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Risks are becoming increasingly complicated to manage: Garth Napier

Risks are becoming increasingly complicated to manage: Garth Napier
03-03-22 / Garth Napier

Risks are becoming increasingly complicated to manage: Garth Napier

The South African insurance industry is a vital socio-economic sector that provides a critical safety net to society. This notion was crystalised in 2021 as we continued to grapple with the fallout from the pandemic and the implications of the disease on the short-term insurance market.  

One of the industry’s highest priorities in 2021 was to get to grips with the court rulings on business interruption claims, and then prioritise settling them as quickly as possible. Old Mutual Insure received a fairly large number of claims however we believed that we should not wait for the court to make a ruling before we offered relief payments to many of our smaller commercial clients - this represented relief to nearly 22% of our clients. 

In January 2021, we embarked on a roadshow to inform all our brokers regarding the next steps are and actively engaged with our service providers to make sure that clients receive priority treatment and proceeded to make sure that interim payments were made to keep the businesses running. We are proud that to date we have already made 225 interim payments. 

We are even more proud to have resolved 89% of the claims received, and the last remaining claims are in the final stages of calculation or are in the Indemnity Period is still in progress.

Another priority that was highlighted as a risk in 2021 is how vulnerable our country’s infrastructure is to cyber-attacks. Many of our government institutions were held to ransom last year, causing major blockages and delays at the supply chain level and in the ports. It is clear that it is no longer a case of if a massive attack happens, but rather when. When hackers sieged Colonial Pipeline for a ransom of $5 million in May this last year, it set off a cascading crisis for the whole East Coast of America for days on end. Our emerging economy simply cannot afford even one such devastating event.

The insurance industry is at a critical juncture as we wrestle with what the increase in cybercrime means for existing policies. On the one hand, commercial customers are keen on a product with specific provisions for attacks related to cyber losses, with the global trend as fewer insurance companies offering policies against cybercrime, saying it simply encourages more such behaviour. On the other hand, we are seeing a demand from individuals for protection against cyber losses, as more individuals use personal devices for banking: This is only going to increase as we rely more on technology. We need to find a solution that will allow insurers to produce a product at an affordable price for customers. 

Another concern that has become critical to manage is the plausible risk of grid failure, which has accelerated in 2021. We have become accustomed to load shedding in winter, but the grid has proved volatile, with power insecurity prevailing throughout the summer months. The implications of grid failure would be catastrophic. One need only think back to 2004 when parts of the USA had grid failure, and how 20 to 30 million people were left without electricity for 2 or 3 days.

The research from the South Africa Insurance Association (SAIA) suggests that a similar event would take our country two to three weeks to get back up and running. And the knock-on effects would be even more devastating: There would be no water due to no pumps being able to operate, failure of security systems, and cell phones would not work given that mobile tower back-up batteries would never outlast such an event. This is a very real risk facing our country and the insurance sector. 

We are also concerned that a repeat of the riots from this year could be on the horizon in 2022. This would devastate the economy and the insurance industry. The implications are that Sasria – who have never before experienced such a level of civil unrest in our young democracy – will be in a very difficult financial position to honour claims on a similar scale to those experienced in 2021. 

From an insurance claims point of view, the industry has experienced reasonably benign figures compared to 2020. This may seem surprising in light of the looting claims and Sasria pay-outs of over R32 billion, but our role was to support SASRIA and most policies had exclusions in place. Motor vehicle claims have decreased and claims as a result of disasters like floods and fires are down, despite the Cape Town fire that happened earlier this year on Table Mountain as well as the recent floods in the Southern Cape as a result of summer rains.

However, we expect this to change in the future, given the massive implications of climate change. This is something we are seriously thinking about and applying to our risk modelling on a daily basis. We don’t have all the answers yet and view climate change as a risk that we are on a journey to unpack. 

Although the impact of the pandemic has been devastating for many, we have seen some positive trends in insurance. 

Firstly, we have seen new business models emerge in the agricultural space. Online auctions were not a reality prior to 2020, but now players in the agriculture sector can buy livestock and insure it from the date of purchase to the date of delivery, significantly decreasing the risk of something going wrong in between. We launched a product to this effect with partners SwiftVee in 2021. It is still a small contributor to our bottom-line, but we foresee this to grow in time. This approach underpins how we are viewing newer, smaller, and nimble InsurTech players who are coming to market: We don’t see them as a threat, we see them as a potential partner to take innovative solutions to market.  

Another positive trend, in the individual insurance market, is lockdowns have been beneficial in reducing motor claims, while some of the uptick in economic activity has driven some to get insurance cover. The impact of continued lockdowns is likely to be neutral if not slightly positive on the individual insurance market due to lower claims. However, a global trend that is putting pressure on our ability to manage motor claims is supply chain disruptions as a result of the global microchip shortage in the automotive market.

The shortage of parts is driving up the price of parts, and we foresee it being a blip in the short-term insurance market lasting between 12 to 18 months (it is more expensive to repair vehicles). We think this is going to accelerate the shift towards a shared economy model, where our customers in the personal motor insurance market will shift from individual to being a small corporate or business. This is especially so as the trend to use services like Uber and Taxify increases due to cost. 

In 2022, it is likely that usage-based insurance models are going to increase and allow the insurance industry to deliver cutting-edge solutions to customers. Policyholders will begin to question why they pay a fixed premium if their risk is lower. This is especially so when it comes to vehicles, and individual risk profiles come into play. Products that offer a rebate or money back based on how often you are driving and how far will steadily become more popular, and this will drive a big shift in products that launch, as well as innovative pricing models. 

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