Lizé Lambrechts, Group CEO of Santam
The COVID 19 pandemic has shaken our society to its core. Many family members, colleagues, friends or acquaintances have either lost their lives or been infected. As devastating as the virus has been to livelihoods and communities, there have also been several silver linings.
Over the past 18 months, we have witnessed a phenomenal capacity for creativity in adversity as well as a collective desire by people, civil society, the business sector and Government, to make a difference. More importantly, as insurers, we are in a unique position to help lead South Africa to a more resilient future, by providing cover when people need it most.
However, if anything, the pandemic exposed the existence of systemic risks in our society. Systemic risk refers to risks that typically play out as a chain reaction in a system resulting in widespread losses to individuals, businesses, industries, and even countries. Examples of systemic risks are pandemics, climate change, cyber-risks, political instability, etc. Such risks are a threat to both resilience and access to capital because they are increasingly difficult or expensive to insure against.
For example, the COVID-19 pandemic has triggered a raft of exclusions and higher premiums both locally and globally in insurance and reinsurance contracts. This has resulted in a reduced capacity in certain lines of insurance for insurers and reinsurers alike. Similarly, reinsurers are raising their catastrophe reinsurance premiums off the back of higher risks associated with climate change. The insurance industry, along with its public sector counterparts, must adapt to meet these challenges to strengthen resilience and access to capital.
The ability of insurers to provide cover for systemic risk largely depends on whether reinsurers are willing to underwrite the risk. As the economic impact of COVID-19 became clear, reinsurers moved quickly to exclude pandemic risk from their coverages. Without the ability to diversify such risk, even in the context of a global premium pool, the potential liability of a pandemic was simply too large for them to cover, deeming it effectively ‘uninsurable’.
Uninsurable risks, characterised by large numbers of people and businesses suffering a loss at the same time, are usually addressed through government relief programmes. In such instances, there are simply too many simultaneous claims, making it impossible for insurers and reinsurers to shoulder the financial fallout. Similar exclusions are commonly imposed in the event of a nuclear disaster, terrorism, and war.
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It stands to reason that if something can’t be diversified, it cannot be insured, but if you can diversify at a global level, then it can often be insured. Another way of insuring against an event like a pandemic could be to build up a fund over time in partnership with the government, something that everybody can draw from when a pandemic hits.
In the meantime, individuals and businesses must share the responsibility to protect themselves against uninsurable risks. For the most part, protection must come in the form of better risk management that culminates in risk reduction or even prevention. We believe it falls to insurance industry stakeholders to drive awareness around such practices.
Where risk is unavoidable, governments should use their sizable balance sheets and ability to legislate to form public private partnerships (PPPs) with insurance industry stakeholders, in order to provide some protection.
What might a scheme like this look like? Government would create the legislation for the structure and operation of the PPP. An aggregator could then collect a small premium from a large number of, for instance, farmers that would be paid into a fund managed by a private sector insurer. Distributions would then be paid out to affected members in the case of a severe weather event, such as drought, flood, hail or frost. If the assets inside the PPP were insufficient to provide adequate relief, the second port of call could be a reinsurer, whereafter the government could act as the reinsurer of last resort.
In South Africa, we already have a successful blueprint of such a model in SASRIA. Instead of reinventing the wheel, we believe its mandate could be expanded to provide more protection against the rising risks we face. Leveraging expertise in the private sector would add further impetus to such a model.
The reality in South Africa is that many individuals do not have the resources to buy insurance. Yet they are the ones who need it most to keep extreme poverty from their door when systemic risk events occur. Again, the private and public sectors have the combined resources to find a solution; it is already being done elsewhere on the continent.
More importantly, a thriving insurance sector is a critical cog in any healthy economy. Insurance makes people and businesses more resilient. Adequate cover helps them to bounce back when things go wrong. It is the safety net that allows people and companies to focus on what makes them thrive.
Systemic risk will continue to evolve into an ever more complex animal. As insurers, we need to prioritise our understanding of these risks and drive the innovation and collaboration needed to help individuals and businesses remain resilient and ensure continued access to capital.