In my ASSA convention presentation on systemic risk last week, I took pains to highlight the difference between real systemic risk and mere catastrophic claim risk or even concentration risk.
In this post I will cover these and other cats, the place of reinsurance including “feelings” and why this is hyper relevant for captives.
To demonstrate how even large general insurance catastrophes typically have no systemic implications for South Africa, I referenced the “2017 fire and storm claims”.
2017 Western and Southern Cape storm and fire claims
“Santam noted that the total insured damage has been estimated at around R3 billion, with economic losses (taking uninsured property into account) at significantly higher levels.
This was by far the worst catastrophe event in South African insurance history, with Santam client claims totalling around R800 million, of which R72 million related to the Cape Town property damage.”
So that all seems very intense. But then the story continues.
The Santam group weathered ‘the worst catastrophe event in South African insurance history’, to report growth of 14% for the six-month period ended June 2017. Underwriting margin declined to 4.2% still within 4% to 8% range.
So we are left with the “worst catastrophe event” and underwriting results for Santam are still within range.
Which 2017 storms was that?
My slides for the convention had to be locked down some weeks back. So I was unable to include the other 2017 storms, in Gauteng and KZN.
According to this moneyweb article on the storms and insurance damages, might be between R1bn and R1.5bn for the industry. Those numbers are for the industry as a whole, so although they are higher than the R800m of claims anticipated by Santam for the earlier storms and fires, they are still major catastrophes all the same.
It’s hard to say precisely whether these claims, frequency and severity, have been influenced by climate change. The consensus is for more extreme weather all around. While in any individual year this might mean more claims for insurers, I don’t believe it is bad for insurers overall. Insurers can adjust premiums to take the risks into account, and purchase reinsurance to protect against the damages.
On the contrary, as individuals and businesses and governments are exposed to greater risks, arguably the need for insurance increases.
(That’s a very different point from the damage of climate change and weather patterns being terrible for uninsured people and society as a whole.)
The place of reinsurance
Clearly, reinsurers picked up a significant tab for those claims. There was the usual debate around one vs two separate events, given the storm and winds that led and fanned the fires around Knysna. Appropriate use of reinsurance is so much more critical in the P&C / general insurance / short term insurance market than it is in most life insurance contexts.
The soft side of reinsurance optimisation
Adequate reinsurance, rational reinsurance modelling and optimisation – and careful, considered and conscious risk appetite setting is key here. What I mean by that is, trying to understand how risk managers, Exco, Risk Committees and the Board will feel and react to actual claims not protected by reinsurance, either for moderately large claims within retentions, or massive claims (or multiple horizontal aggregations) above limits. Much of the modelling can be hyper-rational and informative, but the step of understanding the implications is often missed before the first event.
Even more critical for Captives
This is often an uncomfortable step for new Board members, or for representatives on Captive Insurer Boards less familiar with the significant risks and heavy reliance on reinsurance common in those structures.
Failure of reinsurers and systemic risk?
A question asked after my convention presentation was, what about the failure of reinsurers to pay out these cat claims?
There are two possibilities here:
- The claims are so large that the highly rated, international reinsurers cannot pay. We are fortunate in South Africa given the size of our market and our relatively low risk from truly serious catastrophes that I simply don’t see this happening. The scenario of concern might be a major catastrophe at a future date after much-weakened international reinsurers were already teetering on the brink after a serious of climate-change or financial crisis impacts on solvency. Presumably as reinsurers’ credit worthiness was declining, appropriate risk management at local direct writers would be considering alternative solutions, including capital market options for risk transfer and limited risk accepted.
- Poorly worded or misunderstood reinsurance contracts mean the reinsurer is not obliged to pay the claims, resulting in a gap between risk accepted by the direct writer and risk protection provided by the reinsurer. This is a far more significant risk. It is an operational risk from a risk taxonomy perspective, but with obvious underwriting interactions. This is where legal and compliance are needed to support the actuarial and risk functions.
All in all, cat risks and claims seem to be on the rise. Insurers may ultimately benefit from this, but only if sound risk management and adequate reinsurance cover is in place.
- Make sure your reinsurance optimisation considers hard and soft factors;
- Monitor the capital strength of reinsurers…
- …and consider capital market alternatives; and
- Confirm that your reinsurance contracts themselves provide the cover you think they do