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risk specialists

T H E A N N U A L SPECIALIST RISK REVIEW2

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9

CO

NT

EN

TS Introduction

Participants statistics

General claims trends

Broadform liability

Professional indemnity insurance

Accident and health insurance

Cyber insurance

Commercial crime insurance

Directors and officers insurance

Conclusion

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6

8

12

16

20

24

28

32

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Stalker Hutchison Admiral (Pty) Ltd is a wholly owned subsidiary of and provides insurance underwriting services exclusively for and on behalf of Santam Ltd.

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risk specialists

T H E A N N U A L SPECIALIST RISK REVIEW 2019

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T h e S p e c i a l i s t L i a b i l i t y l a n d s c a p eI N T R O D U C T I O N :

As the leading specialist risk underwriter for 34 years now, with a particular focus in the casualty risk class, SHA has first-hand insight

into the cost and disruptive impact that human failure and error can have on a business.

In delivering on SHA’s purpose to help restore livelihoods and ensure business continuity, we are proud to share the second edition of the SHA Annual Specialist Risk Review with our stakeholders. The survey covered questions on a broad range of business risks that SHA provides insurance coverage for. We sought insight and feedback from both business executives and insurance broking partners who act as important risk advisers to businesses. Whilst today’s insurance news headlines and dominant industry conversations focus on the devastating loss of life and financial impact related to major weather events and changing climate patterns, there is also cause for concern in respect of loss incidents and events, which we attribute to the declining Human Capital Risk Index (“HCRI”).

As I write this article, the background CNN news coverage is the alleged Boeing 737 Max Jet sensor failure, resulting in the tragic loss of life of hundreds of passengers and crew members involved in those two fateful crashes in Indonesia and Ethiopia, as well as billions of dollars of shareholder wealth being wiped off Boeing’s market cap.

As the investigation develops, and depending on what the facts finally reveal, the final impact to

Boeing may be in a severe financial crisis resulting from significant third-party losses from impacted airlines. These losses could include loss of future customer orders due to brand and reputational damage, as well as potential criminal charges and financial loss suits against key employees, directors and officers if found guilty of gross negligence and failure to apply due care and skill in the conduct of their duties.

This incident follows hot on the heels of the tragic event involving Vale’s iron ore tailings dam collapse, killing several hundred people. Researchers at World Mine Tailings Failure (“WMTF”) organisation noted that this was the eleventh serious failure of this nature in the last decade. They also stated that not only are such events on the increase, but they are likely to become more prevalent unless action is taken. A number of major South African organisations and government regulatory bodies have also been involved in headline-grabbing events over the last few years. These cases highlight the declining HCRI and the resultant catastrophic financial impact, as well as the tragic loss of human life in some cases.

The following incidents come to mind: 1. The corporate collapse and failures of the

Steinhoff Group; 2. The out-break of Listeriosis in the

processed meat industry; 3. The collapse and failure at VBS bank and

concerns over the external auditor (KPMG) audit sign-off processes;

4. The collapsed M1 pedestrian bridge while under construction during rush hour traffic;

5. The ongoing operational and financial failure at Eskom – to name but a few significant and memorable cases.

 As losses resulting from the declining HCRI continue to rise in both frequency and quantum, the challenges for insurers in these classes of business are becoming apparent. Globally, capacity and appetite for the liability risk classes are diminishing at a rapid rate. Specialist underwriters are facing job losses, insurance premiums are climbing, and coverage is being curtailed. The risk pool diversification argument resulting in the under-pricing of these risk classes has been exposed as the claims liability tail develops fully.  We need to start acting now, if we are to ensure a viable and sustainable insurance market that will provide ongoing innovative solutions to businesses well into the future. Specialist risk insurers, their insured clients and their insurance brokers must start engaging in conversations around this admittedly sensitive topic.

Talking about one’s own vulnerabilities is not something that comes naturally to corporates who operate in a world of fierce competition. There are many reasons driving the declining HCRI, some of which

are obvious to see, whilst others are not so obvious. Declining educational and professional standards aimed at producing more graduates; the mass exodus of highly skilled and experienced professionals from South Africa to other countries offering better economic upside and political certainty; coupled with an increasingly complex business environment caused by multiple system independencies and the human greed factor, are just some of the key drivers.

We trust that our annual Specialist Risk Review will be seen in the context of SHA attempting to engage in such conversations. We thank all the businesses and insurance brokers who took the time to provide us with their valuable responses.

