JURGEN HELLWEG: Managing emerging risks of a turbulent climate through insurance

Many SA industries have buckled under the mounting pressures ushered in by a series of “black swan” events in the past three years. The current “black swan” (an unpredictable event of unforeseen magnitude) materialised in 2020 as the onset of the Covid-19 pandemic, followed by the beginning of the Russia-Ukraine war just two years later.

The operating environment for businesses was also affected by SA’s deteriorating energy crisis, which is expected to continue well into the future. 

The threat to local business continuity has come from internal and external sources. The pandemic alerted insurers to the importance of underwriting for pandemic-related risks and adjusting their policy options as well as coverage to ensure long-term viability.

Within a broader, global context, the Russia-Ukraine war has disrupted supply chains across multiple sectors. For insurers, the effect of these disruptions has been most evident in the local motor claims segment, with insurers being unable to source replacement parts for various types of commercial vehicles. These are just two of the many factors that have been compounded by an environment in which high inflation has led to the rising cost of insurance and claims. 

Disruption has also come from large-scale digital transformation and rapid technological development. The insurance sector in particular is being disrupted by the influx of “insuretech” innovations and the launch of new services and products such as usage-based insurance and pay-as-you-go policies. Developments such as these have compelled traditional insurers to improve on the innovation front to maintain a competitive edge. 

With this shift towards digital service provision, risks related to cybercrime have increased exponentially. With a high number of SA businesses falling victim to data breaches, phishing attacks and the theft of sensitive information, insurers have been forced to adapt. They have had to strike the delicate balance between providing a comprehensive service that covers all emerging risks and ensuring that their business models are poised to absorb these risks and remain financially viable. 

Power outages

Loss of income due to decreased productivity and business interruption has been the most tangible impact of escalating blackouts, but the cumulative cost involves several other key factors. In addition to loss of turnover, long-term damage to property and electrical systems, as well as stock losses of perishable goods, present an enormous challenge for many SA businesses. Sectors such as manufacturing, retail and hospitality bear the brunt of the energy crisis, with many businesses being forced to absorb the cost with little prospect of recovering their losses.

Businesses that have invested in adequate insurance for losses related to power outages may have found some reprieve from the potential financial impact. In the current hard market in insurance, characterised by stricter underwriting policies and higher premiums, it is vital for businesses to take out the appropriate cover and implement contingency plans to manage energy-related risks. 

One of the greatest repercussions of the energy crisis has been the limiting of options for businesses in search of ways to access cover for energy-specific losses. As losses resulting from lack of power supply are no longer seen as “unforeseen”, a fundamental principle of insurance, and as the industry has moved to limiting the exposure related to a grid failure event on various levels by excluding this cover from their policy, it is vital for commercial clients to consider alternate supply measures to ensure the continuation of their business practices should such an incident occur.   

With load-shedding expected to worsen over the coming winter months, the impending threat of grid collapse has become a frightening possibility — one for which businesses need to be appropriately prepared.

Risk profile

For many businesses a robust risk management strategy may warrant taking on an additional level of cover and implementing further measures to curb the effects of load-shedding. Commercial short-term insurance and strong risk-mitigation strategies will continue to be the most effective ways of buffering a business against financial loss.

Considering the multitude of elements affecting clients, businesses should see commercial insurance as a bespoke service offering, rather than a blanket response to risk. By working closely with advisers, businesses can ensure that their insurance policies are tailored to reflect their unique risk profile and take factors such as affordability into consideration.

Insurance policies provide the contractual foundation for managing risk, but insurance advisers provide the much-needed manpower to provide businesses with ongoing support and advice. Not only can advisers provide in-depth knowledge on which insurance products best suit particular businesses and industries, but they are also extremely valuable resources for helping businesses maintain their operations when disaster strikes.

Advisers should therefore be seen as agents for business support and valuable stakeholders, rather than external parties. 

• Hellweg is CEO of commercial insurer Western National.