By Kobus van Niekerk – FCII Chartered Insurer (Senior Underwriter at Consort)
The construction industry, and to a certain extent the engineering industry, is responsible for developing the infrastructure that enables new housing for the homeless, jobs for the unemployed and transport for labour. The finance of these essential niceties is mainly the responsibility of the Government as whole, but especially at a Municipal and Provisional level.
One of South Africa’s biggest construction challenges is housing and the services that support it. With an ever-growing population and an increasing unemployment rate, informal settlements are growing in number, size, and inhabitants.
The infrastructure required to support these housing developments, roads and services such as sanitation, electricity and water, which are all essential, are lacking due to the almost complete absence of any investment by local authorities, municipalities and provincial Government.
The irony is that, as cities attract more people looking to improve their financial position, many are unemployed but still require life’s basic necessities, thus creating commerce and industry around them. Therefore, the desire to settle the homeless and unemployed in and around our present commercial industrial hubs, with the infrastructure and amenities such as schools to support them, will at the same time invite the commercial world to create jobs. This, in turn, will enable the country to address the major unemployment problem, minimising the crime factor and improving law and order.
The Private Sector has suffered, not only from a lack of investment, but also due to the lack of and rationing of electricity. Housing developments have to deal with an increase in interest rates making the purchase of housing units for many unaffordable. On the other hand, investment into alternate energy sources has flourished, with all forms of business, private households and quasi government institutions such as schools and the medical field, investing in this sector. Whilst new civil work is rare, road repairs and individual housing as well as alterations and additions are on the uptake.
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The grim side of this downturn in new civil contracts, is the millions of Rands invested in construction equipment, which now stands idle. The Engineering insurance market is experiencing a decline in the need for specific contract insurance policies whilst annual contract turnovers show a decline in work undertaken and lower estimated future work.
Unfortunately, contractors are also exposed to adverse weather conditions, an increase in crime, especially theft and malicious damage as well as the Construction Mafia, which have led to underwriters becoming more careful in their underwriting. These factors have led to amendments to policy wordings and greater differences in covers available in the market, wordings and underwriting criteria, which, in turn, increase the need for clients to seek qualified advice when taking up new or amending existing insurance.
With the present industrial revolution, the engineering industry is developing and changing in leaps and bounds alongside the technological breakthroughs we are witnessing, such as self-driving vehicles. The original electronic equipment insurance policy designed to insure the office computer is becoming a major tool in insuring complex electronic equipment. The capital outlay is massive, and the physical exposure requires modern and sophisticated underwriting skills. Not only should the material damage be insured, but any consequential losses should also be considered.
The economic pressures and technology advancement have a direct influence on the engineering insurance market. The increase in crime, and the severity of elemental perils should be considered by the underwriter. South Africa is not immune to or isolated from world trends. For example, local insurers should consider the adverse opinion international reinsurers hold towards the coal industry, including mining. Furthermore, it is important that engineering underwriters assess each risk presented to them in accordance with the individual exposure of the project and rating it accordingly. The nature of this business does not allow and cannot afford lower standards, as policies may stretch over years and, without a cancellation clause, the underwriter should be more cautious in their terms, conditions and premium offered.
Another concerning element in the insurance industry, and in particular the engineering segment, is the lack of experienced and trained staff. With untrained staff and / or improper supervision, underwriters will become extremely vulnerable in accepting risks at terms and premiums which are inadequate to the risk at hand. The broker community also suffers from this lack of knowledge syndrome. It is clear that underwriters and brokers should work hand in hand to ensure sustainability in the sector.
Although engineering insurance only contributes about 10% to the short-term insurance market as a whole, their overall responsibility is much higher. It is essential that a sound engineering insurance market is established in order to service the country and this is done through due diligence, competent staff and sound underwriting.
Consort Technical Underwriting Managers (Pty) Ltd (FSP 2273) underwritten by Lombard Insurance Company Limited (FSP 1596) an Insurer licensed to conduct non-life insurance business.