As we continue on this journey, we are sure to start developing more insightful and difficult questions that are impacting on the declining HCRI as well as what solutions are required. We believe that only through the power of collective wisdom will we find answers to some of today’s and tomorrow’s most pressing challenges.

We look forward to continuing in robust conversation as we seek to fulfil our purpose.

SHA’s purpose: in a world filled with risk and resulting adversity, our purpose is to help restore livelihoods and ensure business continuity, keeping hopes, dreams and future possibilities alive!

Gareth Beaver, Chief Executive Officer

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Total participants

Total participants

Total participants

Company size (number of employees)

Small (0-100)

Medium(101-2000)

Large(2001 -25000)

Extra Large(25000+)

2% Medical

13% Accounting 6% Legal

12% Financial Services

6% Real Estate

27% Technology13% Building Environment

Global South African

Corporate Business Leaders

Brokers

Professional Indemnity

PARTICIPANTS STATISTICS

Current Role:

ED - Executive Director

AD - Associate Director

SM - Senior Manager

D - Director

P - Partner

BO - Business Owner

CEO - Chief Executive Officer

CLE - C Level ExecutiveSM BO CLED CEOPED

10

20

30

40

50 44%

3% 3%

17% 17%12%

2% 1%

AD

20

40

60

38%

15.4% 87.6%

28%

8%26%

35% 31% 16% 18%

Total participants

Company size (number of employees)

Industry

<51 51-100 101-200 >200

HC - HealthcareR - RetailOG - Oil & GasO - OtherPS - Public SectorU - UtilitiesP - Professional ServicesH - HospitalityM - ManufacturingTL - Transport & LogisticsT - Telecoms

SME Cyber Security

PSR OG O TLUHC H

10

20

30

24%

12%15%

6%4%1%1%

16%

7% 5%6%

M TP

27% 27% 21%25%

Less than 10

10 - 50

51 - 100

More than 100

PM - Project Manager QS - Quantity SurveyorAR - ArchitectE - EngineerTC - Technology CompanyEA - Estate AgentTA - Travel AgentIB - Insurance BrokerAC - AccountantA - AdvocateAT - Attorney TCQS AR E AEAPM IB

10

20

30

23%22% 22%

2% 2%1%3%

9%5% 5%6%

AC ATTA

Profession

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There seems to be a general sentiment in South Africa, and in many other developed insurance markets, that

the frequency as well as severity of both professional indemnity and liability claims are increasing at a substantial rate. Market trends are pointing towards the risk landscape becoming more challenging in the years to come for these two classes of business.

This is immediately evident when one reviews the SHA claims data over the past few years. As a point of departure, the average quantum of a liability claim has risen significantly in a relatively short space of time.

Between 2016 and 2018, the average value of intimated liability claims expanded by over 100%, from R557 000 to R1.25 million. The total value of capital settlements on liability claims during this period has also grown by 42%. The results from older data are even more startling, with the annual liability claims payments shooting up by 190%, from R59 million in 2013 to R171 million at the end of 2018.

While the average value of intimated PI claims has not grown for all sectors, in certain professions, such as in the built environments, average intimated claim values have gone up

from R5.7 million to R8.5 million between 2016 and 2018 - thus an increase of 49%. Looking at the five year claims data, the same startling trend is evident with claims payment values on PI claims growing by 24% from R217 million in 2013 to R269 million by the end of 2018.

Of course one really needs to drill down into specific claims categories to understand where the problems lie. There are quite a few examples where claims averages grew in value by orders of magnitude. The intimated values for personal injury (slip-and-trip) claims, for example, have risen from R172 600 to R270 690 between 2016 and 2018.

This essentially means that individuals who sustain injuries on an insureds property, now claim over 56% more in damages than they did two years ago. Even more notable, the average intimated claims for product liability surged from R1.65 million to R14.75 million. The frequency of claims intimations in both these categories has also increased exponentially.

One category that bucks the trend is the arena of property damage – the average for intimated claims where the third party is claiming for physical damage to property

Janine Janse van Vuuren,Executive Head: PI and

Liability Claims

Consumers have become more aware of their rights, the legal remedies available to them, and the amounts that they stand to gain in the event of a liability suit going to court.

has remained relatively flat at around R1 million for the past two years.

This is actually not surprising. The above-mentioned trends in product liability and personal injury claims are, to an extent, driven by the non-financial components of the awards. Claims for pain and suffering are becoming progressively larger and are often inflated, while claims for future loss of earnings tend to be exaggerated. In the arena of personal injury claims, a trend of spurious and even fabricated claims is also emerging.

