CEO to CEO: The most challenging risks facing re/insurers right now

As a South African CEO plotting a course through these challenging times, I wanted to reach out to other CEOs and share my personal insights around pressing issues, but also opportunities, in the hope this opens up dialogue around the current climate and topical matters impacting South African businesses.

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The most challenging risks facing re/insurers right now

Increasing geopolitical tensions, the rapidly evolving world of cybercrime, unpredictable climate changes, regulatory compliance complexities, inflationary increases, economic downturns, currency volatility, emerging technology and AI are among the more pervasive challenges currently shaping global business.

The insurance sector is not immune to these threats, and much like clients turn to insurers and reinsurers to help them mitigate these risks in their businesses, so insurers and reinsurers themselves must remain agile in order to continue to meet these challenges head on.

In fact, Deloitte's 2024 Global Insurance Outlook notes that the escalating frequency and severity of global risks are intensifying the focus on the insurance industry's capacity and readiness to react as society's 'financial safety nets'.

It goes as far as to say that many insurers are realising that 'reacting to risks may not be good enough and are undertaking transformation efforts aimed at preventing losses from happening in the first place'.

In South Africa, economic conditions continue to challenge the industry while increases in extreme weather events and cyberattacks warrant serious attention. Beyond our borders, the growth in emerging markets necessitates that insurers and reinsurers are prepared to weather economic storms to meet this need.

Inflationary increases

Globally, some of the highest inflation rates in decades were recorded in 2023, driven by supply chain disruptions brought about by the Russia-Ukraine war and as a result of the protracted fallout from shipping restrictions experienced during the pandemic.

According to Stats SA, annual consumer inflation quickened in February, rising to 5.6% from 5.3% in January 2024 and 5.1% in December 2023. Product categories that drove much of the upward momentum included housing and utilities, miscellaneous goods and services (most notably insurance), food and non-alcoholic beverages, and transport.

The impact of inflation - and any subsequent interest rate hikes - varies according to the different business lines. Given how volatile markets are on this front, we as re/insurers need to constantly incorporate inflation into our pricing and future product developments.

Cyber threats and security

Last year, Insurance Business America reported on dozens of major, crippling cyberattacks that had hit global insurance businesses. The extent of the attacks was staggering.

It quoted IBM's latest cybercrime report, saying that data breaches had cost global companies a combined US$4.35 million. The figure was a 2.6% increase from the previous year. In the US, however, that cost was more than twice the global average at US$9.44 million, with the healthcare sector being hit the hardest.

The International Association of Insurance Supervisors (IAIS) revealed in its cyber risk paper that the significant volume of personal and financial data that insurance companies possess makes them an attractive target for cybercrime groups. This risk is compounded by the extensive connections re/insurers enjoy with financial institutions.

The theft of sensitive data, phishing and ransomware attacks are the most prevalent in our sector, necessitating the urgent need for stringent, proactive cyber security measures to be integrated into both the business and IT architecture of re/insurance firms.

Extreme weather events

PwC and the Centre for the Study of Financial Innovation's (CSFI) joint Insurance Banana Skins 2023 report listed climate change as among the top three concerns for re/insurance companies.

It noted that the cost and pricing challenges climate change presented as an underwriting risk, as well as the risk to re/insurers' own businesses, had seen this issue rising in the rankings. By insurance sector, climate change was the number one concern for reinsurers. Had respondents from the life insurance sector been excluded from this survey, climate change would have been the top overall risk.

This underscores just how potent a threat climate change has become. The Banana Skins report highlighted the impact of climate change for re/insurers: it puts pressure on the insurability of some risks and certain regions, and it negatively affects claims, with catastrophic losses becoming more prevalent.

This is a major industry threat in terms of both profitability and operations, and points to the importance of using accurate CAT modelling tools to underwrite this risk.

Emerging markets

Sub-Saharan Africa offers significant opportunities for growth for the re/insurance sectors. However, some of the intrinsic risks to operating in many of these countries are raising red flags.

Soaring inflation, currency volatility and high commodity prices make for challenging underwriting and business environments. The macroeconomic climate across the continent is also seen as a severe near-term risk in several countries, including South Africa.

In recent years there has also been a drop in the creditworthiness of African debt issuers. This has had a negative impact on reinsurers in particular.

Through sound underwriting and the use of competent risk analysis tools, reinsurers can alleviate some of these risks. Although, experience and skills with working in these territories is the most invaluable tool in realising the full re/insurance potential of emerging African markets.

It is clear that the risks facing the broader re/insurance industry are becoming increasingly interconnected, presenting simultaneously as operational and underwriting risks, affecting both us as re/insurers and insured parties.

Aside from an agile approach in responding to these risks, firms will have to develop new products, enhance their customer engagement efforts, become more customer centric, and possibly reconfigure operating models to stay ahead of threats as we continue to navigate this unpredictable landscape.