Sector battles mother nature
New climate change-related catastrophes of recent years have caught SA insurers off-guard and cost them billions
The world lost $344bn to weather-related disasters last year and insurers paid out $132bn in climate-related claims. It was the second-costliest year on record, data collected by the global insurance giant, Aon shows. Insurance losses for last year alone were
163% higher than the average recorded from 2000 to 2016. Can it get worse than 2017?
“We don’t know, and the question is: what will happen if claims continue to rise?” says Tim Ingham, an insurance dispute lawyer, who was nicknamed the weather man at Norton Rose Fulbright law firm. SA experienced a number of catastrophic events last year: devastating storms in three provinces, the Western Cape droughts and the Knysna fires. While local insurers previously benefited from the view that SA was not prone to natural catastrophes, they may start to pay higher reinsurance rates. Ingham predicts that if the trend in losses related to weather events worsens, we could start to see exclusions of weather-related events and uninsurablility could become a serious problem.
While it is the nature of shortterm insurance to deal with disasters, weather patterns of late have gone beyond what existing underwriting models had priced in. As a result, most markets have experienced declines in profitability of nonlife insurance, and though some improvements in pricing were observed last year, re-insurer Swiss Re says the market remains in a phase of below-average profitability. Swiss Re’s latest Sigma report estimates that underwriting margins need to improve by at least 6 to 9 percentage points in major Western markets. The situation is not different in SA.
For instance, the country’s largest short-term insurer, Santam, only recovered its net underwriting margin — a measure of profitability — to the upper scale of its target range recently, when it announced that its margin stood at 8.4% in June. Just a year earlier, Santam’s net operating margin stood at 4.2%.
Santam’s weather-related claims jumped from around R600m in 2016 to R2.1bn in 2017. Just a decade earlier, catastrophe claims paid out by the insurer stood at just R300m when adjusted for inflation.
“Most catastrophes in SA are as a result of weather-related events. One exception may be considered to be fires, though the Knysna fires of 2017 were widely considered to have been driven by climate-related factors,” says Santam’s chief underwriting officer John Melville.
He says there will always be catastrophic events that cannot be avoided, especially weather-related incidents as SA undergoes more and more of them. However, the price of insurance doesn’t have to increase drastically, he says.
“If as an industry we contribute in the right manner to ensure that the risks we insure are adequately protected, this will allow insurance to remain affordable to the majority of South Africans,” he says.
Rikus Visser, head of PSG Insure, says exposure to catastrophes has the biggest influence on insurers’ underwriting margins, which ultimately affects the premiums charged to consumers.
“To maintain a healthy margin we’ll have to understand and properly price our risks.”
He says as the nature of risks insurers have to underwrite changes, data analytics and experiences of other markets that have had more exposure to weatherrelated events and technological advances will play a big role.
“To cater for changing customer needs and weather patterns, we are going to need new products to be developed but we need to accurately price them so that we don’t incur huge losses or price ourselves out of the market.”
Melville says catastrophe events related to urban growth and insufficient infrastructure development have a severe impact on insurance loss ratios. However, other factors making short-term insurance more challenging are changing client behaviour, shrinking disposable incomes as well as governance and regulatory changes.
“Doing general insurance business over the next number of years will be more complex due to systemic and interconnectedness of key future drivers. But it will present forward-thinking organisations with tremendous opportunities to add value to society and close the risk-protection gap in
SA,” he says.
As if the current environment is not challenging enough; SA insurers may have to deal with claims arising from land expropriation without compensation as well. Insurers can usually recover expropriation losses by taking governments to court if expropriation was done illegally. But Michael Chrinos, a consultant at Norton Rose Fulbright, told insurers during an insurance seminar to look at the legal implications of the changing short-term insurance risks, that it will be difficult to recover any insurance losses arising from land expropriation in SA because it will be done legally.
What it means: Insurers face challenges caused by natural disasters as well as the legal issues brought about by land expropriation