Is the industry prepared for drivers of change?
We have all come to terms with the fact that we are operating in a vastly different industry than we were operating in five years ago. However, while there are many internal drivers of change, there is an increasing element of external influences of change. This is forcing insurers to refocus their attention on a hybrid business model which can cope with industry drivers of change and external drivers of change.
We have seen and heard how climate change is affecting the industry. The insurance industry was caught off guard in 2012 when hailstorms wreaked havoc on the short-term industry in Gauteng. More surprising for the industry was when the hailstorms happened again in 2013. Just when the industry is preparing itself for another possible hail season, an earthquake hit the central regions of the country.
This leaves us with some peculiar questions. Do insurers have effective disaster modelling strategies to cope with claims arising from these events? If they do not, is it not time to increase their focus on developing these strategies?
Ignoring the law of averages
One of the common denominators about the events which have affected the Highveld area is that they have largely been unpredictable. As pointed out above, the ferocity of both hailstorms put the industry on the back foot. One has to ask if this is a case of becoming complacent or have we ignored the law of averages?
According to Pieter Visser, a Catastrophe Analyst at Aon Benfield, hailstorms are not an uncommon occurrence. “They take place across South Africa on an annual basis, but what makes the Gauteng hailstorms noteworthy is the net retained exposure that the province represents. Gauteng’s built-up area constitutes only 0.5% of South Africa’s land surface area but due to the fact that the area is densely populated, Gauteng constitutes 35% of the exposure to catastrophic events such as hailstorms,” explains Visser.
The growth of lower income households in the property market also presents its own challenges in this respect. “Hail damage to a property that is worth R500 000 and one that is worth R2 million is virtually the same. The cost of replacing a window or a roof for example, equates to the same amount regardless of the property or its location. Even in the motor vehicle insurance market, losses are much higher than in the past due to changing manufacturing methods, increasing costs of vehicle parts and the like,” says Visser.
Improve your value proposition
Insurers will have to look at their pricing methodologies. This may come in the form of increasing rates or implementing higher excess payments that are levied in the event of a catastrophe, such as a hailstorm.
There are however a few things that can be done to mitigate the risk of hail damage and a good place to start would be to adhere to weather warnings. “Home maintenance is critical,” says Mandy Barrett of Aon South Africa. “Roof tiles and windows receive the most damage during a hailstorm, which makes it important to check the quality of roof tiles and the thickness of window glass to protect against damage and injury. The increasing focus on green technology also means that many households have solar geysers and panels that are greatly at risk during a hailstorm due to its structure. It would be wise to check whether these items are included under your homeowners’ insurance cover,” urges Barret.
Shaking the foundations
While the industry is now preparing itself for what could be another significant hail season in terms of claims, the industry was not prepared for the earthquake which hit the town of Orkney in the North West province.
In 2012, only 7.5% of earthquake related losses were covered by insurance according to findings from James Daniell, founder of the CATDAT Damaging Earthquake Database (a historical global catastrophe database compiled by Wills Research Network (WRN) partners).
Christelle Fourie, Managing Director of MUA, says these statistics raise important questions over the preparedness of the insurance industry to deal with such disasters. "The tremor that occurred in Gauteng is a wake-up call to the insurance industry about the need to prepare effectively for large scale disasters."
“While it has yet to be proven that earthquakes are related to climate change, insurers have been among the first to start feeling the effects of natural disasters in the form of increased pay-outs related to severe weather events like floods and storms,” says Fourie.
"In South Africa, most insurers are aware of the implications of climate change but more work needs to be done in order to better understand its full impact. Due to the fact that South Africa is not a country with a recent history of extreme natural disasters, we have become somewhat relaxed about disaster risks, let alone the possibility of loss accumulation – the simultaneous unfolding of two large-scale natural disasters - such as an earthquake and a tsunami, which happened in Japan in 2011."
While insurers are reluctant to quantify the extent of the claims resulting from the earthquake, earlier in the month, ABSA already received 200 claims following the event. Standard Bank received 129 claims while Mutual & Federal received 11 claims. This will however increase in the coming days.
Prepare for the worse
The last earthquake that happened in South Africa before the recent one was in 1969. One cannot blame the industry for not expecting an earthquake after 45 years of not experiencing one.
Reinsurers are going to play an important role in the industry as it comes to terms with these events. Even if insurers are prepared for these events occurring on a more regular basis, they turn to reinsurers when it comes to large volumes of claims. So the key question is: is the role of the reinsurer changing? Randolph Moses, Managing Director of Hannover RE Africa, says that reinsurers are preparing for another year of significant claims, which is a strategy which will continue for the foreseeable future. To watch an exclusive interview with Moses, please click here.
Editor’s Thoughts:
The role of the broker in preparing for a catastrophic event is important. Keeping policyholders up to date over whether they are sufficiently or under insured is becoming an important facet of the broker’s job. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
