Globally during 2019 there was a move towards a hardening of the liability and special risks markets, South Africa was not immune to the affects thereof and followed suite. This trend escalated during the latter part of 2019 and into early 2020 and now despite Covid-19 remains and we foresee this continuing for a considerable time going forward.
A hardening market in short is a combination of material changes to increased premiums, reviewing and tightening up on policy wordings and coverages and managing the use of capacity across risk portfolios. Insurers in our classes of business are also following the property markets and are more receptive to, supporting proportional placements, excess layers or coinsurance sharing of risk.
The following factors locally and internationally are influencing a hardening market:
- Increasing litigation – consumers are more aware of their rights and are more open to pursue recourse through the courts, coupled with increase in consumer awareness and activism
- Big claims on large corporates – there is direct correlation between the size of the client and the size of their claims
- Frequency of big claims – there is a trend that the occurrence of larger claims is on the rise.
- Ever increasing claim investigation and legal costs – consumers want accountability, this drives initial investigations and costs upfront during the claims process; the trend is also on the increase.
- A changing world environment – uncertainty is the only certainty, unprecedented and unexpected losses, unknown exposures, unanticipated contingencies, fundamentals that were previously in place are no longer relevant – our past loss experience is not a reliable indicator of future losses. Who would have predicted that this time last year we would today be in this situation with the global pandemic we are facing now. We needing to price for unknown future losses and exposures that we have no idea about.
- Reinsurance markets experiencing losses in other areas – geographical, assets, weather etc. that have an indirect knock-on effect on the liability market, coupled with a trickledown effect from reinsurers – cost of capital, cost of doing business.
- Underwriting margins (underwriting profits) being squeezed – given increased cost of doing business and the claims escalations
- The understanding that historical pricing and trends are not the ideal predictor of future premium requirements. We need to adjust drastically and proactively based on loss history as well and exposure profiles.
- A more conservative approach to reserving across all lines – increased reserving now for the unknown future losses.
A hard market allows underwriters to:
- Coverage and Price: An opportunity to correct the past (soft market terms and conditions – price, deductibles, wordings, coverages, improving proposal forms – in line with market exposures and asking more relevant questions to improve risk assessment)
- Risk Selection: Focus on improved risk selection. A more focused approached to select risks or, when appropriate, increase prices and/or deductibles on less desirable risks.
- Capacity management: Being strategic when deploying capacity on all risk types for corporate, commercial or SME accounts. This includes ventilating capacity, restricting capacity on primary layers offering co-insurance lines.
Trading in a market affected by a pandemic
Like the rest of the world, as an industry, we are still finding our feet as to how this will exactly affect our business going forward. It will no doubt impact us all whether from reduced income due to a decline in new business quotes, clients cancelling mid-term, limits being reduced, companies going out of business and not trading, liquidation or at worst increased claims. The hard and continued hardening of the market we believe will continue and how we manage capacity, pricing, coverage, and claims shall remain a focus for all underwriters and reinsurers.
The real exposures and claims from a liability and special risk perspective may not be one hundred percent clearly known or visible now, but we are aware that there may be increased claims emanating from the pandemic. The quantum, if any, is however impossible to predict.
A couple of scenarios to consider that could be potential exposures for businesses to consider during a pandemic which underwriters need to be aware of:
- When times are tough, employees steal. The economic climate is such that people need to make ends meet. White collared crime is on the increase. Processes and controls may be vulnerable and tested by employees or may even be totally lacking during lockdown. Payment authorizations or warehousing risks elevated due to reduced staff numbers or skeleton staff being deployed in the correct areas
Directors and Officers liability:
- The leadership teams of businesses may be held accountable for not implementing or following through with the safety regulations laid down by local and national government. There could be exposures relating to the lack of duty of care to staff members and the general public.
- Broker PI: To what extent have brokers correctly advised on the appropriate level and applicability of insurance covers relative to communicable diseases?
- Built Environment: How will engineering firms, architects, project managers and the likes react to time frames and deadlines they need to meet and subsequently miss if their key staff and a large proportion of their workforce is quarantined or out of action.
- Premises: Potential exposures to those property portfolios (shopping malls), restaurants etc for lack of controls and health and safety for customers and patrons?
- Products: A client manufactures PPE or ventilators and the failure of these and the resultant loss of life, what precautions and quality assurance does the business have in place?
- To what extent is the medical fraternity – doctors and nurses etc – open to claims relating to the failure to assess and treat adequately or being held accountable for not wearing the correct or appropriate PPE when treating patients?
- With many businesses working from home, remote terminals and devices may be more susceptible to network and data breaches. Businesses need to ensure that network security is enhanced, patches deployed, and antivirus software regularly updated.
What are the London, European and South African trends?
Regarding pricing, capacity, risk selection and wording restrictions set out herewith, is exactly what is being seen in Europe. South Africa generally lags Europe by 6-8 months in terms of changes, however this is not the case now. Our hard market and approach to underwriting during this period is running in parallel to Europe.
Regarding actual exposures to the pandemic, we have seen that throughout Europe, although inconsistent for now, exclusionary language is being placed onto reinsurance treaties as well as original policy forms. The most common forms in this regard are the LMA5399 (for reinsurance policies) and LMA5396 (for insurance policies). Although there are inconsistencies, its still early days.
Within South Africa, we are already seeing variations of the absolute exclusion being applied by underwriters to policy wordings, however the underlying intentions are all the same. This driven by the reinsurance markets and underwriters and will becomes the norm within the latter part of 2020.
Overall, as a result of the current pandemic coupled with the risk uncertainty and increased exposures discussed above, these factors will continue to fuel and drive the hard and hardening market we now face. We will no doubt be in this cycle for a while to come and the cautious approach to risk will be maintained.
By: Warwick Goldie – Chief Underwriting Officer at ITOO Special Risks