Written by John Patch, Senior Risk Engineer at Indwe
PAST: Pre-COVID Crisis
The insurance industry, which has gone through high and lows, has traditionally been a sure bet. Through many of the disasters all around the world, the global insurance market has remained resilient. The insurance market recovers from disasters through:
- Collective accumulation of insurance premiums into global underwriting markets (major investors or financial institutions).
- Sound investments (hedging – property market).
- Increasing premiums post-disaster (the majority must pay for few significant global events or claims) to the end user, as a result of these disasters.
Insurance and insurable interest was a prerequisite to doing or staying in business and it became part of the due diligence framework. Professionals were employed to look at ways of limiting exposure to insurers through complex structures and wording, and foreseeing the extreme inevitable disaster. The insurance market, in order to protect its investment value, started imposing risk management, risk engineering and standards of audit and self-governance as a means of protecting the insurable value, both for itself and the client base.
Clients were encouraged to spend fortunes on protection measures, including financial mechanisms, physical protection, and policies, procedures and systems. When losses were fortuitous, insurers would pay out (After all, wasn’t that the reason for taking out insurance?) but when their interests weren’t 100% protected, the standards of protection weren’t 100% or the market hardened, insurers would take action such as imposing further rules of protection, deductibles, and threatening clients with coming off risk.
The domestic market, including life, home owners and householders, is also being continually squeezed for increased premiums (15% increase vs a 6% GDP increase) without any grounds of justification. An increase in costs was going to be a hard sell going forward, particularly when head counts have been slashed and with the advent of technology replacing humans.
PRESENT: COVID Crisis Lockdown
What is the role of insurance and risk management or risk engineering when a disaster event affects all countries, nationalities and communities, and affects all global economies, currencies and markets?
Companies are encouraged in these uncertain times to keep their risk engineering practices and protection in place. These protection measures, in many instances, have been maintained – but to what end? Their businesses are in survival mode. One needs to consider that many medium-sized businesses are shutting their doors permanently, while large corporates are being negatively affected by cancelled orders of equally or bigger corporate clients and they may also be forced to close their doors. In addition, labour forces are being retrenched or made redundant, and this is significantly increasing unemployment.
FUTURE: Post-COVID Crisis
Instead of having clients that were embarking on risk management and risk engineering strategies, there will be many companies and clients abandoning their premises and simply walking away. The financial institutions that own or bond these properties will now be the client who has to implement risk engineering strategies to protect the assets. Will they have the financial resource to do this without rental income? The property market value chain is going to be significantly depressed, therefore forcing a reduction in insurable value, and thereby forcing a reduction in premium income.
- The insurance market is going to go through very tough times.
- When markets harden or a large portion of the population lose their sources of income, they immediately reduce costs by cancelling insurances, such as life or domestic.
- They also reduce protection measures such as security or engineering costs.
- There will be significant pressure to reduce rates without necessarily attaining a sound level of financial resources per traditional models.
- The Financial Services Regulatory body is going to have to relook its legislative governance mandate or face a significantly reduced insurance market supply.
Risk engineering is going to change drastically. Engineering surveys and management services will face challenges in selling the benefit or adding value to the clients. There will be a significant reduction in service providers in this sector, including fire engineers, security service manpower providers, engineering and electrical maintenance services, as many will have closed their doors. In addition, the scope of service will have to change the point of departure and entry into the market.
Those companies that were visionaries and ventured into the digital arena with online hazard assessments, standard knowledge databases, self-audit risk and governance systems, questionnaires, premium differentiation models and platforms to create and save chains of evidence to validate claims and ensure payments, will be the sought-after partners of the immediate future.