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The Santam Insurance Barometer 2020/2021 which aims to measure the concerns of the South African short-term insurance market has been released. Extensive research was conducted among various stakeholders including 150 intermediaries, 400 corporate and commercial entities, and 401 personal insurance consumers to better understand what is happening in the market and to determine the opportunities that exist for insurers and intermediaries. The in-depth report reveals the impact of systemic risks and pandemics on the economy and the insurance industry and shines a spotlight on the evolving role of intermediaries amid this changing risk landscape.

The spike in recent catastrophic events including the devastating social unrest, the COVID-19 pandemic, and rising unemployment is having a significant impact on the economy. This report highlights the importance of public private partnerships between government and the insurance industry to build resilience against systemic risks and pandemics.

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Key takeaways

  • A thriving insurance sector is a critical cog in any healthy economy, however 60% of surveyed intermediaries believe that systemic risk can only be met by the formation of public private partnerships (PPP) between government and insurance stakeholders.
  • Intermediaries will continue to be integral to the success of insurers, however they need a more client-centric approach as they evolve into the role of risk advisor.
  • The pandemic-induced trend to work from home has had a material impact on the personal insurance landscape.
  • A struggling South African economy remains the biggest emerging concern for commercial entities, with 62% of respondents ranking it as their biggest concern.
  • In terms of emerging risks, corporate and commercial entities surveyed ranked their top risks as the COVID-19 pandemic impact on business interruption (57%) followed by political unrest (48%), social change (44%), cybercrime (36%) and climate change (35%).
  • The segments that are most at risk of losing niched insurance products due to reduced turnover are the construction, transport and travel lines, with aviation and travel industries particularly impacted by the forced restrictions on movement.
  • In spite of these challenges, 83% of large companies and 73% of SMEs surveyed feel optimistic about their business prospects.

SYSTEMIC RISKS AND PANDEMICS

John Melville, Executive Head: Underwriting Services, Reinsurance and International

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THE ROLE OF INTERMEDIARIES

Andrew Coutts, Head: Intermediated Business

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PERSONAL LINES OVERVIEW

Attie Blaauw, Head Personal Lines Underwriting

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COMMERCIAL LINES OVERVIEW

Philippa Wild, Head: Commercial Underwriting

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SPECIALIST BUSINESS OVERVIEW

Vuyo Rankoe, Head: Niche Business

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AGRICULTURE OVERVIEW

Gerhard Diedericks, Head: Agriculture Crop

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Systemic risks and pandemics

“Systemic risk refers to risks that typically play out as a chain reaction in a system resulting in widespread losses to individuals, businesses, industries, and even countries.”  Examples of systemic risks are pandemics, climate change, cyber-risks, political instability, etc. John Melville: Executive Head: Underwriting, Reinsurance and International, Santam Insurance

Santam’s Insurance Barometer for 2020/2021 revealed why a robust insurance sector is vitally linked to a healthy economy. “Not only does insurance allow individuals and organisations to bounce back after a catastrophe,” says John Melville, Santam’s Executive Head of Underwriting, in the report, “it is also often the gateway to gaining capital, as most financial institutes require the property or business to be sufficiently insured before approving loans.” 

It is clear that, if resilience gives you the confidence to spend, and access to capital gives you the means to do so, then insurance really is the lifeblood of economic growth. 

The research showed that political unrest (50%), cybercrime (45%), and the pandemic’s impact on business interruption were three of the top four emerging risks identified by commercial intermediaries. 

The imminent threat of these to the economy’s ability to bounce back and gain access to capital lies in the ever-rising cost of insuring against these risks. The question is whether insurers are willing to underwrite systemic risk. For example, when it became clear that Covid-19 had a wide-reaching impact on the economy, reinsurers were quick to exclude pandemic risk from their coverages. This is because the potential liability of a pandemic was simply too great for them to cover, deeming it effectively ‘uninsurable’. At this point, the government often steps in with relief programmes.

Partnerships for resilience and sustainability of the insurance industry

The report states that Santam is looking ahead to see how they can provide selective, local epidemic and pandemic cover for the corporate market should another similar disaster arise. “In South Africa, we already have a successful blueprint of such a model in South African Special Risk Insurance Association (SASRIA),” says Melville. “Instead of reinventing the wheel, we believe its mandate should be expanded to provide more protection against the rising risks we face. Until then, it remains the responsibility of the individual and businesses to protect themselves against uninsurable risks.

