2011 is turning out to be the worst year in history as far as natural disasters are concerned. There will definitely be a negative effect on the insurance industry. What that will be is still unknown, but time will tell. We asked a few people from the industry to provide us with their comments.
Mike Durek, CEO ACE Insurance South Africa
A series of natural disaster is raising the spectre of a potentially permanently changed insurance industry. Tornadoes in the USA, earthquakes in Japan and New Zealand, flooding in Australia – these are just some of the elements of a perfect storm which, apart from its enormous human cost, is impacting severely on the industry.
The financial cost of the Japanese earthquake alone is enormous; it is the biggest even to impact reinsurers and insurers since Hurricane Katrina in 2005. In combination with other disasters, the last quarter is one of the worst – if not the worst – in the history of the insurance industry.
These incidents follow many favourable years in which soft market conditions prevailed. At this moment, flat or rising premiums are likely, depending on the type of risk and asset being covered. The short answer to how the industry will deal with these impacts is that costs – premiums – are bound to increase. Lloyds perhaps puts it best and most simply: lift rates or see risk collapse.
A stark example of the pressure which these events have put on the industry can be seen in one company going from returning a profit of $482-m in Q1 2010, to a $950-m loss in Q1 2011. Sustainability of the industry depends on recovery of these losses. Whilst the US hurricane season is still to potentially impact the insurance industry in Q3, we have to see whether 2011 is an earnings event to drive slight rate increases, or whether the erosion of capital is significantly enough to drive a hard market from 2012 as seen after 9/11.
Following such catastrophes, what has also become abundantly clear is that the choice of insurer may have a material impact on how well the company or individual caught up in disaster can cope. Those insurers with more reserves are in a better position to absorb the massive costs of such incidents. More than that, the ability to process elevated levels of claims becomes salient; time is money, so the speedy and correct settlement of high volumes of claims becomes a defining factor of insurance value in such times.
Preparing citizens for events like these is a perhaps even more daunting task. Japan and New Zealand are countries in which the respective governments invest substantially in education, building codes and regulations and even structures such as tsunami walls. These are mitigation strategies for the earthquake-prone geography; in the USA, ‘Tornado Alley’ has early warning systems and various measures to protect citizens in anticipation of weather disasters. Even these well-laid plans have proven ineffective in the face of the unpredictable might which the planet produces. However, these events have demonstrated with absolute clarity the necessity for insurance cover; without it, recovery might be near impossible.
Implementing a EWRM programme
Chris Brits, Executive Leader, Alexander Forbes Risk Engineering
COVER: Is the frequency of natural disasters increasing?
Yes, even taking into account that humans are now spread more widely across the planet, many living in previously uninhabited areas, and that the reporting of natural phenomenon has improved in recent years, there is still a clear trend indicating that natural disasters and extreme weather are on the increase.
(source: Emmanuelle Bournay, UNEP/GRID-Arendal, http://maps.grida.no/go/graphic/trends-in-natural-disasters)
COVER: Can companies really prepare for numerous disaster scenarios, occurring simultaneously, flowing from one event?
Yes, companies can anticipate, prepare for and ultimately manage multiple disasters events simultaneously if they adopt a comprehensive Enterprise Wide Risk Management (ERWM) programme.
Such a programme should:
· Identify potential risks
· Assess and evaluate their impact on the business
· Develop mitigation or reduction strategies to manage the impact of the various risks on the business
· Regularly monitor, control and amend the process
If a range of potential proximate causes of risk, whether natural disaster or extreme weather, is identified, then a correctly structured EWRM programme can predict the full range of risks that may result.
Thereafter, the impact of these risks on the business at operational level will need to be detailed, conceptualising the specific risks to product line, marketing plan, HR, skills, suppliers, finance, production plans, and so on. This should involve a thorough evaluation of the costs involved, including insurance cover.
Specific strategies can then be tailored and built into the business continuity plan. Such strategies would mitigate or manage each of the risk scenarios or combinations thereof and include a clear delegation of duties and responsibilities. In short, the business continuity plan will not only identify the risk, but also its severity and likelihood as well as how particular risks can be dealt with through policy and procedure. This will ensure that, when risk events occur, there is a plan in place supported by informed and trained personnel with a clear chain of command.
