Tackling Insurance Program Review: State of the Market Review and Things to Consider
Global commercial insurance pricing increased for the eleventh consecutive quarter in the second quarter of 2020, according to Marsh's quarterly Global Insurance Market Index (GIMI). This is a proprietary measure of global commercial insurance premium pricing change at renewal, representing the world's major insurance markets. Based on the findings, global property insurance was up 19% and global financial and professional lines were up 37%, while global casualty pricing was up 7% on average.
Social inflation pressures drive these persistent increases and low yields, amongst other factors, which we will cover briefly in the next points. Several large underwriting losses add weight to the situation, with COVID-19 estimated losses for the insurance industry standing at a staggering US$107 billion, according to Lloyds’ as of May 2020.
In South Africa alone, some of the largest material damage losses in recent times have been fires at the Durban warehouse and in Knysna as well as the storms in Joburg in 2017. These cost R4 billion, R3billion and R1 billion respectively. With such significant impact on re-insurers’ balance sheets, some providers in the region have been forced to go into run-off, restrict underwriting capacity, and a few of them to mergers and acquisitions.
The challenging insurance market for the manufacturing and logistics sector is intensified by exclusions and limitations in new terms and conditions, not to mention the force majeure provisions already included in most contracts of carriage from a logistics standpoint, which is uninsurable. After facing significant revenue losses caused by stoppages and disruption in operations, the industries could find themselves uninsured in these areas.
The impact of a challenging market
The challenging insurance market has seen underwriters pushing for increased pricing, increased deductibles, and restricted coverage. For the manufacturing and logistics sector, this not only means an increased cost for buying insurance, but may also point to a higher amount of uninsured losses on the balance sheet. These conditions are increasingly resulting in insurance buying being a leaner, more precise process that requires a deeper understanding of risk management.
After transferring the insurable portion of risk to the insurers, manufacturing and logistics companies can turn to other options to lessen the remaining risk. Companies can opt for various ways of risk financing such as self-insuring and captive solutions. This could involve creating a captive pool of funds to manage losses as an example with some expert guidance from risk consultants.
The risk management process therefore becomes a key piece to the puzzle on dealing with any shortfall from insurance coverage. Companies should gain a better understanding of their risk profiles and risk appetite in order to be better prepared for adverse losses. For this to be an effective approach, a risk management mind-set and culture should be embedded into the DNA of the organisation in consultation with risk management brokers.
Moving forward
While on the road to increased operational capacity, manufacturing and logistics companies will need to consider the following to build resilience into their journey:
Risk profile - reassess the risk register. In addition to the existing operations, this is also important if one has had to shift business objectives to take on new opportunities.
Operational readiness - ensure that all new regulations are being followed - both in relation to the pandemic (such as capacity requirements) and regarding resources and processes. This is essential because part of this could be material to the provision of insurance coverage and the soundness of the company’s own risk management.
Employee health and wellbeing - health and safety revisions will need to be made in line with current recommendations, and the mental health of the workforce will be an essential part of moving forward. This will be a major opportunity for cost control.
Supply chain analysis - know your vulnerabilities, including when resetting supplier relationships. This assists in knowing the potential risks at each stage of the chain and look at ways and means, not only to minimize chances of disruption, but how to get back quickly when there is.
Have a risk reliable management consultant and broker partner – In order to tackle all these challenges in a way that makes sense both to your business and to insurers alike. An expert partner will be important going forward as there is no separation between risk management and insurance.
Marsh is the leading Risk Management and Insurance Broking services company globally with experts across various industries and in-depth knowledge in risk and strategic consulting. Contact us today for an end-to-end solution regarding risk management and insurance matters for your business.