a more proactive approach to risk management and risk mitigation than at any time previously. The Russia-Ukraine conflict, although not a direct or immediate threat to local businesses, introduces various challenges to businesses with operations or trading partners in the affected countries. 

Insurance brokers understand risk

Insurance brokers plying their trade in the fast-paced commercial insurance market will be quite familiar with  insurers’ growing risk mitigation demands. For example, those wishing to place large commercial clients’ buildings on cover against fire risk have had to comply with tougher underwriting requirements for some time. Sprinkler systems are non-negotiable, and premium increases are inevitable despite such mitigation measures being put in place. Going forward, business owners will have to think carefully about a range of other risk factors too. “Poor infrastructure, cybercrime and large-scale workplace changes that have come about because of Covid-19 have had a profound effect on insurance for businesses and corporations,” comments Gibbens. 

South Africa’s ailing infrastructure is a major bugbear for insurers, who would love to be able to place insurance covers in a perfect world. The trouble is that many local municipalities are bordering on dysfunctional, as exhibited by the not-so-long-ago decision by Clover to relocate an entire cheese factory from Lichtenburg to eThekwini. The firm sited “ongoing poor service delivery” by the local municipality as the main reason for its decision. Santam laments “the impact of deteriorating power, water, port, rail and road infrastructure” on businesses and the business of insurance. Infrastructure decay “stifles economic growth and reduces the country’s ability to put a dent in its unemployment numbers” while making insurance cover more expensive.

An obvious hindrance

You do not need an advanced degree to see the problem. “A lack of fire hydrants or inadequate stormwater drainage, for example, may result in greater fire or flooding damage than would otherwise have been the case; this filters through into a higher cost of insurance, ultimately reducing resilience and access to capital,” writes Gibbens. Poor infrastructure stood out among a handful of key risks flagged in the insurer’s 2021 Santam Barometer Report, which surveyed 400 commercial and corporate entitles and 150 intermediaries. Other issues that are top-of-mind among insurance brokers and business owners include the accelerating rate of change brought on by pandemic; future systemic risks in the climate change and pandemic context; and cybercrime. 

Cybercrime is a great place to begin, given that many non-life insurance brokers believe the industry’s next Black Swan event will emerge in this area. You can see reminders of the threat posed by bad actors in cyber space each day, as highlighted by the recent extortion demands made against TransUnion South Africa. Hackers reportedly demanded US$15 million from the firm to prevent them from releasing more than 50 million data records that it seems were lifted from TransUnion’s servers some years earlier. Market commentators reckon the source of the data was an old Home Affairs database stored by the firm, but the details are moot. What is real is the business interruption and regulatory exposures that the firm now faces. 

Could the cons outweigh the pros?

“The rapid adoption of technology has allowed many businesses to operate more efficiently; staff are now able to work remotely, which has equipped organisations with the ability to gather talent from a variety of locales without needing to physically be there,” writes Gibbens, describing some of the positives from the work-from-home revolution. “Unfortunately, it also increases the potential risk of cybercrime”. The insurer referenced last year’s cyberattack on Transnet as an example of the carnage that cybercrime is causing. South Africa’s port authority suffered a major cyber setback that left trucks stranded at the Durban port for up to 14-hours and left the port operating at just 10% of its capacity. Such incidents have huge business continuity and insurance consequences. 

Per the 2021 Santam Barometer, roughly 45% of the commercial intermediaries surveyed identified cybercrime as a key emerging risk, whereas only 36% of commercial and corporate entities agreed. This number was unchanged from the 2019 survey despite a significantly larger sample size. “This goes some way towards explaining why we have not seen a proportionate increase in the demand for cyber insurance cover, even though the growth in both working from home and digital communication have materially increased cybercrime risk,” surmises Gibbens. 

Systemic risks, meanwhile, are described as vulnerabilities in a system that can lead to widespread losses to individuals, businesses, industries and even countries. The pandemic and subsequent national lockdown is a great example, as is the rioting that afflicted parts of Gauteng and KwaZulu-Natal in July 2021. The insurance industry protected against these risks, but it is unclear how it will respond in the future. “Riots, coupled with the risks associated with climate change and pandemic, have resulted in higher premiums in insurance and reinsurance contracts locally and globally; the knock-on effect has been a reduced capacity in certain lines of insurance for insurers and reinsurers alike,” notes Gibbens. And, of course, insurance coverage is often reduced while premiums go up. 

Insurance: integral to business and the economy

We conclude this piece with the oft-repeated line that a thriving insurance sector is an integral part of any healthy economy. In his article, Gibbens points out that insurance not only makes people and businesses more resilient but also serves as a prerequisite for borrowing and gaining access to capital, both activities being necessary to maintain a robust and dynamic economy. 

His closing paragraph reminds readers of the need to prioritise risk management to deal with future risks. “The industry must shift the collective mindset from one of risk transfer to one of holistic risk management; we want to see the industry move from repairing and reimbursing clients after a loss to more investment in risk preparedness, so that insurers can add value every step of the way,” he concludes. 

Writer’s thoughts:
There is little doubt that the evolving risk landscape is making it more difficult to place certain risks on cover. What are your on-the-ground experiences of South Africa’s risk landscape circa 2022? Can you share any examples of risks that you are struggling to place for your commercial clients? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

 

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Added by Suran Singh, 13 Apr 2022
interesting articles
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