“Is the insurance industry doing enough?”

Reinsurance forms an important part of the financial services industry as it is a major contributor to the industry’s sustainability. However, over the past few years, the number of natural catastrophe’s and other risks has risen within the financial services industry. This has put the industry’s sustainability under severe pressure at times.

At an event which was recently hosted by the Insurance Institute of Gauteng, the issue of this sustainability came under the spotlight.  

On the rise

Thabo Twalo, Chief Underwriting Officer at Munich RE, pointed out that the number of relevant loss events has increased by an average of around 3%/year since 1980. This has had a significant impact on the financial services industry. 

“Natural disasters caused high losses of $160 billion in 2018. This was roughly half of the losses experienced in 2017 ($350 billion) but more than the long-term average of $140 billion. At approximately $80bn, insured losses were far above the average of the last 30 years ($ 41 billion), although less than the previous year ($140 billion),” said Twalo. 

Twalo pointed out that overall losses (adjusted for inflation) from natural catastrophes have risen significantly over time. Scientists believe climate change already influences extreme weather events. Scientists further predict an ever-clearer signal in the future, varying between regions and types of events. 

“We have also seen that the rise in loss ratios is a trend which is being driven by economic growth (higher exposed values). Vulnerability is also significantly impacting losses,” said Twalo. 

Significant gaps

Natural catastrophes are on the rise in Africa and the insurance gap in this market is more pronounced than anywhere else in the world. 

According to the Munich RE NatCatService 2019 survey, there were just under 60 catastrophe events in 2000 in Africa alone. This increased to over 80 events in 2014, and from 80 events in 2014 to over 110 events in 2018. 

 Over 70 of the losses due natural catastrophe events that were recorded in 2018 were caused by floods. Thirty-nine of the loss events in that year were caused by meteorological events such as tropical cyclones, extratropical storms, convective storms or local storms. 

Are we doing enough?

Twalo pointed out that the fact that there is such a significant gap between actual losses and insured losses is concerning. 

“There is still work for the insurance industry to do as the insured losses are not where they should be. The industry needs to make more of an effort,” said Twalo. 

2017 was a particularly bad year for South Africa in terms of losses suffered by natural catastrophe events. According to Twalo, the losses suffered from the 2017 Knysna fires amounted to $420 million. However, the insured losses from the Knysna fires only amounted to $200 million. 

“What is key to note is that there were 10 fatalities in the Knysna fire event. We have just recovered from Cyclone Idai, and while there have been no calculations on the losses, the fatalities from this event was over 1 000. My own feeling is that the direct losses from the event may come close to $775 million,” said Twalo. 

Natural catastrophes have an even bigger effect on certain economies. “What’s sad is that at one stage, Mozambique was one of the worlds fastest growing economies, events such as Cyclone Idai have a significant effect on this growth pushing the country back into poverty because of the lack of insurance penetration,” said Twalo. 

Reinsurance challenges

What are some of the challenges that faces the reinsurance industry? 

“Climate change makes losses even less predictable. Technology is having a major impact on the reinsurance industry. Improved technology (driverless vehicles) reduces the need for insurance and the interconnectedness of the industry means a single event can have wide impact. Increasingly complex products can result in unseen challenges and sustained low interest rates have made the reinsurance industry attractive to new entrants such as pension funds. The pace of development has also (perhaps) been too fast compared to the skills of the industry’s labour force. Our methods of production and products are all increasing in complexity; increasing the likelihood of a loss,” said Twalo. 

Editor’s Thoughts:
The insurance industry exists in a fine balance where losses need to be managed. With loss events increasing, how long will this balance last before it is challenged? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.