How to avoid your business becoming uninsurable
18 April 2018 | Web Article Number: ME20189475
PROPERTY-related and business interruption losses as a result of fire and weather catastrophes have increased dramatically in South Africa, with 2017 having the highest underwriting losses on record.
Insurers incurred material underwriting losses driven by major natural catastrophes including the Knysna bushfires, the Transnet Rossburgh warehouse fire (the single largest fire loss) in Durban, a large hexane plant fire, a tornado in Gauteng and multiple heavy rainfall, hail and flooding events in Gauteng and KZN.
Reinsurers no longer regard South Africa as a low catastrophe risk region due to the high frequency of large loss events, resulting in adjustments and price increases.
“Given that the principle of insurance is that the losses of the few are paid for by the many, and the losses of the few have been greater than the total premium collected, insurers have had to respond by increasing premiums for all clients - even those with no claims at all,” said Clive Boyd of Aon South Africa, insurance brokers and risk consultants.
Insurers are also reviewing the types of risks they are prepared to take on, paying particular attention to high-hazard industries such as paint, plastics, wood, packaging, refrigeration, recycling and warehousing.
“Insurers are far more stringent when taking on risks, and clients will need to demonstrate their commitment to risk mitigation and prevention,” Boyd said.
“In terms of fire risks, insurers may make the installation of Automatic Sprinkler Inspection Bureau (ASIB) approved sprinkler systems mandatory, and require that, in the event of a fire, the insured must prove that valid electrical and occupancy certificates had been obtained and that the premises was SANS 10400 compliant.
“In the absence of any of these, a fire-related claim can be rejected in its entirety, so the importance of managing compliance with fire-risk management requirements cannot be emphasised enough.”
Risk management is another focal point for insurers. In the absence of a demonstrable risk management process, a business could find that an insurer may opt not to renew cover if it believes the risks are uninsurable.
In order for a risk to be underwritten, there must be a survey report on file, indicating that the risk meets minimum underwriting guidelines and that the insured has adopted and implemented the risk control recommendations made in the report.
“After a decade of declining rates and profitability for insurers, battered by consecutive years of major losses due to natural catastrophes, it took a particularly bad year in 2017 to trigger the inevitable hardening of rates that 2018 is continuing to experience,” said Boyd.
“In order to remain insurable, risk managers need to review their formal risk management and audit programmes, ensuring that they comply with all national building regulations, installing ASIB approved sprinkler installations where recommended and adhering to risk control requirements as set out in underwriting survey reports.”
Boyd said that mitigating fire risks requires close collaboration between insurers, risk managers and brokers to ensure that the current risk management programmes are still compliant with a significantly more stringent underwriting process. Failure to comply with the statutory requirements and codes of practice for fire protection can leave businesses in severe financial crisis and with potential legal ramifications.
“Ultimately, reviewing such programmes is a task best undertaken with a professional broker who will work with the client to ensure that the fire prevention strategy is linked to an insurance program that fully addresses the needs of the business.”