GARTH NAPIER: Insurance industry now has to weigh a wider range of claims

The insurance industry is a vital socioeconomic sector that provides a critical safety net to society. This notion was crystallised 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 prioritise settling them as quickly as possible. We 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, which is still in progress.

Another priority that was highlighted as a risk in 2021 is how vulnerable our country’s infrastructure is to cyberattacks. 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 whether a significant attack will occur, but rather when.

When hackers besieged Colonial Pipeline for a ransom of $5m in May 2021, it set off a cascading crisis for the whole US East Coast for days. 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. While commercial customers are keen on a product with specific provisions for attacks related to cyberlosses, the global trend is that fewer insurance companies are offering policies against cybercrime, saying it simply encourages such behaviour.

We are also seeing a demand from individuals for protection against cyberlosses as more people use personal devices for banking. This will only increase as society relies 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 accelerated in 2021. We have become accustomed to load-shedding in winter, but the grid has proved volatile year round, with power insecurity prevailing throughout summer. The implications of grid failure would be catastrophic. One need only think back to 2004, when parts of the US experienced grid failure, and how 20-million to 30-million people were left without electricity for two to three days.

Research by the SA 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 pumps being unable to operate, a failure of security systems, and cellphones would not work given that mobile tower backup batteries would not 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 of July 2021 could be on the horizon in 2022. This would devastate the economy and the insurance industry. The implications are that the SA Special Risk Insurance Association (Sasria), which has never experienced such a level of civil unrest since the dawn of our young democracy, will be put in a difficult financial position if it is called upon to honour claims on a similar scale to those experienced in 2021. 

From an insurance claims point of view, the industry has experienced benign figures compared with 2020. This may seem surprising in light of the looting claims and Sasria payouts of more than R32bn, but our role was to support Sasria and most policies had exclusions in place. Motor vehicle claims have decreased and claims due to disasters such as floods and fires are down, despite the Cape Town fire earlier in 2022 on Table Mountain as well as the recent floods in the Southern Cape due to summer rains.

Online auctions

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

Though the effect of the pandemic has been devastating for many, we have seen some positive trends in insurance. New agricultural business models have emerged. Online auctions were not a reality before 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. 

Another positive trend, in the individual insurance market, is that lockdowns have reduced motor claims, while the uptick in economic activity has driven more people to get insurance cover. The effect of continued lockdowns is likely to be neutral if not slightly positive on the individual insurance market due to lower claims.

A global trend that is putting pressure on our ability to manage motor claims is supply chain disruptions due to 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 12-18 months, making it more expensive to repair vehicles.

We think this will accelerate the shift towards a shared economy model, in which our customers in the personal motor insurance market will shift from mainly individuals to being more small businesses. This is especially so as the trend to use services such as Uber and Taxify increases due to cost. 

In 2022 it is likely that usage-based insurance models will 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 regarding 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 the products that launch as well as more innovative pricing models. 

• Napier is MD of Old Mutual Insure.