Cameron Cupido, CEO, Reinsurance Solutions Intermediaries
The year ahead in global reinsurance looks nothing like we expected it to just 12 months ago. The Covid-19 pandemic; renewed lockdowns and fears of more; uncertainty around a second wave; the effect of the global economic contraction on premium volumes; and low interest rates are all shaping the sector in unexpected ways.
In South Africa, the most recent forecast by the South African Reserve Bank predicts our GDP will shrink by 6.1% in 2020, largely driven by the impact of Covid-19. This is expected to result in contracted premium volumes for certain niche insurance classes of business, such as hospitality business, travel insurance, trade credit, marine cargo and event cancellation.
The South African context
In understanding the effect these factors will have on the reinsurance sector in 2021, we need to consider the backdrop against which they will play out.
Prior to Covid-19, South Africa’s reinsurance market was hardening. The pace of this hardening slowed down slightly in 2020. Loss-free programmes had flat renewals and loss-affected renewals were up 5% on average. This was due to significantly lower incidents of catastrophe and property large losses in 2019 and 2020.
Renewals were tough, and reinsurers pushed hard to increase rates and tighten terms and conditions. Reinsurers’ underwriting discipline (analysis and interrogation of renewal information) was more rigorous, while reinsurance wordings and exclusion clauses were scrutinised more closely.
Among all this, the Covid-19 pandemic took hold in South Africa and we went into phased lockdown. An enormous question mark exists as to the full financial impact of Covid-19 related losses in the South African insurance market. Business interruption claims as a result of Covid-19 are still being challenged in court, and while we await the outcomes of these cases to understand the extent of the impact, it’s safe to say the long-tail nature of these claims will create challenges for pricing at renewal.
Lockdown also forced many companies to work from home, spurring increased digitisation in the workplace and as a result, increased exposure to cyber-crime. Some reinsurers have begun to address their potential exposure to cyber losses by introducing stricter cyber exclusions. This is expected to be a feature of upcoming renewals, as the work-from-home trend continues long after the Covid-19 crisis has passed.
Looking forward to 2021
Based on this, we can look ahead to what 2021 might hold for the South African reinsurance sector. Firstly, I believe reinsurers will continue to actively manage their exposure to Covid-19 by introducing stricter terms, conditions and exclusions in reinsurance wordings.
Loss-affected programmes are likely to see price increases at renewal. I think programmes that are exposed to Covid-19 losses, in particular, could see significant price increases. Loss-free programmes will most likely see flat renewals, with any increases being exposure related.
Renewal discussions on loss-affected and Covid-19 accounts are expected to be difficult and drawn out in the year ahead. Insurers could mitigate some of this by starting renewal discussions sooner rather than later, allowing for adequate negotiation time with reinsurers.
The regional context
Looking at the broader Southern African market, the IMF expects Sub-Saharan economies to shrink by three percentage points in 2020. Although recovery is expected to begin in 2021, these economies will only reach 2019 levels in 2022.
Before Covid-19, the region experienced reduced reinsurance profit and capacity following increases in the incidence and severity of natural catastrophes; the negative impact of climate change; and the cost of doing business in the region. These challenges were further compounded by currency fluctuations and fragmented and protectionist local regulations.
Hard market conditions are expected to worsen in 2021, with uncertainties around Covid-19 further sustaining conditions. The shocks being experienced in global reinsurance markets are expected to reverberate into our region, where major reinsurers are beginning to streamline their activities to concentrate solely on key markets. Ultimately, this will reduce reinsurance capacity in the region.
However, there is a silver lining: the projected economic recovery, buoyed by improved commodity prices and new explorations of hydrocarbons, is expected to spur regional insurance and reinsurance business. The increase in climate change-related catastrophes is also sensitising the agricultural sector to the need for insurance. Although, despite an increased uptake of parametric covers, reinsurance capacity remains restricted. Meanwhile emerging organisational risks like cyber risk are predicted to be good future growth areas in Southern Africa.
Weathering the storm
Professional reinsurance brokers equipped with adequate resources such as analytics software and highly skilled staff are able to guide clients through hard market conditions.
Price increases and the adjusting of terms and conditions must be justified. Pricing levels must be risk commensurate to adequately cover exposures, and the reinsurer’s view of the risk should be aligned with the insurer’s view.
Professional brokers can assist with all this, and challenge risk pricing assumptions made by reinsurers to achieve consensus on the technical price.
If 2020 was anything to go by, such professional support will be an absolute necessity in the year ahead.
About Reinsurance Solutions Intermediary Services
Reinsurance Solutions Intermediary Services (Pty) Ltd is a level 2 B-BBEE company, partially-owned subsidiary of the Mauritius-based Reinsurance Solutions Group, the largest independent African-owned reinsurance broking group servicing Africa and the Indian Ocean Islands. From our office in Woodmead, Johannesburg, we provide reinsurance solutions to a growing base of blue-chip insurance clients in Southern Africa and Lusophone countries, including Angola, Botswana, Cape Verde, eSwatini, Guinea-Bissau, Lesotho, Malawi, Mozambique, Namibia, Sao Tome & Principe, South Africa, Zambia and Zimbabwe.
At OWLS Software we offer 8000 insurance software features designed to automate any Insurers, UMAs or Brokers insurance admin.
