Key trends in the short-term insurance industry

The South African insurance industry is a vital socio-economic sector that provides a critical safety net to society. This was crystalised in 2021 as we continued to grapple with the fallout from the pandemic and the implications of the disease for the short-term insurance market.

Business interruption claims

One of the industry’s highest priorities in 2021 was to get to grips with the court rulings on business interruption claims and settle them as quickly as possible.

Old Mutual Insure received a fairly large number of claims. However, we believed that we should not wait for the courts to make a ruling before we offered relief payments to many of our smaller commercial clients. This represented relief to nearly 22% of our clients.

In January 2021, we embarked on a roadshow to inform our brokers of the next steps, and we engaged with our service providers to make sure that clients received priority treatment and that interim payments were made to keep their businesses running.

We are proud that, to date, we have made 225 interim payments.

We are even prouder to have resolved 89% of the claims received, and the remaining claims are in the final stages of calculation or in the indemnity period.

Increase in cybercrime

Another risk that was highlighted in 2021 is how vulnerable our country’s infrastructure is to cyber-attacks.

Many of our government institutions were held to ransom last year, causing major blockages and delays at the supply chain level and in the ports.

It is clear that it is no longer a case of if a massive attack happens, but when.

When hackers sieged Colonial Pipeline for a ransom of $5 million in May last year, it set off a cascading crisis for the US east coast for days. Our emerging economy cannot afford one such devastating event.

The insurance industry is at a critical juncture as we wrestle with what the increase in cybercrime means for existing policies.

On the one hand, commercial customers are keen on a product with specific provisions for attacks related to cyber losses, but the global trend is fewer insurance companies offering policies against cybercrime, saying it simply encourages such behaviour.

On the other hand, we are seeing a demand from individuals for protection against cyber losses, as more individuals use personal devices for banking. This will only increase as we rely more on technology. We need to find a solution that will allow insurers to produce a product at an affordable price for customers.

Real risk of grid failure

Another concern that has become critical to manage is the risk of grid failure, which accelerated in 2021.

We have become accustomed to load shedding in winter, but the grid has proved volatile, with power insecurity prevailing throughout the summer months.

The implications of grid failure are catastrophic. One need only think back to 2004 when parts of the USA had grid failure, and how 20 to 30 million people were left without electricity for two or three days.

Research from the South Africa Insurance Association suggests that if a similar event occurred here, it would take two to three weeks to get the country back up and running. The knock-on effects would be devastating. There would be no water because pumps would not be able to operate, security systems would fail, and cellphones would not work because mobile tower back-up batteries would not outlast such an event. This is a very real risk facing our country and the insurance sector.

Repeat of last year’s riots?

We are also concerned that a repeat of last year’s riots could be on the horizon in 2022. This would devastate the economy and the insurance industry.

Sasria would find it very difficult to honour claims on a similar scale to those experienced in 2021.

Benign claims figures

The industry has experienced reasonably benign claims figures compared to 2020. This may seem surprising in light of the looting claims and Sasria pay-outs of more than R32 billion, but our role was to support Sasria and most policies had exclusions.

Motor vehicle claims have decreased and claims as a result of disasters such as floods and fires are down, despite the fire on Table Mountain and the recent floods in the southern Cape.

However, we expect this to change in the future because of climate change. This is something we are seriously thinking about and applying to our risk modelling daily. We don’t have all the answers yet and view climate change as a risk that we are on a journey to unpack.

Positive trends

Although the pandemic has been devastating for many, we have seen some positive trends emerge.

Insurtech in agriculture

We have seen new business models emerge in the agricultural space. Online auctions were not a reality before 2020, but now players in the agriculture sector can buy livestock and insure it from the date of purchase to the date of delivery, significantly decreasing the risk of something going wrong in between.

We launched a product to this effect with partners SwiftVee in 2021. It is still a small contributor to our bottom line, but we foresee it will grow in time.

This approach underpins how we are viewing newer, smaller and nimble insurtech players that are coming to market: We don’t see them as a threat; we see them as potential partners to take innovative solutions to market.

Fewer vehicle claims

Another positive trend in the individual insurance market is that the lockdowns have reduced motor claims, while some of the uptick in economic activity has led some to get insurance cover.

The impact of continued lockdowns is likely to be neutral if not slightly positive on the individual insurance market due to lower claims.

Shift to shared economy model

However, a global trend that is putting pressure on our ability to manage motor claims is supply chain disruptions as a result of the microchip shortage in the automotive market.

The shortage is driving up the price of parts, and we foresee it being a blip in the short-term insurance market lasting between 12 and 18 months.

We think this will accelerate the shift towards a shared economy model, where our customers in the personal motor insurance market will shift from individual to a small corporate or business. This is especially so as the trend to use services such as Uber and Taxify increases due to cost.

Usage-based insurance

In 2022, it is likely that usage-based insurance models will increase and allow the insurance industry to deliver cutting-edge solutions to customers.

Policyholders will begin to question why they pay a fixed premium if their risk is lower. This is particularly the case with vehicles, where individual risk profiles come into play.

Products that offer a rebate or money back based on how often and how far you are driving will steadily become more popular, and this will drive a big shift in products that launch, as well as innovative pricing models.

Garth Napier is the managing director of Old Mutual Insure.

Disclaimer: The views expressed in this article are those of the writer and are not necessarily shared by Moonstone Information Refinery or its sister companies.

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