When it comes to insuring those who cannot afford it - but often need it most - South Africa’s private and public sectors can learn from how the African Risk Capacity (ARC), an African Union (AU) agency, provides cover for those without adequate resources. Santam is already driving similar innovations for South Africa, according to the report. Citing one such an example, Santam is currently piloting a Soil Moisture Index in collaboration with the South African Insurance Regulators that provides relief to policyholders when the index drops below a certain level during periods of drought.

“From where we stand, innovation in the insurance industry has more momentum than ever before, which is just as well because the rising complexity of the emerging risks we face needs a commitment to innovation.” John Melville

Seen and Unseen Risks and Opportunities

With the technology boom that has spawned due to Covid-19, we are more vulnerable to another potential systemic risk: cybercrime. While cybercrime insurance provides quick access to service providers that help alleviate the resultant fallout and cleanup required after an attack, simple measures such as updated anti-virus software and educating employees will help prevent major cyberattacks.

Less obvious is the impact of rolling blackouts, and failing water, port, rail, and road infrastructures. These effectively choke economic growth when it comes to employment, as well as increasing the risks of damage and insurance costs.

As for infrastructure development, Santam continues to show their support of the Renewable Energy Independent Power Producers Program (REIPPP) as they have for over 10 years, by giving those committed to cleaner energy access they need to capital, as well as resilience to face evolving challenges. At the same time, they continue to work closely with reinsurers to ensure that legacy infrastructure is insurable for the duration of what may be a lengthy transition to cleaner energy.

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The Role of the Intermediary

“At Santam, we believe the intermediary can help catalyse a necessary shift in how people and businesses think about insurance. As professional risk advisers they could bring more focus to the practice of risk prevention and mitigation as opposed to pure risk transference.” Andrew Coutts: Head Intermediated Distribution

The insurance barometer highlights how the pandemic stress-tested the products and relationships that are shared between insurers, intermediaries, and their clients - exposing weaknesses and strengths, and making growth and innovation a necessity.

Insurance intermediaries - also known as insurance agents or insurance brokers - facilitate the placement, purchase, and claims of insurance to clients, and provide services to insurance companies that complement the insurance placement process. For this reason, intermediaries have always been integral to the success of insurers. However, now more than ever, intermediaries play a vital role in the insurance landscape as their relationship with the end client helps them better understand the risks that clients and businesses face. Consumers prefer personalised services and products, and as such, the intermediary’s role in providing this feedback is paramount. More importantly, it equips them with the understanding they need to launch into the next role in their evolution: risk adviser.

The Move from Product-seller to Risk Advisor

According to Coutts, there is consensus around the three main deliverables that clients want from their intermediary and insurer:

  1. Information on how to lower or manage their risk more effectively.
  2. Careful claims monitoring, with foresight on the impact it will have on premiums next year.
  3. Real-time SMS notifications when risk is increased.

“What is the defining characteristic of a risk adviser?” says Coutts. “They can sense and respond to risk in real-time. In that vein, a good starting point for any intermediary would be to sit down with their clients at every policy renewal and ask the question, ‘What could happen next?’ What could the next black swan event be? Will the Eskom grid fail? Is there another severe drought around the corner? What if a hacker holds your business to ransom?”

When intermediaries persistently explore such scenarios it not only improves the fit and price of cover, but also distinguishes them from the other insurance product sellers, as a trusted risk adviser. Monetising their advice ensures their revenue is not dependent on product sales alone.

“Intermediaries must become trusted advisors to remain relevant. Better risk management is required to limit exposure and prevent losses.” Andrew Coutts.

For commercial businesses, their top needs from their intermediary or risk advisor are all equally important:

  • Personalisation - Understanding their needs (77%)
  • Efficiency with claims handling (77%)
  • Expertise and knowledge of insurance (77%)

Intermediaries’ in-depth product knowledge, and the intention behind them, will be of particular importance in light of the emerging risks that most intermediaries are worried about, such as cybercrime (45%) and climate change (31%). Not only does the public expect intermediaries to consider every potential risk exposure and aspect of cover for adequate protection, but the insurance regulator does too. If the risk advisor is found not to have advised their client appropriately, they may find themselves liable for Professional Indemnity (PI) claims.

Some other stats of interest emerged from the reports:

  • 81% of intermediaries want more simplistic policy language, and 51% would like a wider selection of cover options at different price points.
  • 50% predict that they will need to provide expert product and risk advice within the next two years.

Rise of Technology

The report states that there will be an increase in the use of technology in the next 24 months by intermediaries, particularly around back-office processes that integrate with insurers to expedite claims and quotations. The use of technology for client communication will increase, in spite of the fact that most commercial clients using an intermediary (75%) say they would prefer returning to face-to-face client engagement. However, in the absence of those in-person meetings, email (67%) and telephone (49%) are preferred over video conferencing (39%).

