GARTH NAPIER: Climate change among top threats to non-life insurance industry

The SA non-life insurance industry is facing significant headwinds. Coming off a challenging year in 2021, which saw the industry respond to the fallout from an unstable grid, mass riots and looting as well as weather-related losses, this year the hope for an economic recovery has remained subdued.  

Many of the dominant themes experienced this year are likely to continue creating a challenging environment for the non-life insurance landscape in 2023. But as with many emerging risks, there is also opportunity.  

One of the most significant risks to emerge in the insurance industry is the effect of climate change. There has been an increase in frequency and severity of natural disasters globally. In the past three years catastrophic events in the US alone have risen to nearly 19, with the costs exceeding $102bn. Back home, the severity of weather-related events has risen 10-fold over the past decade, while the frequency of large catastrophe (CAT) claims have increased from six to 36 per decade since 1982. 

Our data shows that the average annual CAT claims in the past 10 years between 2012 and 2022 were 10 times higher than they were between 2000 and 2011. The insurance and reinsurance markets have said the recent KwaZulu-Natal flood disaster was the single biggest CAT event in history. We predict that CAT claims will continue to increase in volatility, resulting in an increase in the cost of reinsurance. Reinsurance claims have exceeded R80bn in SA over the last three years, and we expect reinsurers will have a reduced appetite to fund these events in future. This will need to be balanced with the important responsibility non-life insurers have of lessening the disastrous affect of climate change on society.

We are navigating a prolonged period of hyperinflation, and while our hope is that it will stabilise it is likely to persist well into 2023. It will continue to significantly affect our industry, and consumers are likely to remain under pressure. After the disruptive lockdowns of the past two years, global supply chains have struggled to normalise. The demand for used vehicles has exploded, with data showing that used car prices have risen 8%-14%.

Grid collapse

The average cost per claim is increasing significantly. Our claims inflation has been on an upward trend since 2021, and this continued in 2022. The market is already pricing in these inflationary pressures, with 10%-15% inflation expected. Against this, we are seeing significant premium rate and excess increases. It is critical that policyholders work with brokers to ensure they remain adequately protected against loss events. We have already responded to the challenge by giving customers optional extensions and top-up cover to hedge against inflationary pressures.

We are concerned about a potential grid collapse in SA, which is looking ever more likely. The damage to many businesses would reach far beyond the actual blackout and some might be unable to recover due to the unparalleled nature of such a situation. This could have an even more devastating effect on the insurance industry. 

Load-shedding is already causing an upswing in electronic equipment damage, burst geyser and power surge claims. Frequencies for claims stemming from load-shedding have almost doubled. Our data shows that since 2018 the number of electronic equipment, burst geysers and power surge claims has risen 93%, 437 for the year to date.    

The insurance industry has been lagging other industries in productivity improvement for some time. We are experiencing a shortage of data, actuarial and IT skills, which is leading to a war for talent. There is a shortage of experienced underwriting skills, and there are increased costs to attract and retain talent, with more entrants disrupting the insure-tech and bancassurance space. The non-life insurance market will need to address the productivity imperative to overcome stagnation. The opportunity is to drive operational efficiencies through digitisation and automation.

M&A space

It is not all doom and gloom as major shifts in the market force industry players to redefine ways of doing business. We expect consolidation of the insurance market to increase as smaller players come under pressure. Mergers & acquisitions as well as partnerships with underwriting management agencies are also likely to increase in 2023 as the landscape for product innovation becomes even more competitive. These are key levers for growth and diversification in the SA non-life insurance market.

Historically there have been only a few non-life insurers that have played in the M&A space, but other players are catching up, with a major shake-up of the industry on the horizon. The broker market will also not be spared from consolidation and transformation. There is evidence that market consolidation is already under way, with some small brokers having already exited, merged with similar entities or sold their portfolios to larger brokers. This is being driven by legislative and regulatory change, the increasing cost burden, which is leading to a need to centralise administration functions, and an ageing broker force. It is likely that joint ventures in this space will increase and transformation becomes an imperative for the industry.

Historically non-life insurers have overrelied on motor and property books, but this will affect margins in future. Diversification therefore becomes an imperative. We continue to strengthen our distribution capabilities and non-insurance revenue streams, while simultaneously focusing on growing some of our specialist areas, such as marine and engineering, to hedge against this. This also needs to be coupled with ongoing innovation to meet ever-evolving customer needs. 

The non-life insurance industry has proven its resilience in providing a critical safety net to society during times of disaster and crisis. Despite the challenging operating environment and headwinds in 2023, we expect the industry to play an even more important role in these uncertain times.

• Napier is MD of Old Mutual Insure