Risk alert in this hard market cycle

In what was one of the costliest years for both insured and uninsured losses, 2017 racked up a total of US$135bn, as estimated by global risk management company, Munich Re. “There are some prevailing themes evolving in the short-term insurance space – some of these are ‘not so nice’, and will impact small to medium businesses and the corporate segment for that matter,” says Guy Scott, CEO of one of the largest independent broking firms in South Africa, Econorisk.

Scott says the ultimate threat to SMEs may not lie in the possibility of a catastrophic event, the real threat is the danger of these businesses ticking boxes, getting basic cover that couldn’t possibly cover them adequately – and not realising that getting quality cover in place will take some time in order to meet all the compliance and regulatory needs.

While the overall losses cited by Munich Re were both a global and local phenomenon, the South African short-term insurance industry experienced it’s own wave of knocks as it entered a hard market cycle from about mid-2017. This was triggered by storms in the Cape, followed by devastating fires that swept through the Knysna and Plettenberg Bay areas, spreading across to PE. Floods in Durban, a R1bn warehouse fire, and a catastrophic bulk carrier crash in Durban harbour added to the turmoil. Recent reports quantify the damage to the loader at around the R264m mark, and that figure excludes the damage to the ship itself or the quayside.

So, what does this hard market cycle mean for small to medium businesses?
Pondering forces of nature and Acts of God would give any business owner sleepless nights. A more practical approach for anyone operating a growing business in this tough economic climate is to take stock of the type of short-term insurance they have in place. And for those businesses where risk management was never fully previously considered, there’s an absolute necessity in a hard market cycle to ‘do it or be damned’.

“In my 37 years in the industry, the last real hard market we experienced in South Africa and globally was post 9/11,” says Scott. “But that was short-lived; there was the typical spike in premiums and pricing was driven by re-insurers – but market dynamics (supply & demand) prevailed and there was a fairly fast return to pre-9/11 pricing.” Our local environment however, has become increasingly volatile, challenging, uncertain and at times ambiguous. While last year’s fires and drought were attributed to climate change, the spectre of the 2018 listeria outbreak continues to have an extremely costly impact on the food and retail industry along with more than a whiff of reputational damage for some. More recently, 32 trucks were burned in protest action at the N3 Toll Plaza near Mooi River, where according to the Road Freight Association, the SA trucking industry suffered R300m worth of losses in one month alone.

Yet there’s a conundrum
While businesses are advised to step up to the plate and make sure they are adequately insured, there’s a tendency in hard market cycles for some insurers to lose their appetite for risk and become more selective in the risks or business that they write. Where players in the market are declining business if the risk is too high, it means businesses can’t get the cover they need. Scott believes a vibrant economy depends on full short-term insurance support.


Capacity issues:
Strain on underwriting managers & smaller insurance players

Tougher measures:
Stringent compliance & risk management on businesses

During a hard market cycle, there are capacity issues, with a marked strain on marginal or smaller insurance players – the industry has even seen the closure of some underwriting managers (UMA’s).  Insurers apply more stringent risk management measures and ensure stricter compliance to laws. For instance, enforcing building regulation compliance, focusing on hot work permits, ensuring ASIB certificates relating to sprinkler installations, which costs a small fortune for an SME.

There is a need to take compliance step-by-step in order to achieve full cover over time.

Bottom line

Businesses need a brokerage that knows what it’s doing, has the inherent skill to provide the right cover, and the expertise to negotiate the maze.  It is crucial – not only in hard market cycles but also in tough economic times to choose your service provider with eyes wide open.  “It is important to have an established partnership approach between client, insurer and risk advisor, strengthened by an action plan around risk improvement,” says Scott.

6 ways to equip your business in a hard market cycle

  • Its is crucial that SMEs have a trusted advisor on their side – a partner to give the right advice upfront and then champion your case on a claim.
  • Ensure your business is compliant with the minimum regulatory and legal compliance requirements.
  • Work in partnership with your advisor to purchase the correct class and scope cover with adequate limits.
  • Be informed of new and emerging risks.
  • Disclose material changes to your business.
  • Be aware of cheap and nasty insurance offerings based on tick box advice.

Ultimately, Scott advises that you leave nothing to chance when it comes to the sustainability of your business. “Econorisk completely understands the financial constraints of small to medium businesses, that’s why it is important to have the personal relationship – to advise properly and to implement a short-term insurance path that provides quality from the start and an incremental improvement in the risk over time.”

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