Engineering Insurance generally contributes to a small segment of the overall insurance market in South Africa, (historically, anything from around 1% to as much as 5% of the total Insurance Premium Income, depending on insurer). However, due to an excess in capacity and increased competition within the segment insurance rates have not been maintaining risk-related levels of late; nevertheless, Engineering Insurance for the time being remains a profitable class of business.
Skilled Underwriters have managed this feat because Engineering Insurance is a niche product with experienced practitioners in most cases. Underwriters have, however, faced many uncertainties and onerous risks and burdens in recent times which have and will further impact the segment in the foreseeable future, such as:
· Changes to the environment on many fronts
Whilst consumers have enjoyed low interest rates in recent times, there remains uncertainty around project finance availability via banks and investors, and uncertainty regarding future interest rates. This has created an economic environment where individuals are reluctant to incur debt and take on only smaller projects. Additionally, government spend currently makes up the bulk of large infrastructure projects and capital investment in the local engineering sector, as a result BEE contractors, brokers and insurers are often brought in on these projects. While this certainly presents a great employment opportunity, unfortunately, it may put the project at greater risk if the suppliers are not the best in the field or provide the best cover available. A further concern of insurers is the changing weather conditions being experienced globally.
· Legislation frameworks
The current legislation requirements and logistics in this field, including currency and foreign exchange controls, insurers’ footprint and licences or representation in other countries and/or regions, present a major barrier to underwriters that need to be overcome if significant growth is sought.
· Insufficient practical understanding in the field
In many cases, the misconceptions of general insurers and brokers on Engineering policy types leads to the misapplication of cover. This often is the result of a lack of understanding of the available cover because there is no industry standardised wording for Engineering Insurance products. As a result, wordings often need to be adjusted to fit each project on a bespoke basis and therefore rating structures versus actual indemnity becomes increasingly complex. Additionally, different offerings in this market are unfortunately generally price driven and not quality of insurance cover driven.
· Changes to the industry
Continuous changes to legislation regarding Accreditation requirements, Regulatory examinations, Conflict of Interests rules, and to the Financial Advisory & Intermediary Services Act (FAIS), have created a negative perception of the insurance sector that acts as a barrier to entry by technical candidates and has greatly complicated the functioning and effectiveness of incumbents also. This is not to mention the high cost of compliance and time investment required, where it can take years before a candidate has an adequate level of knowledge to handle the complexities of the job.
· Bridging the skills gap
The 2010 FIFA World Cup certainly brought many opportunities to the engineering industry and this specialised insurance field. However, with these opportunities also came an influx of new competitors in the form of engineering contractors and insurance underwriters. The subsequent threat to this field, however, is that this market is reaching a state of maturity and saturation before it is ready to, and, in many cases, this may lead to price sensitivities and risks to sustainable skills resources and/or quality of the insurance cover. So, while a certain amount of fair competition in any field is healthy, in a sector that is so technically complex, there exists a serious skills shortage with underwriters that is further exacerbated by a lack of knowledge and understanding by brokers and clients. As a result, the skills gap in this industry needs to be narrowed better to enable the provision of new product offerings at credible prices.
Further to this, building a pool of suitable skilled resources that have the required specialist knowledge and understanding needs to be a core focus in this field. At present, the skills gap in both the engineering and insurance fields is the largest contributor to inhibiting growth in this market. Experience has shown that large insurers have not always nurtured or valued the required skills and resources required in this field due to the costs that this entails and/or an inability to sufficiently train staff. This is not to mention that recessionary conditions, following the economic downturn of 2008/9, and the subsequent re-structuring of some insurers, has created a situation where unwitting insurers have lost skilled staff in an attempt to reduce costs based on the perception that rate book underwriting will suffice.
In today’s market, underwriting management agencies (UMAs) hold the majority of the skills in this field and as such a lot of onus has been placed on them to continue to develop the sector. UMAs are therefore tasked with dispelling any negative perception of the field and attracting potential new candidates. In addition to growing a knowledgeable skills resource base, UMAs also need to ensure that brokers are sufficiently educated or skilled up on the potential implication of different wordings of diverse insurers’ cover, and on all available cover bouquets, as there is often a misconception that only one or two classes fall under “engineering”.
These bouquets may include:
- Contractors all risks/contract works
- Public liability
- Machinery breakdown
- Loss of profits/business interruption
- Deterioration of stock
- Computer and electronic equipment
- Plant all risks
- Dismantling, transit and erection
- Works damage
There is no denying that change is needed to address the future uncertainties and associated risks to this field. For instance, more modern and relevant cover that also takes the current market environment into account needs to be developed across all bouquets of Engineering Insurance and, in line with this, amended wordings for this cover that are easier to understand and compare are long overdue. The only way to bring about this change and to rectify these constraints, is to narrow the skills gap through re-educating the industry. In line with this, obtaining and retaining suitably skilled staff and providing both staff and brokers with technical training will continue to be a major task for UMAs and insurers.