By contrast, property damage claims are far less likely to be inflated, since they have to be backed up by empirical facts in the form of invoices and vouchers for physical repairs, or replacement.

The rise in frequency of claims confirms our observations that consumers have become more aware of their rights, the legal remedies available to them, and the amounts that they stand to gain in the event of a liability suit going to court. This, coupled with a tough economic climate, is driving the behaviour evident in our claims data.

In the PI space, the increases are in part, driven by professionals taking on work at reduced

Personal injury claims average up from

R172 600 to R270 690

between 2016 and 2018

more damages claimed than two years ago

Physical damage to property has remained

at an average of R1 million for the

past two years

fees with resultant cost cutting strategies. This inevitably has an adverse effect on risk management, and contributes to the rise in claims. More professionals are also venturing into other areas of business in an attempt to diversify their offering to remain competitive in a struggling economy, further exacerbating the situation. We have also seen the impact of the loss of professional skills to the overseas market, with resultant deterioration in the level of skills transfer within businesses – leading to errors by inexperienced staff. This is dealt with extensively under the PI section of this year’s review.

In terms of the total claims that were paid, professional indemnity and liability policies paid out a combined sum of around R276 million in 2013, which went from R360 million in 2016 to R440 million in 2018, which reflects a total increase over the period of 59%. Due to the long-tail nature of these classes (which is generally between three to five years) it should be noted that claims payments lag behind the years in which the risks were underwritten and as such the payment data does not yet reflect the recent application of a more cautious underwriting approach and hardened terms, which led to a slight drop in policy count. We expect that this will start

annual liability claims payments shooting up

by 190% between 2013 and 2018

R59 mil

R171 mil

GENERAL CLAIMS TRENDS

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impacting claim numbers within the next 12 months. What is clear, is that there has been a notable escalation in the intimated and settlement values of individual claims, even as the number of contributors to the insurance pool shrinks.

In summary, the trend in claims intimation and settlement values is following an upward trajectory, as a result of the changes in litigation behaviour, claims inflation, a tougher economic environment, currency weakness and an increase in risk exposure generally. In light of this, there are some steps that prudent business owners can take to stem the tide, and ensure that their businesses are protected when the time comes to claim from their insurer.

Risk management, on the part of the businesses we insure, is a common theme throughout this review. It can contribute not only to the quality of risk impacting on the insurance value proposition, but we also believe that it plays a critical role in the claims management process, to ensure that liability insurance remains viable for insurers and accessible for businesses. A key strategy in improving the value proposition for both the insurer and the client is to focus on identifying and settling valid claims before litigation ensues, thereby drastically cutting down on high litigation costs incurred to defend these claims. This approach also tends to have a positive impact on claims inflation in long-tail business, as the lifespan of the claim is reduced with resultant cost savings.

This can generally produce a win-win scenario for the insured and the third party, preserving the limit of indemnity for payment of damages, and avoiding depletion of cover. It also helps to avoid any negative impacts on the loss ratio of the insured, as well as future adverse consequences in their insurance negotiations. We believe that it also benefits the client in terms of managing the potential reputational impact on their business, as well as mitigating against the impact on relationships with their own clients (who are often the claimants under both PI and liability insurance policies).

Legal fees have gone up by between 8% and 10% each year. When considering the inflationary effect that legal costs have on liability cases that routinely take three to five years to reach settlement, this represents a major source of erosion on the sum insured of any given policy. As an aside, it should also be noted that the time to reach settlements is becoming more drawn out due to growing backlogs and inefficiencies in the courts.

The perception that the cost of litigation will be recovered if the case is won through the courts is also incorrect, as the reality is that costs are often not recoverable. Claimants may be indigent, and the courts seldom allow a full cost recovery by the successful party, effectively leaving the successful defendant to carry the costs.

To mitigate against the high cost of legal fees, SHA adopted a strategic approach to claims management beginning in 2015. This

approach included moving more of our legal work in-house, managing our legal resources more efficiently, and actively finding ways to avoid becoming embroiled in lengthy and costly litigation.

This was done by accelerating the liability and quantum debate and negotiating early settlements and appropriate risk buy-outs to the benefit of both the insurer and insured. The latter strategy effectively means that SHA offsets the risk associated with high cost and uncertainty of litigation by making appropriate and realistic settlement offers, thereby affecting overall savings.

Of course the impact of this strategy varied for the various categories of liability business. Legal cost spend on PI claims, for example, only reduced marginally from R37 million in 2016, to R32 million in 2018. This is not unexpected, as the majority of claims in this environment tend to be of very high average quantum. When faced with a R100 million claim, for example, a risk buy-out is not an option, so one has no other choice but to continue with the legal battle for however long it takes.

