By: Thokozile Mahlangu, IISA
Traditionally, liability insurance policies featured relatively low down on the list of cover in South Africa, with claims also being fairly low in terms of value and frequency.
However, this is rapidly changing, with the frequency and value of liability claims climbing and insurers increasingly focusing on this insurance segment.
Liability insurance is designed to offer specific protection against third party insurance claims. Payment in a liability claim is not typically made to the insured, but rather to someone suffering loss who is not a party to the insurance contract.
Over the past few years, several major South African corporates, organisations and government entities have been involved in well-publicised loss incidents and events including product recalls, faulty workmanship and infrastructure failure, among others.
A few high-profile examples that come to mind include the collapse of the M1 pedestrian bridge while under construction in 2015, the outbreak of listeriosis in the processed meat industry in 2017, and – most recently – the Jagersfontein tailings dam collapse in September.
High-profile liability cases such as these have helped to raise some awareness among businesses, prompting a gradual change in the approach to liability risk management. However, there is still significant room for improvement.
A study by Allianz Global Corporate & Speciality released earlier this year found that fires or explosions resulted in the most expensive losses for local businesses during the past five years. These account for 65% value of all claims, while claims related to faulty workmanship or maintenance generated the second-biggest cause of loss, at 20%, in South Africa.
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The growth in frequency and quantum of liability claims supports the view that consumers are becoming more aware of their rights and more informed about the legal recourse that is available to them. Also, South Africans are generally becoming more clued up on amounts they could be awarded should they win a liability case in court.
According to Best’s Market Segment Report, several global and local drivers have also placed additional pressure on insurance capacity in the Directors’ and Officers’ (D&O) liability insurance segment.
Among these factors is social inflation, where the costs of claims increase because of societal trends such as higher awards against corporate policyholders, increased appetite for litigation, pressure for liberal treatment of claims, changing perceptions of social responsibility, as well as populism. Other trends that have an impact on the D&O insurance market are an increase in class action suits and rapidly evolving cybersecurity threats.
These trends should serve as a warning that even the best-intentioned companies, with top-notch quality control standards in their manufacturing and other processes, are not immune to third-party liability claims. Regardless of how good their processes might be and how strictly they are supervised, accidents and mistakes can still occur.
Liability claims can have a profound impact on business operations, professional service providers and the personal lives of people. Thus, liability cover is crucial for businesses where the financial, physical, and legal interests of the public are concerned. Individuals also recognize that their actions and behaviours could result in liability claims bearing huge financial consequences.
The increasing pressure on the liability insurance segment has attracted the focus of insurance companies and should also become a priority area for brokers to determine how they should approach liability insurance and assume their responsibility to their clients.
It is important for brokers to discuss liability insurance cover with their clients and make sure that the client can demonstrate how they actively manage their liability risks through factors such as contracts and various processes to maintain adequate liability coverage.
Brokers should consider that a key strategy for enhancing the value proposition for both the insurer and the client, is to improve their ability to identify and settle valid claims before they result in litigation. This will significantly reduce the cost of having to defend them.
Keep in mind that as the litigation trends among the public continue to shift and evolve, a more conservative approach to exposure and risk management will be crucial to ensure the sustainability of the liability insurance market going forward.