Risks in 2023… what are we likely to see?
The insurance industry is going through unprecedented change, locally and globally. FAnews spoke to Qiniso Mthembu, Group Chief Risk Officer at Johannesburg Stock Exchange Limited about the risks in 2023… what we are likely to see, what these risks mean for insurers and more.
2023… what’s in store?
A pretty obvious one, according to Mthembu, relates to failing public infrastructure, specifically energy supply concerns which, from a strict risk perspective, is no longer a risk but an issue. The only uncertainty (risk) around it, Mthembu says, is the potential for a complete grid collapse (national blackout) or higher stages of loadshedding than we’ve seen in the recent past; with more severe implications on the economy.
“This has to be understood in the context of other factors that already confront South Africa and, therefore, have a compounding effect. These include other public infrastructure risks such as ports, rail networks, water, etc. The risk that South Africa loses its prominence as a gateway into Africa continues to rise. It is important that our responses are swift and deliberate. There is no need to wait for a scenario, as we now face with Eskom, before we address these risks as well as exploit the opportunities they present,” said Mthembu.
“Alongside these factors, is the possibility of greylisting and its possible impact on domestic and foreign flows, which would add to the compounding factors already alluded to. In addition, we are likely to see the impact of inflation in the real economy well into mid-2023 and possibly to the end of 2024. This is if one considers the fact that bringing the inflation sustainably to the SARB’s 4.5% target midpoint is likely to be a challenging task and realistically, the headline CPI is unlikely to come back within the upper 6% target range before late Q2 2023 and only possibly approach the 4.5% midpoint by the end of 2024,” added Mthembu.
One has to acknowledge that South Africa’s inflation levels while unprecedented, are low compared to the levels we’ve seen in other jurisdictions. “The challenge, however, is that one has to consider the uniqueness of our socio-economic construct relative to others. The demand side is already weak, consumers are under pressure for various reasons like high interest rates, high unemployment, high debt levels and the increasing cost of living. All of this proves negative for domestic growth,” emphasised Mthembu.
Additional uncertainty concerns
“On the back of this, I point out additional uncertainty concerns that we may confront in the coming year, namely, to what extent do these challenging circumstances stimulate further proliferation of illicit economic activity? We have already witnessed key indicators that this is festering when one considers, for example, the rise in human trafficking, arms smuggling, construction mafia, cable theft, Eskom sabotage, illegal mining, etc. South Africa is losing a large portion of its GDP every year, to the illicit economy and in the context of the tough economic environment predicted going forward, one would suggest that these are likely to only increase. To qualify this, SARS announced that it recovered R8.2 billion in revenue from criminal and illicit economic activities in the 2021/22 financial year. This figure is above its target of R2.5 billion for the year and well above its recoveries of R1.9 billion for the 2020/21 financial year. The key question is, are we equipped to adequately respond, so that this does not further constrain the real economy that is already ailing?” questioned Mthembu.
“Might we see more civil unrest triggered by a range of factors, from the cost-of-living concerns, service delivery and other politically motivated factors? Reflecting on 2022, one concedes that perhaps there isn’t sufficient united condemnation of government to lead to a singular societal uprise. In qualifying this view, I reference the recent failed attempts by some protest groups to incite national shutdowns. Having said that, we do have a reference point in the July 2021 unrest, which cannot be completely ignored when one considers what is possible if there’s a trigger event,” she emphasised.
“Businesses are more than likely to continue to contend with increasing cybersecurity risks as perpetrators become craftier in their methods. Ransomware attacks will continue to be a key risk issue and, therefore, the costs associated with preventing, detecting (and isolating), response and recovery will continue to increase, along with the costs associated with protecting organisational data and that of subjects’ organisations are entrusted with. I will add here that this, in combination with the tough economic environment, is likely to imply that some cybersecurity incidents could very well be instigated from within organisations by employees under growing pressure to make ends meet and as part of the growing illicit economy already addressed earlier. To this end, I add that overall, fraud and other compliance risks are likely to also increase in this context and organisations should continue to strengthen their control environments. Also important, is that management should appreciate that cybersecurity risk is a business risk and not a technology risk, and to that end, all employees should understand the threat vectors and be made to appreciate that they are the organisation’s first line of defence,” she continued.
Mthembu added that with increased geo-political risk concerns and the recent SA response to the Russia/Ukraine war, SA’s foreign policy posture is likely to come into sharper focus in 2023. We need to work harder at removing any perception (real or not) that we could for example, be financing terrorism.
“The year 2022 also saw some very tangible evidence of climate change impacts, notably, the Eastern Cape and KZN floods. In 2023 and beyond, these are going to become harder to ignore. It is encouraging to see the investment we are making towards an effective response to both the physical and transition risks associated with climate change,” she said.
What this means for insurers
Insurers, according to Mthembu, will have to contend with the impacts of rapidly rising inflation which is pushing the costs of losses higher with a negative effect on non-life insurers’ profitability, with motor, accident and general liability likely to be the most significantly hit.
However, she believes the rising interest rates could also be a positive development for insurers, as they promise greater returns on their investment portfolios. For the last decade, low interest rates have been weighing heavily on non-life profitability, as well as posing challenges for life insurers.
“The cost-of-living crisis and anticipated inflationary recession is likely to have another negative impact on the insurance business, as it could result in decreased demand for insurance products, as customers have less money to spend on new policies and some are likely to let their existing policies lapse or will be rate shopping and looking to downsize coverage to the barest minimum or cashing out life insurance,” she said.
“Insuring companies for cyber will continue to be a challenge for insurers, with many possibly finding it to be unviable to take on the risk, further impacting the bottom line for insurers (underwriting losses), while complicating life for businesses looking to get coverage. Of course, we also acknowledge that where insurers may consider underwriting, companies may find it difficult to meet the conditions for cover which imply increased and robust cyber resilience measures which come at significant cost. In the absence of this, organisations can expect rejection for cover, higher premiums and other conditions,” she emphasised.
“In addition, claims from damages to property, businesses, etc. due to the effects of climate change are likely to increase, as the risks continue to escalate and materialise. A further possibility is a rise in declaration of force majeure as businesses struggle to meet demand for a range of reasons outside their control. In 2022, we witnessed Transnet declare a force majeure as their employees engaged in a protracted strike which hindered Transnet’s ability to fulfil its contractual obligations. Sasol followed suit, as they couldn’t fulfil their obligations as a result,” she continued.
Rethinking resilience and continuity
“It has become clearer that organisations need to “rethink” organisational resilience and business continuity. The interconnected risk landscape increases the chances of cascading risks, where one risk causes additional risks to manifest, and organisations need both to appreciate this reality and be adequately prepared to respond sustainably,” said Mthembu.
“It is going to be important for insurance and risk management advisers to understand the implications of the risks already discussed on business, and to identify, as well as leverage opportunities that enable them to, for example, roll out fee-based, value-added services and possibly explore the introduction of new non-insurance services. This will enable them to offset declines in premiums and active policies. Alongside revenue optimisation, it will be important to consider cost reduction measures, while looking to continue to leverage technology which may be a difficult balance to achieve as tech is generally a key spend area out of necessity to remain competitive,” she concluded.
Writer’s thoughts
With risks festering… the year 2023 looks set to be a challenging and interesting year, not just from an economic and business perspective, but all round. Do you agree? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za