While the year-on-year comparison of legal cost saving may not seem that significant, it is only one aspect affected by the impact of improved settlements, which will in turn be impacted by reduced claims inflation on quantification of damages, interest and cost orders.

The liability categories, which tend to see a higher frequency of claims, achieved much better results with this strategy. This can be attributed to the nature of these claims, which are generally lower in value. A risk buy-out of lower value claims therefore, makes more sense commercially.

After all, spending three years tied up in litigation - which could total many hundreds of thousands of rands in legal fees, with little or no chance of recovering legal costs - does not make good business sense when defending a R35 000 slip-and-trip claim.

As a result, total legal costs in this segment went down considerably from R34 million in 2016 to R20 million in 2018. It is also typically, in the personal injury type claims, where our in-house legal team can achieve good settlements without having to involve external law firms.

Finally, the other major component that can have a marked impact on how well a policy can serve a business, is to place more emphasis on avoiding mistakes during the claims process. There is still an unacceptably high number of errors occurring at the point

where the client actually lodges a claim. Late notifications have been a particular problem, with claims data indicating that 38% of all liability rejections and 30% of PI claims rejections, were as a result of late notification issues.

Whilst the number may appear very high, the reality is that in 2018 this accounted for 22 claims in liability (out of a total of 58 liability claims that were rejected for the year). In PI the actual number of rejections based on late notification were 22 claims out of a total number 73 PI claims rejected for the period. Considering that SHA registered 2156 new claims in PI and liability in 2018 with a total open claim count for both classes at 6278, the number of claim rejections based on late notification is relatively insignificant.

With this in mind, SHA has embarked on an awareness campaign to ensure that this number can be improved to ensure that policyholders enjoy full coverage by adhering to the notification requirements.

In fact, the results from the SHA survey also show that a poor understanding of the client’s obligations at claims stage is still a notable problem in the market. A third of the professionals we interviewed indicated that they do not have formal meetings with their brokers, while 20% of corporate business leaders do not have

formal meetings or workshops with their brokers. A third of businesses generally do not maintain a risk register.

There is an undeniable link between SHA’s own claims data and the survey findings with regard to understanding the policy requirements and reporting procedures within a business. Confirming this, results from the survey found that one fifth of businesses do not have formal reporting systems, nor do they understand the requirements of their policies. This is evident in our claims statistics across multiple lines of business and often translates directly into rejected claims. We frequently find that by the time a claim is reported, many avoidable errors have been made by the client, that ultimately compromised their cover.

Having formal risk escalation procedures within a business is a great risk management tool. However, the organisation’s risk managers and legal teams must have a clear understanding of when their insurer needs to become involved.

This is particularly important in high-risk industries such as construction, retail, food and beverage and entertainment. It is imperative that clients have a relationship with their broker and must ensure that they have partnered with a competent advisor in assisting them through the claims process.

Legal fees have gone up

by between 8% and 10%

each year and liability cases take

three to five years to reach settlement

Combined sum of liability and PI claims paid out

2013 2016 2018

Which reflects a total increase over the period of

R276 milR360 mil

R440 mil

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BROADFORM LIABIL ITY LANDSCAPEA widely used form of liability insurance that benefits most commercial entities regardless of business activities. It owns its moniker “broadform” by providing an extremely broad range of specialised extensions that can be tailored to a business’s needs. The policy’s primary function is to provide legal defence cover although damages and settlements are also key benefits.

B roadform liability insurance is on the verge of a major shift in South Africa. Premiums have generally declined

in this space over the past decade; this is largely due to an over-supply of capacity and a fiercely competitive market, but a rapidly evolving risk landscape is set to change all of that.

The recent Listeriosis crisis is a prime example of the type of liability risks that businesses are sure to face in the future. The enactment of the Consumer Protection Act has made the public increasingly aware of their rights as customers. This, coupled with the platform that social media provides, has enabled individuals who feel they may have been wronged by organisations, to connect on an unprecedented scale. The risk of litigation and class action suits against businesses is growing as a result of this. Additionally, the cost of litigation and the size of claims have increased substantially.

In fact, it’s worth noting that 2018 was one of the toughest years for liability insurance in SHA’s experience. This is not only as a result of the Listeriosis crisis, but also because there were a number of long-tail cases that reached maturity in this claims cycle. The food & beverage industry appears to have been particularly hard hit with new risk exposures. To this end, we have seen a marked increase in policy enquiries from clients in that sector.

