The COVID-19 pandemic is testing the global equanimity of every individual and organisation around the globe, and there is every expectation that its ripple effect will continue to challenge the insurance and reinsurance markets for years to come.

According to Paul Griesel, CEO of Aon Reinsurance Solutions Africa, South Africa has not yet felt the full impact of the pandemic, certainly not to the extent that is being experienced globally. Against the backdrop of ongoing COVID-19 losses, poor investment returns, as well as major Business Interruption (BI) claims that are still playing out in court, it is expected that reinsurance rate increases are likely to be significant come January 2021.

“Looking ahead, and considering the longtail nature of the impact of the current pandemic, there is every reason to believe that we are not only facing a hardening of the market in terms of pricing, but also in terms and conditions, wording and exclusions which are receiving intense focus globally,” explains Paul.

Factors at play in the July and October renewal cycles include:

Pricing:

• South Africa has not seen the full impact yet of what is happening globally, however this is likely to be felt in January 2021 – currently, retrocession programs have not yet been renewed, and much of what happens in terms of pricing impact is driven by what happens on the retrocession side.
• Non-loss affected business renewals for July and October came in between 2 – 5% and this is expecting to build to 5-10% going into January 2021. Increases are expected to be significant for insurers impacted by the pandemic.
• In London markets, we are seeing highly centralised underwriting mandates where flat renewals and pricing need to be referred and any sort of reduction is declined.
• Outside of the Covid-19 pandemic, there have been no significant property or natural catastrophes for the South African market.  With COVID-19 excluded, South African insurance programmes look reasonably positive, and as such should not take as much of a knock as some of the more developed markets are taking.
• However, when COVID-19 is taken into account, and the potential outcomes that could emerge from claims cases that are currently still playing out in law courts, we could be facing a very different scenario in the coming months.  If the outcomes are in favour of insureds, and if the cedants can cede this to their reinsurance programmes, then pricing will increase substantially. The challenge remains that it is highly unlikely that a legal outcome will be reached by the next renewal cycle in January, and it is expected to be a protracted process with appeals, regardless of who the eventual outcome favours. This means significant continued uncertainty as to what the impact of COVID-19 claims will be on pricing. Aon Re is currently engaging with reinsurers to understand how the industry will approach pricing in different potential scenarios.

Terms and Conditions

• There is significant tightening of policy wordings and terms and conditions, as well as tightening of language used in certain exclusionary clauses.
• Within the context of Covid-19, reinsurers are actively managing their exposure through stricter, more defined terms, conditions and exclusions in reinsurance wordings. The pandemic has in many ways opened the industry’s eyes to unexpected exposures and ambiguity, spurring the industry to relook policy wording and exclusions - specifically related to infectious disease, pollution and cyber risk.
• The wording of exclusions related to pandemic and epidemic response is under intense scrutiny at present. Many insurers and brokerages are insisting on their own exclusion versions, making it challenging to find one consistent exclusion that is reasonable across the market.
• Similarly, the debate also rages around what constitutes a pandemic and who calls it – the World Health Organisation or Governments? These questions illustrate the complexity of the matter and determining what the accepted triggers are in terms of policy wordings. 
• Timing of renewals also plays a critical role.  Many companies are serving notice of renewals where the date of exclusions come into play, meaning that if your renewal was placed in July and doesn’t run concurrent with the overall reinsurance policy, you may potentially have exposures that are not addressed. In the absence of a clear-cut decision from the courts, it is crucial for organisations to keep in contact with their broker to make sure that every eventuality is catered for.

Uncertainty of investments also apply pressure

With reinsurance capital investments not performing as well in a low interest rate environment, many reinsurers are focusing on getting their technical pricing right.  Reinsurers rely on investment returns. Simply put, portfolio premiums are invested, and the industry receives a return on that investment amount that is utilised to finance combined ratios. The impact of the pandemic is expected to reduce investment returns, which inadvertently impact combined ratios for the reinsurance market. It is an external driver of profitability, which the industry has no control over.  If investment returns are reduced, the reinsurer will be required to increase their rates and technical pricing to remain profitable or at least sustainable, which is addressed through reinsurance pricing.

In closing

While there is no shortage of reinsurance capacity in the South African market, pricing plays a definitive role. It boils down to whether a client is prepared to pay the price for the cover that is available.

“As we get closer to the 1/1 renewal, we’ll have a better view of what the retrocession renewals are likely to be, although we are seeing a definite hardening of the market. To a large extent, Africa and Sub-Sahara Africa are not subjected to global retrocession pricing that could go up as much as 25 – 30%. Africa has not been as impacted by the pandemic as global cover has been, which will place the continent in a better position going forward. While we may still experience a knock-on effect, it should hopefully not be as harsh as experienced by global reinsurers.  On the facultative side, there is substantial hardening in the market and risk appetite at the prices offered has reduced. 

“It is imperative for insurers to take heed of these developments and to proactively discuss these matters with clients in order to manage expectations going forward.  The cheapest price is not necessarily the winner. A measured approach, working with and maintaining the relationships you have had for many years, understand the constraints facing the market including reduced investment returns and thus the need for accurate technical pricing is important.  The approach for 2021-22 should be to work with the reinsurers you know and trust and get the certainty you need from your reinsurance,” Paul concludes.