IIG News

IIG Insights: Critical Mass – When reinsurance matters

On a cold rainy morning in Sandton clearly establishing the onset of an early winter, we warmly welcomed our attendees with a warm cup of IIG magic. Head of Risk Finance at Hollard & IIG councillor of Education, Daphne Peter officiated the session and welcomed our speakers, Thabo Twalo & Lee Ellis and acknowledged our sponsor for the event Munich Re and RFIB Africa. In attendance was IIG Immediate Past President Daniel Stevens, IIG Past President Natasha Bloch, IIG Deputy President Darryl Grater, IIG council members, IIG Class of and over 100 attendees from the insurance industry.

A brief introduction was given around the format of the days session which included an outline of the Q&A session that was held after each presentation.

Our first keynote speaker of the day was Chief Underwriter Officer Mr Thabo Twalo from Munich Re. Thabo light-heartedly shared in his opening statement, that reinsurance is what he actually does for fun. He outlined the basic tenets of reinsurance and the direct relationship it has with natural disasters & catastrophes. He touched on Cyber Risks in his intro, explaining that it is fast becoming a new animal/threat the Insurance industry is facing today.  He unpacked the importance and relevance of the insurance value chain between the reinsurers, insurers and the insured. Thabo emphasized that he believes the most important reason for reinsurance is to assist economies to recover after natural catastrophes for example climatological, geophysical, meteorological and hydrological events. The impact of natural CAT is not reducing, but rather, increasing over time. Relevant loss events are events that have impacted on the economy as well as the loss of life – these events highlight climate change as a reality.  2018 globally proved to be quite active in natural catastrophes – Total global economic loss: $160bn – insured losses were well above the average of the last 30yrs. Economies were only able to recover 50% of the loss which is quite concerning.  This highlighted just how much risk is currently uninsured.  Both the US & SA also incurred losses through wildfires. Half of the economic losses experience by natural CAT is covered by insurance – this is insufficient for now.  Natural CAT in Africa match global trends – weather related. Examples used were the recent natural disasters: Knysna

Fires – 2017 (overall loss US$420m) insured loss estimate: US$200m, Cyclone Idai – 2019 (estimated loss not released yet including fatalities). Of most concern was that globally 50% of the losses are insured but in Africa, the gap is far wider.

Reinsurance matters when risks are too large to be absorbed by the Insurance industry. Current trends indicate a steady increase in the height of new high-rise buildings and such projects are not possible without international reinsurance support. Africa has key economic industries e.g. oil & gas which entail constructions which are exposed to high losses. These types of losses cannot be absorbed by the local economy. Locally, the mining industries have incurred major losses as well as some key construction projects. Furthermore, Contingent Business Interruption can be quite complex. Complex covers require out of the box thinking and Thabo gave the audience of a solution called “Cat-in-a-Box” – simply describes that when an earthquake of a certain magnitude affects a designated area, there is immediate pay-out whether damage has occurred or not. The cover is predefined by specific transparent trigger calculations. Another example was Area Yield Index – agriculture cover which provides blanket cover based on predefined agriculture yield.

Cyber risk is a new threat we are facing. The more sophisticated we get as a society, the greater this threat – the awareness & availability of products still falls short of the evolving threats in the market.

On the cyber front, Thabo also touched on conventional cover e.g. fire being impacted by cyber exposure example a “hack”. He then closed with some of the key challenges experienced by reinsurers:

  • Climate change
  • Improved technology
  • Interconnectedness – single events having widespread impact
  • Increasingly complex products
  • Sustained low-interest rates attracting new entrants e.g. pension funds.

The pace of our development has been too fast compared to the skills of our labour increasing the likelihood of loss.

The Q&A time facilitated by Daphne & Thabo that followed was engaging and enthusiastic especially as gifts were available for participation.  One of the questions in this session was “What is the best reinsurance structure to help rehabilitate a bad performing portfolio”.

A 15min comfort break was taken before presentations resumed once again.

Our second keynote speaker was CEO Lee Ellis from RFIB Africa and his presentation topic was

“The necessity for reinsurance and the role of the reinsurance broker”.  Lee opened his presentation with the importance of reinsurance brokers and their subsequent approach as well as the desired outcome.  He was able to immediately illicit some audience participation on the need for reinsurance.

He covered some of the main drivers with cyber making a reappearance.  Lee outlined some of the main benefits of a reinsurance broker from expert independent advice to knowledge of regulatory framework and enabling access to new market segments as well as enabling informed purchasing decisions. He also emphasized the changing regulation stipulating the need for using only “admitted” reinsurers. He also touched on a controversial topic on how one should choose a reinsurance broker. According to him, the best method is to establish the value proposition each broker brings to your business, as well as local vs international.  Tender processes according to Lee seem to be quite antiquated which also involve long term arrangements that one is tied to. The general market process is more favourable to engage with a few brokers and whoever ultimately comes up with the best deal, gets the lead line. This seems to be a fairer and more transparent process. It’s imperative that within a South African context we have both a local & international presence. Lloyds guarantee is one of best practice and therefore tends to be favoured. As part of one’s approach and methodology, it is crucial to understand your client and their objectives. Most tender processes are completely misaligned to a client’s needs. The better approach would be an analysis of data, pricing, stress testing, fine-tuning and ultimately presentation to market and placement.

Lee broke down the basis of catastrophe modelling and touched on the prevalence of emerging perils. He also attempted to de-mystify exposure and touched on Geocoding.  South Africa, unfortunately, doesn’t have sufficient history to effectively determine hazard levels as compared to elsewhere in the world.  With financial modelling, one looks at the exceedance probability (EP) curves to better quantify expected frequency & severity of CAT events.  The main objectives of the desired outcomes were discussed. Some of these included identifying unique elements of the client, reducing earnings volatility, achieving pricing within the tolerance of benchmarking, aligned reinsurers, aligned wording and most importantly customer satisfaction.

Some major losses were discussed like the Twin Towers, Hurricane Katrina & Sandy.  Lee emphasized that the claims response time is essential in a loss event scenario which defines your role as a broker. So is market intelligence and the ability to engage at the highest levels to effect a settlement.

As a final wrap-up, Lee once again highlighted the importance of a reinsurance broker through:

  • Best access to global markets
  • Market/industry intelligence
  • Portfolio analysis
  • Advocacy of your brand across global markets
  • Aligned reinsurers
  • Claims negotiation

The second Q&A facilitated by Daphne and Lee was equally engaging with the audience asking some difficult questions.  One of the questions in this session was “Name three main catastrophe perils in South Africa”.

The IIG would like to thank our sponsors Munich Re and RFIB Africa for their support and commitment to ensure that the IIG continues bringing topical insurance related insights to our members and the insurance industry.

By: Asiya Swaleh – IIG Ambassadorial Committee Member