South Africa’s insurance industry faces an uphill battle

Beset on all sides, the South African insurance industry has seldomly seemed more pitfall-ridden than it is now, with an “Insurance Heatmap” positioning the property, casualty/liability, and cyber markets in the red.

Describing these markets as “challenging”, the map forms part of Aon’s South Africa 2023 Insurance State of the Market Report.

Aon is a leading global professional services firm providing a range of risk, retirement, and health solutions. In the report, the Aon team focuses on global trends and market factors driving fundamental shifts in pricing and risk appetite, particularly for property catastrophe risk.

According to the report, the property and casualty, riot strikes and terrorism, motor, as well as the cyber and errors and omissions markets have been heavily impacted by “three overarching local and global events”: South Africa’s ongoing energy crisis, the impact of natural catastrophes (both globally and locally), and rising geopolitical tensions.

Energy crisis

For example, during the latter part of 2022 and in 2023, the electricity supply challenges faced by South Africa led to insurers and reinsurers imposing restrictions and limitations pertaining to:

• property damage losses due to interruption of power supply (including loadshedding);
• business interruption losses due to interruption of power supply (including loadshedding); and
• power surge cover and the potential risk of a national grid failure.

In the property and casualty market, grid collapse is now deemed a systematic risk and has become an absolute exclusion, with some carve-back cover for non-related damage.

“Ambiguous policy language relating to the above exclusions remains a concern to the industry”, the report said.

Climate change

Global natural disasters in 2022 – resulting in near-average economic losses totalling $313 billion – caused an increase in cover restrictions, including in South Africa following the KwaZulu-Natal floods, affecting reinsurance treaty renewals.

Zooming in on the property and casualty market, Aon said it continued to see reduced capacity on risks, “making it challenging to secure coverage with carriers”.

It added that increased treaty renewal rates were filtering through to insurers, while inflation was impacting the underwriting and claims process.

“Rate increases continue, with an average of 15% for good clean risks, as of April 2023,” stated the report.

A notable exclusion or limitation is that flooding is now sub-limited or totally excluded in certain instances.

“However, some underwriters consider topography and may consider coverage in some areas,” stated the report.

Geopolitical tensions

The rising levels of global wars (chief among them the ongoing Russia-Ukraine war), civil unrest, and economic pressures resulted in the first hardening in the riots, strikes and terrorism market this year since its birth past 9/11 – and it continues to harden.

The significant losses suffered in this market also led to a reduced number in underwriters willing to take on the riots, strikes and terrorism risk.

In the property and casualty market, the global tension resulted in cover for Russia, Belarus, and Ukraine being excluded.

Closer to home, South Africa’s troubled political climate, which may be compounded by the looming 2024 elections, saw Sasria increase its rates last year, with cover limited to R500 million (no excess of loss available) and a reduction in commissions to intermediaries to 11.5% from May – a further increase in the nett premium to insurer.

In the motor market, commercial risks have seen a heavy Sasria rate increase in 2022. The non-life insurer also now requires more detailed vehicle information for commercial vehicles, such as gross vehicle mass and seating capacity on busses.

Key South African trends

The Aon report identified a number of key South African trends.

One that is being felt across industries was the domino effect on the availability of spares, machinery. This has resulted in an increase in replacement costs, while availability, or non-availability, was impacting timelines.

Another trend with a negative influence on replacement timelines, specifically in the motor market, was a reduction in the number of vehicles available for car rental post-Covid. The increase in interest rates and exchange rates also meant that it has become more expensive to do repairs.

In addition, the report found there was an increase in the number of uninsured vehicles on South African roads, diminishing the likelihood of recoveries from third parties.

Other trends in the motor market included an increase in claims due to deteriorating road infrastructure and an increase in the theft of vehicles with keyless technology being targeted.

Listing changes in the cyber and E&O market, the report stated that ransomware activity had started to increase in the first quarter of this year. Another area of concern was biometric information collection and disclosures “due to an uptick in class actions resulting from the improper collection, use or retention of data”.

The need for quality data collection and presentation at renewal was also highlighted.

“Operational technology and supply chain risk continue to be heavily scrutinised by underwriters,” the report stated.

Navigating the changing insurance landscape

To contend with all these changes in the various markets, Aon suggested insurers follow a four-prong approach:

• address their evolving risk profile and objectives;
• increase underwriter confidence in their risk;
• leverage a robust approach to managing their property risk; and
• conduct due diligence on their counterparties.

In the report, Aon stated that economic and geopolitical-related factors have likely impacted insurers’ risk profile and evolved their risk strategy and transfer objectives.

“Challenge and re-set your risk tolerance, appetite, and strategy, and align your risk management programmes accordingly. Leverage risk appetite modelling to ensure optimal value of insurance.”

To build underwriter confidence and trust, Aon advised that insurers communicate transparently and often – in person, when possible – with underwriters while providing access to relevant experts across their organisation to build relationships across insurer stakeholders.

It suggested starting the renewal process early and defining clear objectives.

“Tap into available data to provide robust, quality underwriting information, including property valuation methodologies, risk modelling, risk control and mitigation practices and actions you have taken from past recommendations.”

When it comes to managing property risk – particularly in the case of Natural Catastrophe-exposed risk – the need to evaluate asset valuation methodologies to ensure accurate values is key.

Insurers were advised to leverage Catastrophe Modelling solutions to highlight exposed profiles and loss drivers and to develop a property risk improvement strategy.

“Traditional risk transfer continues to play a vital role in achieving risk management objectives; however, in challenging markets and risk situations where capacity is limited – such as Natural Catastrophe Property – alternatives may provide greater flexibility and some pricing relief,” the report read.

Citing a recent situation where a US-based managing general underwriter was binding business to a non-rated insurer after it lost its Lloyd’s capacity, Aon said it was vital to conduct due diligence on counterparties.

“Especially MGAs (managing general agents) and MGUs. Be cautious, sceptical, and judicious. Remember the adage: if it sounds too good to be true, it may very well be. Have a Plan B,” the report concluded.