Insurers and consumers are between a rock and a hard place
• While climate and geopolitical risks accelerate, SA has to contend with a squeeze on incomes
The non-life insurance industry is increasingly operating in an environment of elevated risk, shrouded in uncertainty. This is set against the backdrop of a stagnant economy, with little expectation for a substantial shift in the macroeconomic environment in the foreseeable future.
Given that 2024 is an election year, a glimmer of relief may be on the horizon for consumers, who faced a costof-living crisis in 2023. However, the extent of this reprieve is expected to be marginal, leaving the non-life insurance market for 2024 at an intersection of heightened risk and cautious optimism.
Of all the threats faced by the short-term insurance industry in SA and globally, climate change and extreme weather events such as flooding, hailstorms and fires are wreaking havoc. These are becoming more common and more frequent, which is affecting the overall risk landscape and making pricing of risk challenging.
Last year’s floods weren’t on the scale of the KwaZulu-Natal flooding of 2022, but storms in the Western Cape in June and September had disastrous consequences for infrastructure. By contrast, in 2024 we are likely to face the dry weather conditions associated with the El Niño phenomenon.
We are seeing significant claims resulting from single events, which will continue to put pressure on industry players and boutique firms. For example, a recent fire burnt down 50 houses in Mabalingwe Game Reserve in Bela-Bela, Limpopo, which resulted in insurance claims well in excess of R50m.
Due to expected high summer temperatures there will be an elevated fire risk in the first half of 2024.
We think partnerships with experts are going to become crucial for insurers to understand and mitigate exposure to climate change. The work we have done around this with strategic partners means we can understand in detail whether a property can withstand 200ml or 100ml of rain, with satellite data also showing how exposed properties are to potential wildfires. This is important as we start communicating to customers around how to protect against risks.
Reinsurance is to the insurance industry what cocoa is to a chocolate factory: if the cost of cocoa goes up, it has ramifications for the production chain and inevitably increases the cost of the chocolate, and likely its selling price. Over the past few years our reinsurance costs have risen by more than 30%, mirroring the surge in claims submitted to reinsurers. This upward trajectory is expected to persist, rendering our operations more costly.
However, we know that in the current economic climate it is going to be difficult to pass on these costs to customers, who are under severe financial pressure. A delicate balancing act ensues in this competitive market. The challenge lies in reconciling the imperative to remain affordable with the necessity to implement price hikes to offset rising reinsurance costs and remain stable as an insurance business.
This conundrum becomes particularly pronounced when considering differentiated pricing based on individual risk exposures. For example, over time this uncertainty may lead to higher premiums for policyholders who are deemed riskier, say for those who live in areas more vulnerable to climate change.
In 2022 and well into 2023 rising interest rates and inflation put SA consumers under immense pressure. While an interest rate cut may be on the cards in 2024, consumers are likely to remain under stress in the first half of the year.
GEOPOLITICS
We are also seeing how the elevated inflation rate has normalised in certain parts of the insurance value chain — for instance, car part prices. In 2022 our claims inflation for car parts was 20%; that is now down to single digits.
However, heightened geopolitical risk, particularly in the context of the Middle Eastern conflict, could contribute to further cost pressure in the months to come given how major routes such as the Suez Canal are affected.
We are watching this closely and are concerned about the widening insurance gap as the difficult environment makes it harder for customers to continue to pay their insurance premiums. We have already seen a drop in the percentage of motor vehicles insured from 31% to 29% due to affordability concerns. This is alarming as the country — which already suffers a low rate of vehicle coverage — can ill afford for the number of insured drivers to decline even further.
We also don’t know how similar this picture is for home insurance such as household, buildings and content insurance. If we assume it is similar, then the insurance gap is getting bigger. This, together with rising costs, is going to put the burden on the government to assist when catastrophes strike.
In Turkey, for instance, there is universal cover for earthquakes, while in the UK the government provides flood-protection insurance. In other words, if something happens a government insurance policy aids in protecting the vulnerable. With every disaster event the poor are getting poorer. We need to explore ways to close the insurance gap.
Claims resulting from power surges have normalised. More customers are installing alternate power supply to get around load-shedding, but this is also creating a rapidly evolving and challenging risk environment. New solutions are coming online daily.
However, customers need to be aware of the risks associated with alternate power supply, and work with their brokers and insurers. When our customers have installed solar power and can produce a certificate of compliance, we adjust the policy and pricing to reflect they own the asset and cover the risks.
Despite the headwinds, we remain cautiously optimistic about the outlook for 2024.
WE HAVE ALREADY SEEN A DROP IN THE PERCENTAGE OF MOTOR VEHICLES INSURED FROM 31% TO 29%