SA insurance company CEOs see climate change as biggest threat to growth

SA insurance company CEOs see climate change as the biggest threat to growth because they see demand from stakeholders, such as investors, regulators and customers, for increased reporting and transparency on environmental, social and governance issues and risk.

KPMG South Africa’s annual South African Insurance Industry Survey for 2021, launched on Thursday, indicates a strong focus on risk management across key areas, such as environmental risk.

At 29%, this was far more than the global figure of 7%, while globally CEOs were more worried about regulatory (17%) and tax (16%) risk.

This is not surprising, as the insurance industry is highly affected by environmental changes and therefore believes that these risks and exposures should be identified, measured and responded to through governance, strategy, risk management, product offerings and related reporting.

Environmental, social and governance (ESG) issues also include corporate governance, market conduct, data privacy and cyber security breaches. Forty non-life insurers, 21 life insurers and seven reinsurers were surveyed.

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Insurance company threats to growth and risk

According to KPMG, although some insurers may have considered and potentially modelled pandemic type scenarios within their own risk and solvency assessment scenarios, only a few, if any, considered the linkages and connectedness between risks to fully foresee the impacts on equity markets, interest rates, operational risks and persistency risks.

In 2021, insurers regarded cybersecurity as the biggest threat to insurance company growth, with environmental or climate change risk in second place, followed by supply chain, emerging or disruptive technology, regulatory and operational risk.

In 2020, the main concern was talent risk, followed by supply chain, return to territorialism, environmental and climate change, cybersecurity and emerging or disruptive technology risk.

The survey indicates that, while the insurance sector was hit hard, it was resilient and adaptable.

“The knock-on effect and interconnectedness of risks emanating from Covid-19 were astonishing and these impacts, as well as their velocity of onset, must be considered to obtain a comprehensive understanding of potential implications moving forward,” Mark Danckwerts, partner at KPMG and African insurance practice leader, says.

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Life insurance

In the life insurance sector, an analysis of 21 of the major life insurance licenses in South Africa, covering 88% of the market by total assets, indicated that the top five life insurers grew their asset base by 3.5%, with the smaller remaining entities outgrowing their larger counterparts with a 9.3% growth in assets.

Net premiums, reflecting risk and FIDP business for these entities, grew by only 2.2% while performance of the smaller life insurers overall grew on average by around 8%, leading to a slight shift in the share of premium. Despite this, the top five still generated over 87% of the total premium written by the market.

“While the hard lockdown had a direct impact on the ability to make sales, with the impact felt during the initial phase of transition to remote working, reporting during 2021 has suggested that this has turned slightly, but the recent civil unrest has put another smaller dent in the ability to engage directly with the customer,” Danckwerts says.

Although the life insurance company sector experienced poor premium growth, mediocre investment performance and significant claims which moved from a total industry profit of close to R22.1 billion in the 2019 period to a loss of R2.6 billion in 2020, dividends for the surveyed entities increased from R16.1 billion to R18.5 billion, with the life insurance industry remaining well capitalised.

However, there is a chance that policyholders could decide that life cover is less of a priority once the vaccination rollout has achieved scale. This will require some tough business decisions, especially when you add some challenging moral decisions for life insurers regarding vaccine mandates for employees, vaccine premium adjustments for policyholders and questions of repricing policies to recoup some of the losses incurred.

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Non-life insurance

The non-life insurance industry reported gross written premiums of R128 billion in 2020, an increase of 5%. Danckwerts says this indicates that the impact of the pandemic on the industry was not as severe as expected and is commendable considering the premium relief measures many non-life insurers provided to their customers.

The insurance company sector delivered a profit after tax of R6 billion in 2020, representing a 28% decrease from 2019, due to the numerous challenges the sector experienced, including defaults on credit, an increase in net claims of R1.9 billion and a claims ratio of 59.5%.

While there was a decrease in weather-related catastrophes and a reduction in the motor claims ratio, there was also a much larger increase in business interruption claims, while trade and consumer credit insurance were affected severely and directors’ and officers’ liability insurance claims increased in frequency and severity.

Total investment income was also down 31.9% due to the interest rate environment and fair value losses, with gross insurance liabilities increasing by 27.2%. In 2020, the market share of the 10 largest insurers by GWP amounted to 73.8%.

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Key themes

During the survey, a few key themes emerged, with insurers focusing on key learnings in terms of planning and dealing with channel overloads, optimising digital advancements to keep pace with emerging risks, stronger scenario planning and stress testing and social responsibility to ensure that they listen to their policyholders to mitigate any brand fallout.

“A key theme has emerged overall; with the fast pace of change in the inter-connected world we live in today we can place less reliance on past data to predict future outcomes. It is time to put a spotlight on the events that we call ‘1 in 200-year events’ with a vision of what the future might look like and how this might differ from our limited understanding of historic events,” states Danckwerts.