Engineering – Tough but Resilient

By: Andrew Charlton of Consort Technical Underwriters

Despite current adverse market conditions, the South African engineering insurance sector will survive.

The key to continued existence lies in two key areas: burgeoning infrastructure development – both here at home and up into Africa – and strong partnerships between underwriters and brokers.

The prevailing economic climate is one of the biggest challenges facing the industry right now. We continue to see margins being squeezed and the resultant consolidation – or even demise – of our clients’ businesses.

The consequences of this situation are two-fold. Firstly, the reduced volume of business continues to facilitate a ‘soft market’ underwriting environment, where insurers are competing for a pool of business which is at best static, if not reducing. Secondly, the accumulated risk premium available to settle losses as they arise is obviously reduced, therefore threatening the ongoing profitability of the sector.

Engineering underwriters are fortunate in that this particular class of business has traditionally been profitable.
But we should never be complacent. We have to keep asking what might happen if we were to experience a number of consecutive catastrophic events, or even just a higher frequency of severe losses. How long would it take for that underwriting profit to turn into a loss scenario?

Having said that, I do believe that South Africans are pretty tenacious and resilient. We have the ability to find opportunity in most situations. There is clearly infrastructure development on the go all around us, so there is most certainly still opportunity within the engineering insurance space.

Much of this opportunity lies outside of our borders.

Insurance markets globally view Africa as the last frontier from a development perspective. Despite progressing from a relatively small base, many African economies are growing at a faster rate than most others in the world, with Ethiopia, Ghana and Cote d’Ivoire featuring among the top five fastest growing economies globally. From our perspective, this means infrastructure development, and therefore opportunity.

The challenge, however, is to navigate the varying legislative landscapes – which are unique to each individual territory – as well as to partner with local markets and assist with underwriting expertise and skills transfer. One thing we must definitely not do is attempt to dominate the markets in other countries. We must take care to ensure that our presence benefits the economies of the countries in which we operate.

More and more general commercial brokers are likely to start receiving requests for engineering business.
For larger brokers with dedicated specialist divisions, this shouldn’t present a problem. But for the smaller, independent broker, receiving a specialist request can be rather stressful. The answer, he believes, lies in partnership.

With the scope of clients that brokers are engaging with on a daily basis, the likelihood is pretty high that, even if not specifically targeting engineering related business, the broker will receive an enquiry for cover which is of an engineering nature. As an insurer, our business relationship with brokers is of utmost importance to us, and therefore we have positioned ourselves to facilitate knowledge transfer as easily and efficiently as possible.

Insurers and underwriters, ourselves included, have invested time and resources in developing training and workshop material, which we are only too happy to present when given the opportunity to do so. Not only does this form of engagement progress and develop our partner relationships, it also serves to ensure that the broker is confident in dealing with an engineering related query, and is well equipped to obtain the detail required in order for us to underwrite the risk.

I do not believe that a turnaround in market conditions will come anytime soon.

The premium pool will continue to struggle to maintain sustainability for the foreseeable future, and we can’t ignore the fact that underwriting terms and conditions as they are currently, may very well be the new normal.

It’s up to us as underwriters and brokers to collaborate more closely with each other and our mutual clients to better understand and mitigate the risks associated with doing business in the current economic climate.

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