Reinsurers and insurers in the South African market have shouldered massive losses over the past five years. Covid-19 was the first in a series of unexpected disasters, volatile market forces, and social instabilities that contributed to the development of a hard market. At the beginning of 2022, conditions in the local insurance market tightened further, resulting in arguably the most persistent hard market in recent history.
Before the pandemic years, South Africa’s insurance market was characterised by softer conditions. A moderately stable macro- and micro-economic climate gave rise to an abundance of capital relative to the size of the market. This translated into lower insurance rates and broader policy terms and conditions. This status quo persisted for at least a decade before the arrival of Covid-19, which was a tipping point for the insurance sector.
No one could have predicted the sheer impact the pandemic would have on industries across the board, and no one could have foreseen what would come next. In 2021, a spate of riots broke out in parts of the country. This was followed by flooding in KwaZulu-Natal. For South Africans, these untimely events played out within the broader context of the energy crisis, which caused large-scale damage because of power surges, equipment failure, and inventory losses.
Things weren’t looking up on the global front, either. During this time, Europe saw an increase in natural disasters, and the Russia-Ukraine conflict put further pressure on supply chains. These events triggered an upsurge in claims, many of which were related to business interruption and property damage. As a result, countless insurers and reinsurers realised that some exposures had not been adequately priced in.
These were, for all intents and purposes, years of unprecedented challenges that the market had not seen before, and which were almost impossible to anticipate. With the increase in claims serving to erode capital and threaten markets, investor confidence plummeted.
An unavoidable chain reaction
Outside of these hurdles, the local insurance industry also suffered a knock caused by rapidly increasing inflation and a series of steep interest rate hikes. Slow GDP growth and a lack of infrastructure spending have exacerbated this situation.
On the ground, issues such as poverty and the country’s record-high unemployment rate undermined any meaningful progress towards post-pandemic recovery. The culmination of these factors has meant that less disposable income has fallen into the hands of customers. And with less income, comes reduced buying power and, ultimately, less spend on insurable assets, such as property and cars.
Loadshedding, as a single event, has changed the local risk landscape indelibly, with many insurers removing certain kinds of cover, imposing restrictive clauses, and increasing exclusions. A greater level of responsibility has fallen on the shoulders of insured parties, who must now implement tighter, more thorough risk management strategies.
The emergence of the hard market for insurance
For reinsurers, it has been time to batten down the hatches – to increase rates and tighten terms. In an attempt to consolidate and brace for the impact of the hard market, underwriters deemed certain disruptions, such as grid failure, to be uninsurable. These changes trickled down to insurers and, ultimately, to clients, who have contended with receiving less comprehensive cover for the same or a higher premium.
Some insurers have seen higher policy cancellation rates as clients look to optimise their disposable income. The non-payment of debit orders and defaults on premium payments also increased over this period. On a commercial level, companies have experienced higher rates of closure or liquidation.
Although the emergence of the hard market may have left industry stakeholders reeling, it may be safe to say that the sector has weathered the worst of the storm. Investor appetite, client expectations, and the repricing strategies implemented by insurers to manage the impending risks have reached a plateau. This does not mean that the hard market is a thing of the past. To the contrary, the hard market is likely to persist well into the new year, particularly considering the country’s uncertain political outlook.
A more stable foundation
The long-term effects of hard-market pricing and the general tightening of policy have reflected positively on the balance sheets of insurers and reinsurers, which is good news for the sector. In fact, many insurers have reported that they have maintained optimal levels of profitability and are now better equipped and prepared to tackle emerging risks with a greater level of foresight and experience.
Going forward, insurers will be keeping an eye on key financial metrics, and they are arguably more prepared to walk away from bad risks to achieve long-term financial sustainability. This bodes well for an industry that has reached a state of relative stability after several peaks and troughs.
Green shoots of growth can be seen in several of the country’s largest short-term insurers, many of which have appointed new C-suite executive and leadership teams who are eager to build on the foundation left by their predecessors. A new leadership system may bring a promising change in direction and a refreshed perspective on how to rebuild trust – the cornerstone of the industry.
For clients, the hard market does mean higher premiums and more stringent underwriting conditions, but there’s another, more positive side to the coin. The hard market has increased competition sector-wide. Insurers that have reinforced their operational policies and taken swift and decisive action to navigate the prevailing adversities are now better capitalised and equipped to handle claims and deliver service excellence to their clients. Within this environment, these robust insurers are eager for good business and are poised to meet the needs and demands of their customer base. In light of this, clients can expect to negotiate competitive premiums and obtain real value for their money.
These shifts have also brought the critical nature of insurer-adviser and adviser-client relationships to the fore. Clients can expect to lean on the industry experience and specialist knowledge of their advisers, who, having weathered quite a few storms, are ready to stand alongside their clients every step of the way.
Equipped with better knowledge on market trends and consumer behaviour, advisers need to go beyond service delivery and become partners of their clients and their businesses. In their advisory capacity, they can offer clients invaluable insights and the tools they need to thrive, even in times of turbulence.
There’s no denying that the local insurance landscape is up against a barrage of new and emerging risks. The weather pattern disruptions caused by climate change, the dramatic uptick in cybercrime, a sluggish economy, and the deterioration of state infrastructure are realities that will require proactive, sound solutions. But now, from a vantage point that is decidedly more stable, insurers and reinsurers are better prepared to tackle the task.
Cedric Masondo is the chief executive of PSG Insure.
Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.
