Expropriation, changing weather and artificial intelligence create new risks
In SA, Santam, paid out R19bn in claims in 2017, with R1.1bn of that relating to floods and hailstorms
Many issues are keeping short-term insurers up at night as they charter the unexplored territories of artificial intelligence, land expropriation without compensation, the sharing economy and changing weather patterns that are hard to predict with today’s underwriting models.
Law firm Norton Rose Fulbright has been trying to understand the magnitude of the liabilities that some of its clients in the insurance sector will face in a few years.
With autonomous cars, the new challenge is that it is now about the risk profile of the vehicle and not the driver
"The concern is that some insurers are not anticipating the liability as they should," says Kelcey Smith, one of the firm’s senior associates. Driverless cars, for example, will change the way that car insurance is assessed and priced considerably, says Smith.
"How do you allocate liability if the car makes decisions completely autonomously? Who do you hold accountable for faults: the software developer? The owner?
"We don’t have answers to all the questions, but it is clear that the automotive risks are changing considerably."
Auditing firm KPMG’s forecasting model has already predicted a 40% decline in personal motor insurance demand in the US by 2040 due to driverless cars and e-hailing services such as Uber.
Uber is already reducing the number of people who want to own cars and thus the demand for car insurance.
"Fewer people need insurance, which puts downward pressure on premiums. With autonomous cars, the new challenge is that it is now about the risk profile of the vehicle and not the driver any more," Smith says.
While the challenge posed by driverless cars can be overcome through certain exclusions, as in the UK’s bill on automated and electric vehicles, it will not solve the projected decline in demand for motor insurance. This decline comes while insurers are grappling with record numbers of claims related to adverse weather.
Figures from UK reinsurer Lloyd’s of London show that in the 30 years to 2014 insurers globally recorded a 32% increase in claims involving flooding alone.
In SA, the biggest commercial insurer, Santam, paid out R19bn in claims in 2017, with R1.1bn of that relating to floods and hailstorms in Durban and Gauteng and R823m to the Knysna fires.
Norton Rose Fulbright’s insurance dispute lawyer Tim Ingham says: "In the past few months all we’ve seen is increases in weather-related events, and the question is are we going see further increases? And what will happen if claims persist to rise?"
He notes that higher global temperatures are raising sea levels, leading to unprecedented storm surges.
While insurers have predominantly covered direct losses related to these events, they are now experiencing an increase in claims for indirect losses, such as business interruption. "Will we see exclusions of climate change losses in future? I don’t know….
"Uninsurability is going to become a serious problem," Ingham says. Lloyd’s has been calling on governments of flood-prone areas to join efforts to minimise the vulnerability of citizens, he says.
SA insurers also have to find a way to deal with claims arising from land expropriation without compensation. When a property is insured, it is currently not isolated from the land on which it is built. The land and crops growing on farms are specifically insured.
While insurers can usually recover expropriation losses by taking governments to court, this will be difficult in SA as the government is planning to amend the constitution to make expropriation legal. Norton Rose Fulbright consultant Michael Chronis says insurers will be able to recover expropriation losses only if the law was not fully complied with, for example if they can prove that the government reduced the value of their clients’ properties over the years.
"In that case, it might not be that [individuals] will need compensation for expropriation but rather for reduced value."
Chronis says those landowners can use the list published by Afriforum allegedly containing names of farms and properties in KwaZulu-Natal that have been targeted for expropriation to claim for the reduced value of their properties.