Insurance, like so many other things, looks very different in the aftermath of the Covid pandemic. In a recent SATIB webinar, Big Ambitions’ Natalia Rosa was joined by Stephen Fogarty, director of Sintelum and Phillip Pettersen, Chairman of First Equity Insurance Group, in looking at what the tourism industry should – and should not – expect from Insurers in the current risk landscape.
There is no doubt that the insurance market is, in industry terms, much harder than it was pre-pandemic: notable changes include the imposition of more restrictive terms and conditions in a policy contract and, perhaps most concerning from the tourism industry’s point of view, a permanent halt on non-damage events (where losses have resulted from a cause besides physical damage such as a fire, flood or storm).
While this may seem punitive, the insurance industry cannot be blamed for taking steps to protect itself: South Africa’s business interruption losses were amongst the largest worldwide. This came about because of the broad wordings of policies that were in place at the time. The broad wording itself is an outcome of measures taken by the Financial Sector Conduct Authority in an effort to prevent anti-competitive behaviour.
While reinsurers’ reticence may be understandable in view of the complexities created by Covid, the tourism industry has always been a complicated one from the insurers’ point of view. It’s one thing to insure a property for an event that has occurred on the premises, such as a fire; but quite another if an event occurs off-site, but still has ramifications for the business. Say, for example, a series of shark attacks deters guests from booking into a seaside hotel – the business is still affected, but in a manner which is less quantifiable. The occurrence needn’t even take place locally for an establishment to feel the impact – when a volcano in Iceland erupted in 2010, airlines the world over were unable to take to the skies. Thus, while it is fair to say that the risks faced by the tourism sector in terms of physical threats (like fires) are no greater than those confronting any other sector, it’s equally fair to say that the industry may be affected by events happening on the other side of the world at any time – a room that remains unreserved has a far-reaching effect on revenue, after all.
Of course, Covid wasn’t the only ‘swan’ event to have made business more challenging for insurers in recent times. (Black, grey and white swan events are characterized by their rarity or likelihood, impact, and the widespread insistence that they were obvious in hindsight.) There are different schools of thought whether the pandemic was in fact a black swan event or a white swan event. The controversial Nassim Nicholas Taleb wrote in an essay that “A global pandemic is clearly a white swan – an event that is certain to occur at some point. Such pandemics are inevitable, they come as a result of the structure of the modern world; and their economic consequences will be even more serious as a result of increasing interconnectedness and exaggerated optimization”. Pandemics have occurred again and again throughout human history, which is why these events need to be prepared for. In fact, In 2018, for example, a specific coverage for financial losses due to outbreaks, epidemics or pandemics was made available (Marsh, 2020[8]) although there has reportedly been almost no take-up!
The July riots (a ‘white swan’ event ), have also caused Re-insurers to rethink their models. The fallout of the riots means that SASRIA is no longer able to offer the same limits once available. Meanwhile, the London market (the only market we are able to tap into for insurance around riots and political violence) has taken a knock in the wake of the events, with capacity decreasing while pricing increased. A matter of supply and demand.
Given this state of affairs, what options are left open to insurers and their clients? Overseas, one solution to have emerged is the creation of pools. In the US, for example, industry players have set up a terrorism pool. It’s a smart model, but not without problems – for example, where does funding come from? How do players identify what triggers the pool, and once it’s triggered, how do they ensure monies are distributed fairly?
The Insurance Services Office in the United States developed two optional endorsements for commercial property policies applicable to business interruption losses as a result of business closures related to COVID-19 in February 2020 although it is too early to determine whether insurers will seek to offer that coverage. Innovation is emerging as a key word as insurers find new ways to cover their clients, with established models falling away as they find new ways to mitigate risks. Looking at SASRIA once more as an example: perhaps one solution lies in packaging a bond that sits above SASRIA, and which may be sold on the equities market. The advantage here is that it would be cheaper than putting up collateral.
Weather derivatives are another unconventional alternative used in places like London, where enterprises that are heavily dependent on weather are able to purchase protective cover that is triggered in the case of loss of income – think of an ice cream shop that sees a slowdown of sales because there are more rainy days than sunny.
These solutions point to the fact that it is possible for insurers to formulate bespoke solutions for industries – but those industries must be willing to accept them. In the past, the hospitality industry has been hesitant to accept innovations around insurance but, given that crises are certain to become a more common fixture (the increasing number of weather-related disasters arising out of global warming confirms this, as does the increasing frequency of Cyberattacks), it may be time for an attitude change. Bespoke solutions inevitably mean higher premiums and taking on a bigger share of risk in the form of self-insurance and increased deductibles, but it also means a greater likelihood of being covered in case the unthinkable transpires.
