The domestic non-life insurance industry is back on the front foot after an impressive 50% rise in aggregate net profits for the 2023 year. This impressive result emerged from a consolidated view of the financial results of 27 insurance brands participating in the 2024 KPMG Insurance Industry Survey, now in its 26th year. FAnews attended the virtual report launch to find out more about the opportunities and threats that short-term insurance stakeholders need to be cognisant of.

Emerging from a mega catastrophe ‘blip’

Derick Vice, Audit Partner at KPMG SA, welcomed the fantastic 2023 result following a couple of tough years for the industry. He acknowledged the three mega catastrophe loss events that had weighed on the sector since 2020 including pandemic-related business interruption (BI) claims; the rioting and looting claims carried by the state-owned special risks insurer after July 2021; and the significant tab picked up by insurers following loss and damage to assets due to April 2022 floods along the KwaZulu-Natal coast. 

“Looking at the non-life results in aggregate … we saw an improvement in net profit from about R6.7 billion to about R10 billion,” Vice said, listing Santam, Bryte and Eskom’s cell captive insurer, ESCAP, as the three main contributors to the profit haul. However, the expert conceded that much of this profit was generated by return on investment rather than underwriting. In particular, local non-life insurers remained ‘under the gun’ due to poor results in the motor insurance class. FAnews regulars will not be surprised by this revelation. 

There are a range of factors contributing to higher motor-related claims including driver behaviour, poorly maintained road and transportation infrastructure; replacement part and vehicle repair inflation; and surging vehicle hi-jacking and theft statistics. “We also have the unique dynamic of about two thirds of the vehicles on our road not having any short-term insurance in place; this is quite different to some other jurisdictions,” Vice said. This is among the many ‘known knowns’ that is impacting domestic motor underwriting; but despite the issue being flagged by the South African Insurance Association (SAIA) decades ago, little has been done. 

Could motor claims be under control by 2024?

Your writer fully expects the 2024 non-life insurer results to reflect improvements in the motor class as insurers implement a range of cover limits, excesses, exclusions and risk mitigations to restore underwriting balance. They have also taken strong steps to address property underwriting challenges that arose from power outages and the significant uptick in business and household solar installations. “Non-life insurers have had to find ways to manage their underwriting methodologies to respond to the massive investment into solar in 2022 and 2023,” Vice said. 

He concluded his non-life results overview with brief comment on the reinsurers, who “had taken a beating in South Africa and internationally” over the past few years. “The connection of the South African reinsurers into the global reinsurance market inevitably meant that there was going to be a hardening of rates; but also changes in underwriting limits and attachment points,” he said. “The latest survey shows how these global forces impact the local results in South Africa.” 

A two-part industry assessment

Kashmira Naran, Partner: Insurance at KPMG SA offered some useful background on the survey. “Our survey consists of two parts: the first is an analysis of the financial results of 27 non-life insurers, 17 life insurers and 4 reinsurers … and the second consists of a series of articles researched and written by our team of insurance specialists on global insurance trends,” she said. She then stepped in as the moderator of a round robin discussion that included four of the insurance experts featured in the ‘themes and trends’ part of the survey. 

Much of the discussion was dedicate to the potentially systemic risks presented to non-life insurers by climate change and cyber. Naran asked how insurance sector stakeholders might approach their overall risk management frameworks to accommodate emerging risks. “A healthy relationship between the risk management function and the executive management team and board is important,” said Marius Botha, who was introduced as a seasoned insurance executive and actuary. He said risk management was necessary to identify external risks and determine how these risks threaten the sustainability and viability of a firm. 

Vice opined that changes in regulation and public opinion had forced risk managers to pay closer attention to their external communication. “Regulators want firms to report on these [climate and cyber] risks; and consumers, investors and shareholders want feedback too,” he said. He argued that South Africa’s long-term focus on transformation and transformation reporting gave firms a bit of a head-start as other areas of the ESG paradigm came into focus. 

Introducing the transition risk concept

In an interesting but not entirely unexpected development, the latest survey showed signs of polarisation around climate change and so-called transition risks. Transition risk refers to the consequences and potential financial losses that arise as firms adapt to a low-carbon economy. This includes risks from regulatory changes, market shifts and technological advancements which affect the risk profile of insured clients, particularly in carbon-intensive industries. Insurers must consider these factors to avoid underwriting losses. 

“There are clear, different camps related to climate change and climate risk; a lot of CEOs are changing the way they articulate this risk [in an attempt] to avoid getting drawn into those debates, and becoming politicised in the process,” Vice said. The result is that the phrase ‘climate change’ is making way for the word ‘sustainability’. Talk about calling a spade a spade, dear reader. 

Martine Botha, Global Executive for ESG in Financial Services at KPMG was called on to offer additional insights in this area. “An insurer cannot say it is going to be net-zero unless it really understands the decarbonisation pathway of the sectors that it underwrites,” Botha said. Put differently, an aviation underwriter has to have intimate knowledge of the transition-linked constraints that firms in that industry encounter. The challenge to insurers and reinsurers is to innovate around product for affected industries, and possibly to assist in moving more capital into research and development in these areas. 

Organised crime a major issue in SA

To bring this discussion back to the tangible risk world, Naran focused in on an audience question re the impact of organised crime syndicates on underwriting results. “Crime is a major contributor to non-life insurer results,” conceded Vice. He commented on the well-documented use of key cloning and relay access attacks used by vehicle theft syndicates as one example.  

The panellist could not resist defaulting to a wider view, being the “S” in the old ESG chestnut. He singled out inequality and poverty as major contributors to South Africa’s crime problems before urging insurers and reinsurers to redirect their corporate social responsibility (CSR) spending to crime hotspots. “Those are the areas that obviously need to be uplifted,” he said. “The young people in these communities are not seeing opportunities; they are not seeing a future; and therefore, they end up slipping into a life of crime.” 

Law enforcement to drive short-term improvements

Improvements in criminal prosecutions and continued cooperation between insurers’ forensic departments and the country’s law enforcement institutions could drive short-term improvements. “The connections between the insurance industry and the various enforcement agencies could be strengthened to help combat crime,” Vice concluded. In this regard, South Africa should not tolerate having criminal matters meandering through courtroom processes for decades or longer. 

Writer’s thoughts:

Sometimes, the solution to a problem is glaringly obvious. Your writer reckons mandatory motor vehicle insurance that would distribute damages and losses across the entire motor pool is a no-brainer. Agree or disagree? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.