Not since the 9/11 terrorist attacks in the United States has the insurance and reinsurance industry been on the brink of such momentous potential strain as it now faces ahead of the unknown impact of Covid-19, says Christine Rodrigues, partner at law firm Bowmans.
In an analysis of how the coronavirus will impact the country’s insurance industry, Rodrigues said that in most cases Covid-19 will not be covered by property and liability insurance.
However, she noted that current life policies and group insurance policies are likely to cover the deaths of individuals or permanent employees due to the coronavirus.
“Given the unemployment rate in South Africa and the low rate of insurance cover, the majority of South Africans lack such sophisticated cover. Most people only have a funeral policy,” she said.
“In the non-life sector, if reinsurers are willing to give reinsurance cover, insurers may be able to extend cover to liability and property risks – albeit at a premium (which may be expensive).”
Alternatively, Rodrigues said that legislation may be enacted to require the government to create a fund to cover future losses. This was the case after 9/11 when the United States passed the Terrorism Risk Insurance Act (TRIA) in 2002 to share losses between the federal government and insurance industry.
This legislation became necessary as insurers either started excluding terrorist risk from policies or escalating premiums to the point where consumers could not afford insurance, she said.
“In the case of South Africa, another option is to extend the mandate of the South African Special Risks Association (SASRIA), which only covers against risks such as civil commotion, public disorder, strikes, riots and terrorism.”
The current framework
Below, Rodriguesprovided an overview of how the Covid-19 pandemic is likely to affect the insurance industry and its customers under the country’s current insurance framework.
- Existing individual life policies that provided cover in terms of a pandemic will continue to provide cover. Consumers need to be cautious about cancelling an existing life policy and replacing it with another. Depending on the number of insured lives that will be paid out due to the pandemic, any future pandemic may be excluded for new policies;
- Group policies are renewed on an annual basis, so companies need to be aware that when renewals become due, reinsurers may change their approach. If they no longer want to reinsure pandemic-related deaths, this may result in group policies excluding deaths or disabilities arising from a pandemic;
- Banking institutions, where loans are provided and require insurance policies to be ceded as a form of security, will need to consider what other forms of security may be required to cover risk of default due to pandemics;
- Lending to small businesses and private individuals will need to be reconsidered not only to ensure financial stability in the economy but also to comply with requirements around ‘treating customers fairly’. This is important as insurance policies ceded as security may not cover the risk of default;
- Medical aid premiums are likely to increase, to cover the costs associated with the pandemic;
- Government will need to look at how state-run hospitals, schools and departments should change the way services are offered, what skills are lacking and how infrastructure should be upgraded or modernised to cater for healthcare services in pandemics. This will impact planning for the National Health Insurance scheme;
- Retirement funding will need to be reconsidered, particularly in cases where the funds of a pension or provident fund are managed by the trustees of the fund. Going forward, trustees of funds will need to consider how investments can be used to mitigate risks to their members. This may require that fund rules are amended;
- Where pension or provident funds procure a policy underwritten by insurers and the insurer undertakes to provide policy benefits for the purpose of funding in whole or in part, the liability of a fund to provide benefits to its members in term of its rules comes into play. Again, where an insurer will no longer provide certain benefits, rules may need to be reviewed.
“It is far from clear at this point how the Covid-19 pandemic will reshape the insurance and reinsurance industry,”said Rodrigues.
“However, there is no doubt that an economy lacking the ability to mitigate its risk through insurance is an extremely vulnerable economy. Some reshaping will certainly be needed.”