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Property insurance underwriting in the era of unpredictable disasters caused by man-made and natural events.

Property insurance underwriting in the era of unpredictable disasters caused by man-made and natural events.


Property insurance underwriting is a very technical profession which requires great skills and experience. There are several factors to consider when underwriting and managing a property portfolio, including the type and quality of the risks insured and the variability of exposures as measured by the construction type, location, occupation, and the insured values, among other variables. The property class of business should generally be characterized by a low frequency and high severity loss profile. However, the recent events like the covid-19 pandemic, the KwaZulu Natal (KZN) July 2021 unrest as well as the March 2022 flooding losses seem to have changed that profile and have once again reinforced the need for underwriters to be prudent. Due to the changing risk landscape, it is imperative for Underwriters to pay more attention to the risk factors discussed below.


Identification of the risk location

One of the key requirements in property insurance underwriting is the risk location. The risk location provides data regarding exposure to natural perils as well as the surroundings which may affect the continued economic existence of the buildings and the business in its current form.  Underwriters need to collect accurate data about the location of all the property risks in their portfolio. Developments in technology has made it possible to obtain granular details of locations using advanced tools. More importantly, the question is not only where the property is located, but also the natural hazards and weather perils.


Underwriters need to pay more attention to the weather-related changes which have been triggered by climate change. The underwriting models and information analysis tools need to be updated to recognize the shifting risk landscape.  The underwriter should collect adequate risk location data, including proximity to flooding zones, possibility of damage by stormwater and earthquakes as well as the likelihood of damage due to strikes and riots. The influence of social media through sensational messages on socio-economic issues also needs to be factored in the insurance models. Risks such as malicious damage to property, strikes and riots as well as political violence and sabotage are increasingly being driven by social media activity. The underwriting tools should also be modified to recognize social dynamics at risk location, and if possible, real-time monitoring should be deployed.


Cresta zone information is very critical for effective underwriting and pricing of property catastrophe excess of loss treaties. The same applies to proportional treaty programmes which are subject to event limits which has an effect of limiting the amounts recoverable from reinsurers when there is a catastrophic event. Again, this issue requires accurate location data for every risk in the portfolio.


Understand the common and special hazards in each location

The major consideration for property insurance is usually fire damage. This is great but property Underwriters need to go beyond the usual fire peril. Property insurance covers several perils and hazards which must be identified and managed from the onset. Some of the more devasting insurance losses are caused by the unexpected causes like riots and strikes and well as weather related losses. Non-material damage losses like the Covid-19 pandemic losses have also affected some insurers. The analysis of risks should go beyond the static risk but also include other potential causes of losses that has never occurred before.


Design an effective system to manage the concentration and accumulation of risk

Insurers and reinsurers are exposed to the risk of excessive losses from a single event because of writing multiple insured in one geographical area (concentration) or at the same physical address or location (accumulation). The aggregation of values on a small area per square meter increases the chances the risk of a catastrophe even if the loss-causing event is small. Unknown accumulation is an aggravated situation where the underwriter does not know the extent of their exposure due to the unavailability of a system of identifying exposures or due to lack of accurate data on risk locations. Underwriters need to manage the risk of concentration and accumulation by making sure that the risk location data is accurate and can be interpreted to fully define the insurer’s exposure. Failure to identify the full exposure at each location can lead to excessive losses which go beyond the insurer’s capacity. The recent floods and the July 2021 riots illustrate this aspect very well because the extent of damage that can be caused by a single event in one location. 


Purchase adequate reinsurance cover

The determination of what constitutes adequate reinsurance cover is a contentious issue. In good years finance executives usually consider ceded premiums as giving away profits while on the other hand underwriters consider reinsurance as “sleep easy cover”. There is no such thing as “sleep easy cover” if there is a possibility that a loss can be as high as the total insured value. Underwriters need to be aware of the various probable loss scenarios and then select the most prudent and conservative approach to purchase reinsurance, whether per risk or catastrophe cover.


Determining the correct premium and terms of cover

The property insurance rates have hardened in recent months driven primarily by the increasing global losses emanating from the Covid-19 pandemic as well as the Ukraine-Russia crises. In South Africa, the KZN floods losses, as well as the July 2021 unrest, have also had a huge impact on the local market. The hardening market conditions have forced underwriting discipline on the market which need to be maintained for sustainable results in the long term. The unpredictable nature of the emerging losses is also a cause for concern which requires underwriters to enhance their terms and conditions of cover to make sure that unintended losses are not covered indirectly by omission. The main concern is the terms and conditions for business interruption cover which require a though understanding of the potential loss scenarios, especially on the contingent business interruption extensions.


The increasing unpredictable nature of losses requires constant research and updating of underwriting models and tools to ensure that insurers write sustainable business in the long term. Reinsurance brokers are very instrumental in facilitating access to international markets which can also add value to the underwriting process. Major international reinsurers have the capacity and capabilities to assist local insurers with both the pricing and capacity for large exposures.


Simba Mukonzo is the Founder and CEO of MUKFIN, an international reinsurance intermediary based in Johannesburg with access to A-rated markets for property and casualty excess of loss reinsurance programmes, including PVT and PTS facultative placements.


Article was written by: Mukfin Financial Services