Managing risk will be crucial
• Market is expected to harden in next 12 months, writes Alf James
The short-term insurance industry is coming off a prolonged period of soft market conditions characterised by a low degree of losses, ample insurance capacity and intense competition between insurers for the available premium pool with the net effect of brokers being able to negotiate better deals in a market in which prices were decreasing and cover widening, according to Neels Kornelius, head of business development for Willis Towers Watson SA.
He says for about the past 10 years corporate insurance rates have been declining year on year. This has only been seen in the upper end of the corporate market whereas the personal lines insurance market, including motor insurance and individual house-owner insurance, is driven much more by analytics and claims history.
However, Kornelius says that a few occurrences have acted in concert to change the soft market conditions.
“At the beginning of this year there was a warehouse fire in Durban that was a big insured loss after which we had a fire at the Braam Park Office facility in Braamfontein in Johannesburg, which was also a major loss.
“We then had the Knysna fires, which although not corporate losses, negatively impacted the results of the country’s short-term insurers.
“Following these, there was a damaging series of hurricanes in the US that has drastically impacted the results of all the major global reinsurers on which our South African insurance companies depend for reinsurance capacity.
“The combination of these factors served to turn the market, which we expect to harden drastically over the course of the next 12 months.
“This will manifest in insurers insisting on higher levels of self-insurance by clients in the form of deductibles; the scope of cover constricting, with insurers either charging for or removing peripheral covers to the policy and cover extensions that used to be added to the policy at no additional premium, like contingent business interruption, and losses of suppliers and customers that impact the business; and, lastly, premium rates will increase.
“Insurers are likely to become more selective, taking a closer look at the quality of the risks that they are willing to accept and interrogating the client’s risk management practices, so the information demands by the insurers from their clients that flow via the intermediaries will ratchet up.
“Brokers will have to start the policy renewal process earlier, because the information demands from insurers will be more comprehensive than in the past,” says Kornelius.
He says the hardening market conditions will impact intermediaries, because the advice and amount of communication they offer clients will increase substantially while the market pricing is likely to demand more negotiating to attempt to maintain pricing and scope of cover with the underwriters.
“Brokers will need to be more thorough in advising their clients, negotiating on their behalf and structuring the policy renewal process.”
Kornelius says key to coping with the hardening market conditions is the improving of risk management, which varies from simply upgrading the maintenance of facilities to ensuring that business continuity programmes are well structured — all aspects of how clients manage their own risk and whether they act proactively will be scrutinised by insurers to determine whether the quality of risk is acceptable or not.
“The demands on companies’ risk management function are intensifying with the fourth generation of the King Report on corporate governance and the third generation of risk managers coming to the fore.
“The first generation of risk managers were compliance driven and focused on satisfying the regulatory requirements. The second generation did good work establishing a culture of risk management and integrating the risk function in businesses as a tool that line management could use from day to day.
“Now, we are seeing the third generation of risk managers emerging who are influenced by King 4 and want to see risk management evolve from a discreet management discipline into a function that is fully integrated into companies’ management systems.”
He believes responsibility for the risk management function varies within companies.
In many companies risk management is still wrapped up together with internal audit, effectively reporting into the finance function of the business, but the risk management function is becoming part of the responsibility of an enterprise risk manager.
“In companies that are more mature in their risk management thinking the risk management function will report directly to the financial director or to the legal compliance compartment.
“In a few select cases, where the CEO really understands the value of risk management, we have seen risk officers reporting directly to the CEO.”
Kornelius says the risk management consultancy sector is also growing in SA.
“There is a wide range of risk-management consultancy services being offered, because it means different things to different firms. Also, there are several levels to risk management, starting at the operational level on the factory floor and extending to the corporate level where the risk management function looks at enterprise risk and King 3 or 4 compliance at board level.
“Risk management is a burgeoning business in this country with a strong professional body, the Institute of Risk Management SA, which is on a par with the best in the world,” says Kornelius.