A look at the top risks identified by the Institute of Risk Management in South Africa (IRMSA) shows that a rocky road lies ahead for the insurance industry. That’s the bad news. The good news is that having faced and overcome many crises in the past, the industry has a playbook to navigate its way through what may come.
Thabile Nyaba (pictured), the chief risk and sustainability officer at Old Mutual Insure and the president of IRMSA, spoke on risk trends during CN&CO’s insurance webinar, InsureTalk35, held last month.
Nyaba said South Africa and the insurance industry were operating within a polycrisis: the simultaneous occurrence of several catastrophic events. And with the risks – both local and international – being so interconnected, it was compounding, pushing “beyond the known boundaries or the risk categories” that the industry has seen.
“But what we’re also observing is that most of these risks are repeating themselves. These risks are not new at all; they are just increasing in severity and frequency,” she said.
One example was weather-related claims, which have increased tenfold in the past decade. Nyaba shared that between 2000 and 2011, the average annual cap claims were R39 million. In comparison, between 2012 and 2022, the average annual cap claims were R371m. Over the past three years, reinsurance claims have exceeded R80 billion in South Africa.
Nyaba said what was needed was to analyse and implement the lessons learned from previous disruptions – be it fire, floods, or economic crises – experienced both in South Africa and in other parts of the globe.
“It’s not about really trying to speculate or predict what the risk is going to be. But it’s about being prepared so that in case any risk comes about, we are able to navigate our way through the disruption.”
Risks affecting the country
The top 10 2023 risks according to IRMSA include:
- a failed state;
- an increasing unemployment and livelihood crisis;
- a systematic failure of public infrastructure;
- an economic collapse;
- large-scale disruption of digitally enabled services;
- the impact of climate change and climate action failure;
- geopolitical instability;
- the proliferation of illicit economic activity;
- the collapse of social security; and
- national grid failure.
Nyaba said most of the risk “had a hook in” whether South Africa was moving towards becoming a failed state. She said, according to some commentators, the country has already reached this point.
“Because of all the things that have been happening – the grey-listing, the potential secondary sanctions we might be facing, the failing infrastructure, and the disruptions on essential services (such as fire and rescue).”
Then there are South Africa’s high poverty, inequality and unemployment rates, the closing down of small and medium-sized enterprises, the threat to the electricity grid, and the growing risk of economic collapse.
“In the past 10 years, our GDP growth in South Africa has not reached 2% and that tells us that, on the economic side, things are stagnant or, as some have said, it is actually going back.”
She said, on an industry level, these risks have led to the hardening of insurance and reinsurance markets, an increase in the cost of claims, some assets becoming uninsurable, a lower demand for insurance, and an increase in financial crimes.
“When confronted with all this negativity, it is easy to feel overwhelmed, but risk is not only about threats. It’s both about threats and opportunities. The secret is that victory comes from finding the solutions in the problems.”
All hands on deck
Nyaba believes that with the insurance industry being so sensitive to the current external operating environment, the South African community at large and the industry can no longer sit back and rely completely on the government to mitigate the country’s challenges.
She said for the insurance industry to remain sustainable, it needs to do things differently.
“All hands on deck. Yes, there are roles that need to be done by the government, certainly. However, there are things that we as the industry should be doing.”
On an external level, Nyaba suggested that the industry look at building partnerships, whether that meant partnering with flood and fire initiatives or collaborating on projects, such as building or investing in resilient infrastructure. She mentioned amphibian houses (a building that rests on the ground but rises in its dock when a flood occurs) and sponge cities (an urban construction model for flood management, strengthening ecological infrastructure and drainage system) as examples.
“We can have lots of partnerships. It could be the triple P – public-private partnerships. But we can also partner within the industry, we can partner with the government, academia, we can partner with the insurtechs, we can partner even locally and globally because the boundaries are no longer an issue.”
Another way to exercise positive influence was through investment – aligning social economic development objectives to the country’s risk drivers.
“We can invest in some of these things that we are facing, like the infrastructure that is broken,” she said.
On an internal level, Nyaba said opportunities that could be pursued by the industry include:
- enhanced modelling capabilities to improve risk selection, and pricing and to raise the profile of climate risk;
- digital transformation such as data-driven customer insights and predictive analytics to support better underwriting and claims-handling;
- targeted efforts towards training and retaining younger generations;
- diversifying products, for example, parametric insurance, and incentivising policyholders for risk mitigation and minimisation;
- building its own capacity for reinsurance;
- focusing on sustainability; and
- building resilience.
Touching on sustainability, Nyaba said it was about not trying to defend current margins at the expense of future revenues.
“It’s about solving tomorrow’s problems today in the most sustainable manner.”
She said building resilience is part and parcel of sustainability.
“We will be living in an environment that is full of such disruptions. So, we might not be able to predict what is going to be the next risk that is going to hit us. However, we should be able to empower our decision-makers on what to do should a disruption occur.”
She said what matters most when disruption hit is the decision-making.
“So, we have to do the scenarios and the simulations whereby we take the decision-makers and the critical stakeholders within the organisation through these simulations so that they are able to know what to do in times of crisis or in terms of disruptions.”