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Personal lines

“It should come as no surprise then that the pandemic-induced shift to working from home has had a material impact on the shape of the personal insurance landscape.” Attie Blaauw: Head of Personal Lines Underwriting & Fanus Coetzee: Head: Claims Adjustment Services

Santam’s research showed that 80% of the consumers surveyed cited a negative impact on their finances caused by the pandemic. This brought the affordability of insurance into light. However, while cutting back on luxuries to save costs, short term insurance very seldom reached the chopping block. Clearly, consumers know that covering their valuable assets is a priority, a sentiment echoed in Santam’s own customer data.

Unprecedented and Sustained Drop in Vehicle Claims, While Home and Household Claims Rise

While curfews and lockdown reduced the number of drunk driving incidents, the severity of accident damage was heightened by more people speeding due to roads being less congested. Vehicle insurance claims dropped by an astonishing 18%. Conversely, the cost of spares for repairs increased due to limits on supply of parts as a result of the pandemic. 

In spite of lockdown restrictions being lifted, it seems the trend of roads remaining emptier as people choose to work from home is here to stay. Santam’s research supports this, with 82% of personal lines intermediaries and 46% of consumers surveyed citing interest in reduced motor vehicle premiums based on less frequent driving. The report indicates that the continued downward trend in motor claims is unprecedented; as motor claims typically increase steadily year on year, without exception. 

The year saw a spike in building (16%) and household claims (6%), however it was not what 82% of consumers surveyed thought it might be, i.e. crime in their area. Santam’s data showed that all risk claims as well as theft- and burglary-related claims were lower in 2020 than they were in 2019.

The unlikely culprit was the increase of burst geysers contributing to building claims, which saw a rapid hike of 16% year on year in 2020. This is an unexpected result of more people working from home. “People showering and bathing more often increases wear-and-tear on geysers,” says Attie Blaauw, “which could be one possible explanation for this anomaly.”

The Fight for Affordable Personal Insurance Continues

According to Santam’s findings, affordability remains a key issue, with insurers and intermediaries innovating to provide more cost-effective solutions, like first-loss or limited cover insurance policies, such as only fire insurance, or only theft cover. Client education and engagement is vitally important.

While affordability is of paramount concern, 65% of the Personal Lines intermediaries surveyed said they want insurers to explain how claims behaviour impacts premiums. 52% requested SMS updates for clients when risks are heightened; 51% would like a variety of cover options at different price points; 47% thought crime statistics per area would be beneficial; and 45% want access to apps that help their clients manage risks better. With Santam, many of these value-adds are already available.

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Commercial lines

“Corporate and commercial entities are generally upbeat about the future, with 83% of large companies and 73% of SMEs surveyed feeling optimistic about their business prospects.” Philippa Wild: Head of Commercial Underwriting & Fanus Coetzee: Head: Claims Adjustment Services 

South Africans are remarkably resilient and adaptable. This is according to Santam’s head of commercial underwriting, Philippa Wild, and head of claims adjustment services, Fanus Coetzee. It must be true, as the majority of organisations surveyed showed optimism for the future, in spite of the pandemic’s devastating effect on both lives and livelihoods. Santam’s research showed that 62% of commercial entities and corporates experienced profit losses of between 24 - 36%; 41% of businesses in the hospitality industry closed their doors, with more retrenching staff and reporting profit losses, while 80% of transport companies and 77% of construction companies suffered profit losses. 

“Since the start of the pandemic we’ve seen evidence that businesses are pivoting to better take advantage of the opportunities presented by our “new normal”,” says Philippa Wild. 

However, despite many organisations moving to a work-from-home model, and investing in technology to do so, there has been no significant rise in the uptake of cyber-related cover over the past 18 months. “The cost of third-party liability and fines following a major data breach can easily run into millions of rands,” says Philippa Wild. “Additionally, loss or damage to digital assets is often not covered by standard insurance solutions.” 

The apathy to invest in cyber cover seems counter-intuitive to the survey’s findings, with 45% of commercial intermediaries ranking cybercrime as the third highest business risk, and 36% of corporate and commercial entities citing it as their fourth biggest risk over the next two years. In this instance, an intermediary - or risk advisor - plays a vital role as they mitigate potential risks for organisations of all sizes.

What are the Biggest Risks for Business?

According to intermediaries and commercial entities, these are the biggest risks:

  • Fire
  • Theft
  • Economic downturn
  • Motor vehicle
  • Business interruption
  • Public liability 

Due to Covid-19, there has been a drop in insurance claims for vehicles, as well as fire claims due to unoccupied office buildings. While this is so, the Barometer encourages business leaders to review their risk exposure regularly, and to ensure they have cover for the less obvious risks such as cyber. It also encouraged proactive measures such as tidy wiring, uncluttered workspaces, and regular maintenance of equipment and electricity boards to minimise the risk of fire and damage.

