7 February 2022
While the global economy is showing green shoots of recovery, dwindling reinsurance capacity and increased premiums, typical of hardening markets, will persist into 2022. There is no doubt that the Covid-19 pandemic has laid bare some of the limitations of traditional insurance like inflexibility of – and gaps in – cover and businesses are increasingly turning to alternative risk transfer (ART) solutions for possible solutions. It follows then that, in 2022, the ART market will be challenged with building capacity for uninsurable risks.
This year insurers will continue to scratch their heads on how to deal with systemic risk; not least because of the precedent created by courts extending perils like they did in 2021 with Covid-related business interruption insurance cases. Both local and international insurers and reinsurers now face the conundrum of having to reassess how to ensure that policy wordings that have been in existence for many years need to be amended to remove all ambiguity and clearly convey their intent and scope, while meeting policyholder expectations.
There is no doubt that in the coming years South African businesses will face increasing systemic risk, especially when it comes to risks related to the supply of water, power and possibly other utilities. This is where ART solutions become increasingly relevant because the traditional insurance market simply cannot comprehensively provide for systemic failures.
Thus, as exclusions or limitations are tightened and premium costs soar, corporate clients will only be able to negate the impact of systemic risk on their organisations by building their own capacity, either individually or as cohesive groups with similar exposures and dependencies.
One of the most pressing risks facing companies in all sectors today is cyber risk and this has been exacerbated by businesses across all sectors rapidly adopting digital technology in order to continue operating during the Covid-19 pandemic. While, according to one cyber security company, cybercrime increased 600% during the pandemic, it is difficult to know the exact cost of cyber-crime in South Africa. An amount of R2.2bn a year has been bandied about in the media in recent years but, according to African Check, no reliable data exists to support these claims. Determining the cost of cyber-crime is not helped by the fact that corporates are, understandably, loathe to disclose data breaches unless forced to do so. What is certain though is that the pandemic has changed the way we work and it is expected that many employees will want to continue working remotely for at least some of their work week, thus cyber risk is not expected to decrease any time soon. This is another area where corporates can mitigate risks and costs by building their own capacity for self-insurance.
Employer and fund schemes offering employee benefits (EB) have also been impacted by the pandemic (death claims have soared) and this is likely to affect pricing at renewal – we are already seeing significant increases in the risk rates for EB. Using ART structures to self-insure components of their EB schemes, could mitigate price increases due to the fact that EB programmes can be customized according to prevailing internal and external risks.
The recent devastating fire at the parliament building in Cape Town may also give government cause to rethink their approach of not buying insurance and changing to an optimal combination of self-insurance and transferring risk to external reinsurance markets.
The inherent flexibility in ART solutions, which allows corporates to tailor their insurance portfolios according to their own appetite for self-insurance, will continue to drive the demand for ART in 2022, as businesses seek to enhance their traditional insurance cover and provide capacity for new, as yet uninsurable risks.