Market conditions in 2017 were challenging for the South African insurance industry with significant loss activity and a soft pricing environment. Last year saw a number of large losses and natural catastrophes (Nat Cats), with substantial losses incurred as a result of heavy storms, floods, drought and fires.  Added to this, South Africa is currently experiencing a weak economy driven by political uncertainty as an election year approaches. This uncertainty continues to undermine business and consumer confidence.

“On the whole, we saw an erosion in underwriting margins to unsustainable levels in 2017,” said Gary Jack, Country President of Chubb Insurance South Africa. 

“In response, it is widely predicted that 2018 will see remedial action, including a hardening of rates and a demand for more stringent risk management. Insurers are placing increased focus on risk quality and risk management which places greater demands on client risk managers to ensure risk mitigation programmes clearly support the insurability of their exposures.” Here, Chubb Insurance provides the following insights into the key risk trends in 2017 and what this means for the risk outlook for 2018:

• ·Rates should harden in 2018 – for the first time in years, there should be a genuine hardening of rates across corporate and commercial classes of business.  South African insurers have seen erosion of underwriting margins in certain classes of business. Property in particular has seen many large losses as a result of fires and weather-related events such as storms, floods and drought over the last few years.  Significant focus on portfolio management and the reassessment of reinsurance programmes can be expected.  The quantum of losses emanating from catastrophe events over the last two years in particular, has been exacerbated by deteriorating infrastructure.   These factors will provide the momentum for an upward movement on rates, which are clearly inadequate to fund the level of losses being seen following a protracted soft market.  The cost of reinsurance should rise, which ultimately drives a hardening market and higher rates. 
• ·Greater local investment in catastrophe modelling - South Africa has not traditionally been viewed as a catastrophe exposed geography and one of the key challenges in managing the insurance and reinsurance pricing for Nat Cats in South Africa is the lack of catastrophe modelling data. Wild fires and storms in the Western Cape and Knysna added an estimated R5bn to underwriting losses.  Floods, torrential rains and strong winds in Kwa-Zulu Natal and Gauteng in October added in excess of R1 billion to the cost of damages in the regions. Given the changing face of South Africa’s environment, there’s a growing need for enhanced modelling to help insurers model and price for this, as well as in portfolio structuring and the assessment of reinsurance programmes. Reinsurance capital plays a fundamental role in helping insurers manage the impact of major catastrophe events.
• ·Insurers will demand more stringent risk management – Insurers are increasing their focus on risk management standards, specifically in challenged industry classes, and requiring more stringent minimum standards prior to providing cover.  Insurers will also focus on managing exposures to contain the impact of large losses, particularly in challenged industry classes – this could see a reduction in line sizes and hence more carriers being needed to complete some placements. We will also see insurers driving an increase in excesses and deductibles, which are generally low by international standards, and more consideration to alternative risk transfer strategies (ART). In general, risk management standards are going to be expected to improve and with reduced capacity in the market, certain types of risk are going to be considerably more difficult to place.
• ·Competitive pressures amplified by economic volatility - Current economic and political factors will contribute to the pressures experienced in the insurance sector as insurers chase growth in a stagnant economy and businesses trim expenses, including insurance spend. Further sovereign downgrades in November add to the pressure - projects financed by international funders with minimum security requirements are forced to be placed into international markets, the attractiveness of SA as a reinsurance destination for African business is reduced and risk managers of multinationals with SA subsidiaries may re-evaluate local placing. Downgrades to junk status can also be associated with a number of economic consequences harmful to insurers. These include reduced growth, increasing unemployment, bond and equity asset valuations, currency devaluation and increasing inflation.
• ·Political risk – Current political turmoil continues to drive an increase in business indecision, social unrest and riot risk.  The 2016 #FeesMustFall protests in South Africa caused estimated damages of R600 million in the university sector alone.  As we draw nearer to an election in 2019, we can expect more uncertainty which could further erode business and consumer confidence.  Given the current political uncertainty, we expect to see a deepening of strategic risks arising from economic, political, and regulatory factors during 2018 and the foreseeable future. 
• ·Cyber risks are amplifying – The growing strategic importance of technology to business, combined with a proliferation of emerging digital-enabled threats, make technology risk a key challenge across all sectors. Disruptive technologies such as mobile computing, cloud computing and the Internet of Things create a greater level of exposure for companies to incidents such as cyber-attacks and social engineering fraud perpetrated by numerous phishing and vishing scams which pose enormous financial threats worldwide. In 2017 we witnessed Wannacry, a global ransomware attack, affecting more than 200,000 organisations. Ransomware is emerging as one of the most costly cyber threats facing organisations, with global losses projected in the hundreds of millions of dollars. Cyber breaches are estimated to cost the SA economy over R5.8 billion a year. Given the growing reliance on the internet and ICT infrastructure and new data protection legislation, managing the financial and reputational risks of cybercrime together with the associated costs of response and remediation will receive heightened focus in 2018.
• ·Flight to quality – given the current state of the market and economy, it is expected that there will be a flight to quality as businesses look to insurers with solid track records, strong financials and global pedigree that can provide the stability needed to navigate the risks of unknown and challenging market conditions, and honour any large-scale claims losses. 

“The key trend indicator for 2018 and beyond, both for South Africa and globally, is that volatility and uncertainty are here to stay,” Jack said.  “Weather catastrophes, political and economic upheaval, major reputational crises in both government and corporate sectors, currency volatility, flagging investor confidence, growing regulatory pressures, failing infrastructure, consumer indebtedness, unemployment and a shortage of management capability in key institutions are taking their toll on business confidence.  Volatility is something that South Africa will endure for the foreseeable future and businesses will need to find solutions to working within such a heightened risk environment. 

“The time to build resilience has never been more crucial as business leaders need to increasingly recognise the linkages between many competing risks and priorities. For those who prepare and proactively manage their risks, the circumstances that 2018 brings may well be a new set of business opportunities. Businesses that actively manage their risk profile will ensure sustainable pricing and insurability despite the pressured market. The good news is that as a global insurer with a vested interest in South Africa, Chubb Insurance remains committed to working together with our clients and brokers to mitigate their exposures and maintain insurability and sustainability.”