In our experience the intimated value of the average claim under a broadform policy has jumped from R557 000 in 2016 to R1.25 million in 2018. As a category on its own, product liability has probably seen the biggest increase in claims severity. The average claim for product liability in 2016 was about R1.65 million. By 2018 this had shot up to R14.25 million. Personal injury claims have also increased in claim amounts, growing from an average of R172 600 in 2016, to R270 690 in 2018. The majority of claims in this category relate to slip and trip incidents.

The results from SHA’s survey have also indicated a toughening risk landscape, showing that 21% of businesses have actually experienced a product liability claim at some point in the past five years. The survey further revealed that many businesses are still not appropriately considering the risks associated with their decisions.

Most notably, more than a third of businesses have changed their key suppliers in the last five years, with 59% of these businesses indicating that pricing was the primary reason for the switch. Concerns over service delivery motivated 28% of companies to find new suppliers, and only 13% cited product quality as their reason for changing.

This suggests that businesses are currently prioritising the cost of materials and products over quality or defect risks, which indicates that the market still has a poor understanding of the devastating impact that product liability can have on a business. This hypothesis can be further backed up by the fact that only 30% of companies buy product recall insurance – keeping in mind that this is intended to help businesses limit the impact of liability that arises as a result of defective products.

Manisha Chiman,Executive Head: Liability Underwriting

Average claim for product liability increase between 2016 and 2018

Average claim for broadform liability increase between 2016 and 2018

R1.65 milR557 000

R14.25 milR1.25 mil

Premiums have generally declined in this space over the past decade; this is largely due to an over-supply of capacity and a fiercely competitive market, but a rapidly evolving risk landscape is set to change all of that.

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Risk management is another important factor that is not receiving an appropriate level of attention in the market. According to the survey, only 44% of businesses conduct their own quality control audits, 43% ensure that their supplier and client risks are managed through adequately worded contracts which clearly outline responsibilities, and 36% confirm that their suppliers have sufficient liability cover. In our experience, failing in any one of these three areas leads to a much greater risk exposure and the distinct possibility of complex and protracted litigation between parties.

In light of this, it is little surprise that almost a third of brokers have already experienced a general hardening of the conditions and rates in broadform liability over the past year. The previous ten years may have seen broadform liability policy pricing contract, however, many of South Africa’s experienced well-established insurers have realised the need to take action to ensure the sustainability of this cover in future. It is now unavoidable that the cost of cover will increase to account for growing claim’s costs.

Additionally, insurers will no doubt place much greater emphasis on risk management measures, not dissimilar to what has been experienced in the property insurance market. The longevity of insurers in the specialist market and the strength of their balance sheet is sure to play a pivotal role in the liability environment particularly since claims of this nature can take many years to develop.

Businesses that continue to have a lax approach to their litigation risks and who are not mitigating liability exposures in a holistic manner, may ultimately see insurers declining to provide them with liability cover. In this regard, they should be able to demonstrate that risks are actively being managed through a combination of contracts, quality control, escalation processes and recall plans in order to maintain liability cover.

In response to the new risk landscape, specialist insurers are applying greater focus to recall strategies, as poorly executed product recalls can open the business up to further liability. It is not uncommon to see businesses with no recall strategy in place,

with the prevailing sentiment being that one only needs to think about it when a product is recalled. This short sighted approach is sure to fail, as when a major product defect that could potentially cause injury or damage becomes apparent, recalls need to take place as rapidly as possible, leaving no time to develop a plan.

On the positive side, it seems that the high-profile liability cases over the past year have helped to raise awareness among businesses and we are witnessing a gradual change in the attitudes towards risk management.

We’ve noted several large retailers increasing the limits on their broadform liability policies, as well as reviewing their contracts with suppliers, insisting that they have their own liability cover in place. We have also seen some companies in the food and beverage industry sharing information in the spirit of reducing liability risks throughout the supply chain.

Large players in the food industry have been hosting food safety seminars that feature insightful learnings on topics ranging from contamination risks such as Listeriosis, to

managing risks through contract wordings and improved quality control. Many of the smaller businesses that attend these seminars do not have access to this kind of knowledge, making these sessions incredibly valuable in helping to make the entire industry safer. We hope to see this trend continue to grow over the coming years.

The results from the broker survey have also been encouraging, with around 50% of brokers now indicating that they are comfortable talking to their clients about broadform liability cover. Given that this is quite a complex line of insurance, the fact that more businesses and brokers are taking the time to understand and enquire about the product, is a positive sign.