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Specialist business

“Growth opportunities will materialise from the development of new classes of insurance to address emerging risks like those associated with cybersecurity and drones.” Vuyo Rankoe: Head of Niche Business

The Barometer highlights how the pandemic has caused many businesses in South Africa to pivot their business models and reinvent themselves in a bid to stay viable. This has exposed them to new and unfamiliar risks. 

According to the study, corporate and commercial entities surveyed ranked these as their top emerging risks:

  • The pandemic’s impact on business interruption (57%)
  • Political unrest (48%)
  • Social change (44%)
  • Cybercrime (36%)
  • Climate change (35%)

While climate change ranks lowest, the devastation of weather-related incidents, such as the Table Mountain National Park fire that damaged parts of UCT, has a significant impact on business interruption.

“A hardening insurance market shows no signs of abating through 2021 and beyond,” says Rankoe, “seeing an increase in demand for Directors and Officers (D&O) liability cover in particular. Indeed, the past 18 months have seen risks, especially liability-related risks, intensify the world over and global reinsurance rates have risen significantly as a result.”

The Barometer indicates that the hard market cycle has made insurance more expensive, resulting in some niche industries amending their cover to match their reduced income. This has especially been the case in the construction sector, as well as the marine and heavy haulage industries. As a result, insurers may move away from offering cover for unsustainable lines, fueling further consolidation, leaving construction, transport, and travel lines most exposed.

Keeping South Africa Moving

“The transportation sector is the veins of the economy,” says Rankoe, “and has also been negatively impacted by the pandemic.” According to Santam’s research, not only have the majority of transport companies surveyed (80%) suffered a knock to their bottom line, they are feeling the rise in the cost of repairs, which in some instances has increased by as much as 40%.

Consequently, Santam has experienced higher frequency and severity losses in the heavy haulage industry, with an increase of 25% in volume and 30% in the average cost of claims. The aviation industry has seen an increase in insurance claims, with the start of 2021 seeing claims processed by Santam to the value of R250 million.

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Agricultural crop insurance

“Farmers expect fit-for-purpose insurance solutions to match their specific needs from insurers.” Gerhard Diedericks: Head: Santam Agriculture

There were some alarming stats brought to our attention in the barometer around farming in South Africa. For example, fifty years ago there were approximately 150,000 farmers working the land, while today that number is only 35,000. In a land full of change and uncertainty, this means farming and agriculture in South Africa is not for the faint of heart.

Moving Away from “Impulse Insurance” to Bespoke Cover

Citing political unrest as their main concern, the primary challenge farmers face is not political, but rather weather-related crop risks: hail, flood, frost, and drought every season, plus changes in weather patterns brought on by climate change.

However, in spite of these concerns and growing risks, the barometer’s data shows that only half of the total crops in South Africa are insured in any given year. The report cites affordability concerns as the primary reason for this, and often results in farmers only taking out insurance in the event of impending adverse weather conditions.

Says Diederiks, “The primary challenge for the crop insurer is to diversify the risk so that they can provide comprehensive and cost-effective cover. Effectively diversifying crop risk requires an intricate understanding of how each commodity will perform across the different regions given the prevailing weather conditions – there are many variables to account for.” This is why farmers expect fit-for-purpose insurance solutions from their insurers that will meet their unique needs.

Ploughing New Ground with Collaboration and Innovation

“Legacy thinking and practices that are no longer suited to the current demands that farmers face,” continues Diederiks, “they need to be replaced by stronger partnerships and more flexible crop cover.”

Santam shows their commitment to the agricultural segment with their innovative indexed, soil moisture insurance product that pays out as and when soil moisture moves below a specified level. However, Diederiks ends his report by stressing the need for both insurers and intermediaries to work together to bring about meaningful advancement in insurance cover for farmers.

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In conclusion

The Barometer serves as an excellent overview of the state of South Africa’s evolving insurance landscape, its consumers, industries, and intermediaries in response to global and local events. In spite of insurmountable challenges, South Africans are putting shoulder to wheel to adapt and change to survive. As the South African economy continues to see new and complex risks emerging, the insurance industry must be unrelenting in its quest for innovation, collaboration, and affordability, and a willingness to underwrite the risks that threaten South Africa’s efforts to rebuild the economy and support business vitality. That being said, industries and individuals must play their part to minimise risk, disruptions, and damages to ensure a safer, more productive South Africa for all.