The non-life insurance industry is facing challenges, but it is not all bad news

The non-life insurance industry in South Africa is facing significant challenges.

Following a difficult year in 2021 in which the industry dealt with the fallout from an unstable grid, mass riots and looting, and weather-related losses, optimism for an economic recovery has remained muted this year.

Changes in the climate

The impact of climate change is one of the most significant risks to emerge in the insurance industry.

Natural disasters have become more frequent and severe around the world, including in South Africa. In the last three years, there have been nearly 19 catastrophic events in the United States alone, with costs exceeding $102 billion. In the United States, the severity of weather-related events has increased 10-fold in the last decade, while the frequency of large catastrophe (CAT) claims has increased from 6 to 36 per decade since 1982.

According to data and research, the average annual CAT claim in the last ten years between 2012 and 2022 is ten times higher than it was between 2000 and 2011.

According to the insurance and reinsurance markets, the recent KwaZulu-Natal flood disaster was the single largest CAT event in history. Anticipation that the volatility of CAT claims will continue to rise, increasing the cost of reinsurance. Over the last three years, estimations that reinsurance claims in South Africa have exceeded R80 billion. We anticipate that reinsurers will be less eager to fund these events in the future. This must be balanced against the critical responsibility that non-life insurers bear in mitigating the disastrous effects of climate change on society.

Pressures on inflation

A prolonged period of hyperinflation is still being investigated, and while all hopes are that it will settle, it is likely to last until 2023. It will continue to have a significant impact on our industry, and consumers will most likely remain under pressure.

Global supply chains have struggled to normalise following the disruptive lockdowns of the last two years. The demand for used vehicles has skyrocketed, with data indicating that used car prices have risen by 8% to 14%.

Against this backdrop, the average cost per claim is rising dramatically. Since 2021, our claims inflation has been rising, and this trend has continued in 2022.

The market has already priced in these inflationary pressures, with an expected inflation rate of 10-15%. In contrast, we are seeing significant increases in premium rates and excess. Policyholders must collaborate with brokers to ensure they are adequately protected against loss events. We have already responded to the challenge by providing customers with optional extensions and top-up coverage to protect them from inflationary pressures, stated Garth Napier, MD of Old Mutual Insure.

Infrastructure failure

We are becoming increasingly concerned about the possibility of a grid collapse, which is becoming increasingly likely. The extended damage to many businesses would go far beyond the actual blackout, and some may not be able to recover at all due to the unprecedented nature of such a situation. This could have even more devastating consequences for the insurance industry.

Napier stated, “Already we are seeing how load shedding is causing an upswing in electronic equipment, burst geyser and power surge claims. Frequencies for claims impacted by load shedding have almost doubled. Our data shows that since 2018 the number of electronic equipment, burst geysers and power surge claims has risen by 93%, 437 for the year to date.”

Scarcity of skills

For some time, the insurance industry has lagged behind other industries in terms of productivity growth. We are experiencing a data, actuarial, and IT skills shortage, which is resulting in a talent war. With more entrants disrupting the insure-tech and bancassurance space, there is a shortage of experienced underwriting skills, as well as increased costs to attract and retain talent.

To overcome stagnation, the non-life insurance market will need to address the productivity imperative. Through digitisation and automation, there is an opportunity to increase operational efficiencies.

What will it take to triumph?

It’s not all doom and gloom, as major market shifts force industry players to rethink how they do business.

“We expect consolidation of the insurance market to increase as smaller players come under pressure. Mergers and acquisitions (M&A), as well as partnerships with Underwriting Management Agencies (UMA) are also likely 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, only a few non-life insurers have participated in M&A, but other players are catching up, and a major shake-up of the industry is on the horizon.

“We have already cemented significant deals in the last two years, characterised by our acquisition of ONE Financial Services in 2021 and Genric Insurance in 2023 (pending regulatory approval). We expect these to unlock new growth opportunities and add to our competitive advantage, as well as offer our customers specialist products and services. It also gives us an ability to rapidly test and scale new product ideas”, Napier shared.

Consolidation and transformation will also affect the broker market. Some small brokers have already exited, merged with similar entities, or sold their portfolios to larger brokers, indicating that market consolidation is already underway. Legislative and regulatory changes, an increasing cost burden that necessitates the centralization of administration functions, and an ageing broker force are all driving this trend. Joint ventures in this space are likely to increase as transformation becomes an industry requirement.

Non-life insurers have historically relied too heavily on motor and property books, but this will have an impact on margins in the future. As a result, diversification becomes a must. 

 “We continue to strengthen our distribution capabilities and non-insurance revenue streams, while simultaneously focussing on growing of some of our specialist areas, like marine and engineering, to hedge against this. This also needs to be coupled with ongoing innovation to meet ever-evolving customer needs. We have already brought several innovative offerings to market when it comes to user-based insurance (for example CommaInsure and Veesure), widening our omni-channel service offering, as well as integrating insuretech partners with our business.”

The safety net

In times of disaster and crisis, the non-life insurance industry has proven its resilience by providing a critical safety net to society.

Despite the challenging operating environment and headwinds in 2023, we anticipate that the industry will play an even larger role in these uncertain times.