Client centricity, climate change, cyber & digitalisation ‘top of mind’ for financial intermediaries
The power of face-to-face networking was on naked display at the 2022 Financial Intermediaries Association of Southern Africa (FIA) Advice Summit, with around 500 intermediaries reconnecting with one another and interacting with the investment and life and non-life insurance brands that supported the event. The fast-paced programme comprised of almost a dozen 20-minute presentations in which financial product providers expanded on some of the key themes relevant to the financial service sector, and more specifically intermediaries. It turns out that client centricity, climate change, cyber and digitalisation are top of mind among brokers, financial advisers and the product providers they transact through.
Frequency, severity and the average cost of claims
Andrew Coutts, Executive Head of Intermediated Business at non-life insurer Santam, took to the stage to lay bare the myriad challenges to profitable non-life underwriting circa 2022. He reminded the audience that the sustainability of non-life insurers was under threat due to the rising frequency and severity of climate change related extreme weather events, illustrating the impact on global insurers and reinsurers with catastrophe loss data provided by reinsurer Swiss Re. According to Swiss Re, the 10-year moving average of natural catastrophe insured losses sits at 5-7% per annum, going back three decades.
“The biggest risk that we face in our insurance industry is climate change; in 2021 we saw US$270 billion worth of losses in the US alone, of which only 40% were insured,” said Coutts, singling out Cat I climate change events such as hurricanes and earthquakes as the major contributors. Locally, non-life insurers are fighting a range of factors that are driving up the cost of claims. They face the rising claims burden from the dual trends of climate change and cyber risk as well as the inflationary pressures that are a legacy of the pandemic, and more recently a consequence of soaring energy prices following the Russia-Ukraine conflict.
“Consumer Price Inflation (CPI) is at 7.8% which means if you want to be insured for the same value in terms of buying power next year, your policy must increase by 8% before you even consider risk factors,” said Coutts. He added that the combined impact of inflation, shipping price hikes and supply chain disruptions meant that replacement parts for vehicles were inflating at two or three times the official inflation rate. Add to this recent dollar strength against the rand, and the emerging regulatory focus on environmental, social and governance (ESG) objectives, and insurers’ reinstatement, repair and replacement costs are being driven sharply higher.
Loadshedding, rainfall and post-pandemic road usage patterns
There are a couple of trends that are causing local non-life insurers all manner of headache. The first is loadshedding, with the number of loadshedding days reported in 2021 already exceeded in August this year. The second, centres on the unusually high precipitation levels experienced in South Africa during 2021 and 2022, with next year promising more of the same. And the third is the return to normal road usage patterns post-pandemic. “We have power surge claims going through the roof as a result of loadshedding and, of course, significantly higher rainfall has driven the number of building claims significantly higher,” said Coutts. Changing criminal trends; infrastructure decay; and urbanisation are also pushing up the average claim per loss event.
Against this backdrop, non-life insurance brokers will have to start preparing their clients for big surges in both personal lines and commercial insurance premiums. As frequency, severity and average cost per claim continue to climb higher, reinsurers are taking a hard stance insofar the pricing of the reinsurance treaties they enter into with insurers. “There has been a significant reduction in reinsurers’ risk appetite, driven by their desire to avoid some of the volatility introduced by global uncertainty; [for the first time that I can recall] global inflation is now impacting reinsurance pricing,” said Coutts. To make matters worse, reinsurers are enforcing sanctions and big exclusions in certain lines of business and geographies, meaning that insurers can simply not cover certain risks.
An ominous shift in occurrence definitions
The bottom line is that brokers and commercial risk managers will have to pay close attention to insurers’ policy wordings in coming months and years. Coutts pointed out that there were significant changes in the occurrence definitions contained in reinsurers’ catastrophe programmes, and that insurers had little choice but to follow these interpretations in their policy wordings too. All that remained following this ‘doom and gloom’ outlook was for Coutts to offer some suggestions to help brokers, alongside insurers, navigate the perfect storm in such a way to secure the best possible outcomes for their mutual clients.
“We need to find a way to drive financial stability and economic growth … by securing and underwriting risk to enable the lending that is required to grow our economy; by finding ways to contribute to safety and reduce systemic risk; and by standing together as a force for social good,” he explained. “There is no doubt that there is lots of capital in the world; it is about how we apply this capital to make it of value to clients when they need it most”. That is, after all, the underlying principle of insurance: the pooling of risk to make it available to people in their moment of need. And that is what makes insurance an industry with significant purpose, capable of adding real value to the economy and society.
Although product providers have intimate knowledge of the challenges facing their intermediary partners, there is some irony in the fact that most financial advice summit programmes are dominated by insurance and investment experts rather than financial and risk advice professionals. This observation does not, however, detract from the valuable information and insights shared by Coutts and other presenters to the FIA event audience. His conclusion was that the non-life insurance industry would successfully navigate the evolving risk landscape, bringing intermediaries and their clients along for the ride.
Calling for incremental value add for non-life insurance clients
“We will be able to navigate this change together,” concluded Coutts. “New solutions will be needed, because pushing the same risk products at higher and higher prices simply will not work”. The industry’s long-term success is contingent upon a renewed focus on advice and risk management, and innovative ways of engaging with both clients and collaborators digitally. The final plea: “Let us use this fundamental shift in risk to propel us into incremental growth and incremental value add for our mutual clients”.
