Insurers need proactive management of risks if they are to provide the safety net required by the country’s economy and society at large, says South Africa Reserve Bank (SARB) Governor, Lesetja Kganyago.
“In this regard, strengthening risk management within institutions, as well as our collective thinking on mitigation of emerging risks, will be crucial,” he said.
The Governor made the remarks while delivering the keynote address at the African Insurance Exchange 2022 Annual Insurance Conference on Monday.
“The financial sector as a whole has remained resilient, despite the multiplicity of shocks over the past two years. The Prudential Authority (PA), much like many of you at this conference, remains resolute in contributing to the resurgence, resilience and revival of the insurance sector through clear supervisory guidance and providing regulatory certainty,” said Kganyago.
In this regard, he said the SARB would continue to collaborate with the Financial Sector Conduct Authority and industry associations to enhance the resilience of the sector.
In his address, Kganyago reflected on the major risks that the non-life insurance sector has had to face in recent years, including the unprecedented COVID-19 pandemic, the July 2021 unrest and the damaging floods.
On the pandemic, he said the lockdowns brought with them a series of new challenges to the non-life insurance sector and tested the provisions of business interruption insurance.
“The impact of the pandemic on businesses meant a significant increase in claims, which did not relate to physical damage. From a non-life insurance perspective, this was a big challenge that resulted in regulatory uncertainty.
“Due to the various legal interpretations of these business interruption policies, legal certainty had to be provided by the South African courts. It would not be an exaggeration to coin this as a significant misstep in managing insurance risk, which had a significant reputational consequence for the non-life insurance sector,” Kganyago said.
In progressing to obtain legal certainty, a small number of non-life insurers provided interim payments to support struggling sectors.
The Governor said the PA would continue to monitor the payment of business interruption claims. Furthermore, he said the SARB had also observed the total withdrawal of non-physical damage business interruption cover in South Africa, which created a significant insurance protection gap.
July 2021 unrest
Last July, as the country began to recover from the effects of the pandemic, a wave of violent unrest struck KZN and parts of Gauteng. This was characterised by widespread looting of businesses, and the burning and destruction of public facilities and private property.
In this regard, insurance claims in excess of R30 billion were recorded by the South African Special Risks Insurance Association (SASRIA), Kganyago said.
“The non-life insurance sector must be applauded for its collaboration with and support to SASRIA, especially in assisting to expedite the claims process and to ensure economic activity was restored.
“Unfortunately, not all businesses have resumed to full or even partial activity following the riots. Of concern was the significant number of affected businesses that were uninsured or under-insured and many were forced to shut down their operations,” he said.
Some lessons from these events, and which require further work, include:
• improved consumer education initiatives that clearly spell out what is covered and what is excluded under an insurance policy;
• clear proposals to address the insurance and risk protection gap, not only as a sector but also in partnership with government; and
• the development of insurance products and solutions that take into account this changing landscape.
Current economic outlook
The domestic economy experienced rapid growth during 2021, after a sharp contraction in 2020.
The Governor said despite the steep contraction in GDP during the third quarter of 2021 due to the riots in KwaZulu-Natal, the domestic economy grew by 4.9% during 2021.
“GDP growth, which would have surpassed pre-COVID-19 levels in the first quarter of 2022, was hampered by the January and March 2022 floods in KZN, the sharp correction in commodity prices and intensified load-shedding. The SARB forecasts GDP growth of 2% in 2022 and 1.3% in 2023,” he said.
In response, the SARB’s Monetary Policy Committee moved to normalise rates, raising the repo rate by a cumulative 200 basis points since November 2021.
Beyond this, Kganyago said the SARB had in recent years had to deal with operational and information technology risks (including cyber-risk) and climate-related risks and opportunities. – SAnews.gov.za