1. THE IMPACT OF REINSURANCE
ON THE INSURANCE CYCLE
The insurance cycle reflects the
rise and fall in insurance prices
and coverage availability in
response to market conditions.
The cycle alternates between
two cycles, the hard market
(peaks) and soft market
(troughs). In simple terms,
insurance prices increase during
a hard market phase, while on
the other hand, soft market
conditions are characterised
by broader coverage and lower
premium rates.
I have decided to focus on the soft
market cycle since it resonates very
well with the current state of affairs
both globally and locally, in South
Africa. Presently, it is not uncommon
to hear the words “business is tough”,
loosely translated to mean that
companies are finding it difficult to
find new business or defend existing
accounts. Could this be a symptom of
soft market conditions?
Soft market cycles can be triggered
by a variety of factors, either working
independently or simultaneously in
combinations. Major insurance loss
events such as 9/11 are known to
independently produce a reactionary
hard market cycle. However, a longer
the time lag after the last major
catastrophic event allows the market to
recover and build-up enough reserves
that act as a shield against poor results
and hence the ability to sustain lower
prices. In other words, the tragic
memories of the catastrophe losses
vanish with time as underwriters forget
how badly they got burnt the last time.
According to the Aon Benfield
Reinsurance Market Outlook
(September 2014), a combination of
low catastrophe losses in 2013 and
increased insurer capital are the major
drivers behind the current international
low reinsurance cost. Global
SIMBARASHE MUKONZO
Head of Technical: Emeritus Re SA
catastrophe insured losses of US$45
billion in 2013 were 22% below the 10
year average while on the other hand
capital in the traditional reinsurance
market grew by US$570 billion.
The excess underwriting capacity has
also found its way into the South
African market through reinsurance and
other direct insurance programmes for
large risks underwritten by international
insurers, and evidently, insurers seem
to be enjoying the temptation to
trade-off the discounts obtained on
reinsurance cost with rate reductions
for their clients.
The persistently slow rate of the
domestic market economic growth
over the past 5 years can also be
blamed for the increasing irrational
behaviour on the part of insurers
and reinsurers because there is
less new business each renewal
period, hence the resultant price
wars as companies seek to achieve
reasonable growth. Unfortunately, the
unintended consequence of this nature
of competitiveness is the “Winners
Curse” where insurers end up charging
too little to win or retain a customer
without much regard to the risk charge
being added to the portfolio.
Soft market conditions might appear
like a great idea to consumers and
regulators because insurance becomes
cheap and readily available, even
to the average man on the street.
However, the reality is that the
industry may not be collecting enough
premiums to meet both current and
future obligations hence the industry
performance will eventually deteriorate,
producing unfavourable returns for
shareholders and investors. The
ensuing capital flight could trigger a
hard market cycle.
The best way to protect consumers is
by ensuring the long-term sustainability
of the industry by charging
commensurate premiums for all the
risks assumed. The large reserves built
up in good years can then be deployed
to smooth insurance prices during bad
times. This for me, is insurance at its
best; the ability to ensure predictability
of one’s future financial position, be
it up-front premiums or net retained
losses. Sudden and steep increases in
insurance premiums can potentially
have the same heart damaging effects
as uninsured losses.
The insurance cycle cannot be avoided,
and neither can it be eliminated.
However, insurers should have the
capacity to draw a line beyond which
a risk becomes unacceptable to avoid
disproportionate risk taking behaviour.
Advanced risk management tools and
the abundant free information on the
cyber space can provide the necessary
capacity to make prudent and informed
decisions.
The risk based Solvency Assessment
and Management regime (SAM) also
enables the underwriter to select and
write sustainable lines of business
because you can visualise the capital
charge that you are bringing to the
portfolio.
http://za.linkedin.com/pub/simbarashe-mukonzo-
fiisa-airmsa/24/40b/a72/
COVER DECEMBER 2014 17