In fact, the hallmark of a sound EWRM programme is the operation of various risk committees monitoring and reporting on the risk mitigation processes. Ultimately, each of these committees should report to a risk and audit committee referring significant issues to the board – so that risk identification, assessment, management, mitigation and assessment becomes integral to the business process 24/7.
COVER: How should we understand climate change in the local, South African, context?
Since South Africa is not on a major fault line, it has not traditionally suffered from earthquakes, volcanoes or tsunamis. This should not, however, blind South Africans to the very real impact that climate change will have on South Africa and South Africans.
Climate change is a global phenomenon. In as much as South Africa is a member of the global community, linked intimately through trade and essential input requirements, we are affected. More specifically, it is predicted that the planet will, on average, be 2 degrees centigrade warmer by the end of this century. A 2 degree increase in temperature will severely affect agriculture in South Africa changing our food production, supply and consumption patterns and compromising our ability to remain global exporters of most of our current staples. Given our economy’s heavy reliance on agriculture, this will have far-reaching implications for our development, production patterns, economy and future security. Such a temperature increase will also change the nature of the diseases that plants and animals suffer from in South Africa as well as increasing the incidence of infection. This is before the impact of irregular weather patterns, including floods, droughts and heavy winds, is taken into account.
As such, all companies need to consider, as a matter of urgency, the development of a correctly structured EWRM programme as an integral part of their business continuity planning. Going forward climate change will undoubtedly affect products, service, markets, suppliers, operations, staff, skills and strategy.
Natural Born Killers … Risk Managing Nature
Jonathan le Roux, Independent Risk Consultant, Member of Crole Le Roux
If you have ever seen the 1994 Natural Born Killers movie, starring Woody Harrelson (Mickey), you will know that, although somewhat different in topic, the media (or access to information and communication of events) has become a ‘critical conductor’ in the notification and managing of risk.
Mickey and Mallory’s ‘success’ in Natural Born Killers was owing to the media-hype that transformed them into legendary folk heroes.
Today’s media coverage of natural disasters – the collaboration between communication and technological platforms, for example, Internet, Blogs, Twitter, YouTube, CNN, SkyNews, ETV, News24 – has shown current up-to-the-second images of devastation that natural disasters can and will continue to have in this ever-changing world of ours. This immediacy of information has created a risk universe that is constantly being redefined or readjusted at regular and irregular intervals.
The devastation of loss of life, loss of houses, loss of business and loss of all livelihoods are the remnants of what was previously known to those survivors as their reality of life. Their world has shifted just like the tectonic plates of the earth. Their future will be based firmly on this catastrophic point of reference. This point will become their North.
On 16 May, an earth tremor shook the East Rand town of Katlehong at 7:15 with a magnitude of 3,1. This was reported as normal. I don’t believe that there is anything normal about any earth-moving activity. Those ‘normal’ indicators might be our only indicator before something bigger comes along. It’s not as if we have a ‘three strikes and you are out’ rule when it comes to disasters of any kind. This is not nature playing tag with us to see how quickly we can tag it back!
So how can you prepare for this? How can you plan for events that will literally turn your life and business (if not the world as you know it) upside down?
Well, here is your Natural Born Killer Checklist:
If you wanted another five checkpoints, then you have missed the first point on the list!
Risk Management is becoming an integrated aspect of any business or person in how they daily (if not hourly) manage their business. As an industry, risks previously regarded as ‘outside of our scope’ or ‘unlikely to occur’ or ‘remote possibility’ are now more common due to the ever-changing environment we live in.
Risk Management is largely a balance between awareness and preparedness.
When humanitarian aid efforts comment that “… we are heading into a more dangerous, disaster-prone and complex future where humanitarian operations need to be more professional, cohesive, effective and accountable than ever before…” you know that times are changing
Awareness and preparedness with leadership is what is needed to get stakeholders together to talk more about these Natural Born Killers and how we Risk Manage Nature. Lloyds of London has already stated that their insurance claims covering the Japanese earthquake and tsunami, the New Zealand earthquake and the Australian floods, have been pushed to close to $4billion, resulting in insurance premiums escalating … how can we not afford to start talking. (source: http://www.guardian.co.uk/business/2011/may/13/lloyds-of-london-insurance-premiums-natural-disasters)?
Reporter: Do you have anything to say to your fans?
Mickey: You ain’t seen nothin’ yet.
(source: Natural Born Killers)