There is still, however, plenty of room for improvement in the liability space, as the litigation habits of the South African public continue to change, a more conservative approach to exposure and risk management will need to be adopted. This will ensure the sustainability of the market well into the future.

34%of businesses have changed their key suppliers in the last five years

Reason for changing suppliers

59%13%

28%

Pricing Service delivery

Product quality

Conduct their own quality

control audits

Their suppliers have sufficient liability cover

Manage risks through

contracts

44% 43% 36%

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P rofessional indemnity (PI) cover is an insurance product that most professionals are already quite familiar

with, and as SHA’s Risk Review shows, there is a growing awareness of the possible litigation risks faced by professionals in various fields. Around 73% of professionals surveyed indicated that their organisations had a formal system for recording and reporting liability related incidences, and 67% of organisations maintain a risk register.

While it is encouraging to see that a growing number of organisations are cognisant that this is a risk that needs to be properly managed, it is worrying to see that only 57% of professionals currently have PI cover in place. It is also concerning that almost a third of professionals do not keep formal systems in place for tracking incidents, especially when one considers the long periods of time that can lapse between an incident and the ensuing litigation.

This is especially alarming considering that the professional liability landscape has changed dramatically in recent years. Around 12% of professionals indicated that they have been sued at least once during their careers.

SHA’s claims statistics also show that the cost of litigation against professionals has become substantial. For each architect that had a claim against their PI policy, the average intimated amount was around R1 million while the average claim size for attorneys was about R3.7 million. Most shockingly of all, the average PI claim against an engineer was R13 million.

The above findings are certainly in line with the trends that SHA has seen in recent years. The frequency as well as the severity of liability claims against professionals have indeed increased substantially, and the market for PI cover has rapidly hardened as a result.

While increasing professional liability risk is a trend globally, the biggest driver of this trend in South Africa is the currently depressed economic climate. Another big driver is the massive skills gap we are currently experiencing, caused by a combination of experienced professionals emigrating over the past decade without passing down skills and relaxed degree requirements. 62% of the professionals surveyed, perceived a marked decline in the quality of graduates entering the market.

PROFESSIONAL INDEMNITYINSURANCE LANDSCAPEAny business or practice that renders a professional service for a fee is exposed to the possibility of litigation as a result of actual or alleged negligent acts, errors or omissions. The policy seeks first to defend the professional although the payment of damages and settlements are also key features of the coverage. Most professionals are required to have PI insurance.

Malcolm Padayachee,Managing Executive: Professional Indemnity & Liability

professionals currently have PI

cover in place

ONLY

Architects =

Attorneys =

Engineers =

R1 million

R3.7 million

R13 million

While increasing professional liability risk is a trend globally, the biggest driver of this trend in South Africa is the currently depressed economic climate. Another big driver is the massive skills gap we are currently experiencing, caused by a combination of experienced professionals emigrating over the past decade without passing down skills and relaxed degree requirements.

Average PI claim per profession

30%of professionals

don’t keep formal systems in place for

tracking incidents

18 19

This observation also rung true from a claims perspective. SHA has seen an increase in claims activity in the various professions, directly related to inexperienced or poorly supervised professionals. This ultimately led to an increase in PI claims from a frequency and severity point of view.

It is commonly accepted among legal and built environment professionals that there is a massive skills gap in these sectors and that the young graduates coming into the business world are not adequately equipped with the hard and soft skills required for their profession.

This phenomenon is one of the factors that has influenced the pricing of PI premiums in recent years. Many insurers have reassessed their rating and imposed increases in their pricing to counter the increased influx of claims against inexperienced professionals.

Competition on pricing between professional firms also increases the risk of litigation. Firms that significantly cut their costs in order to undercut their competition, often have to cut down on the resources and man-

hours that can be allocated to a particular project. In many cases, it means that senior professionals do not take the necessary time to oversee the less experienced team members. Firms in the built environment are particularly vulnerable to these kinds of risks and we have seen major claims arise from errors made during critical phases.

With market conditions becoming more challenging, it is increasingly common for professional firms to supplement their incomes by diversifying into services that are not part of their core skills. For example, we have seen a rise in the number of attorney firms that now offer tax and forensic consulting as additional services.

If the firm appoints the appropriate skills to accommodate its additional service offerings, this may very well not be a problem. Subject to the insurer’s risk appetite, an underwriter may structure policies to accommodate those expanded services at an additional premium.

However, there are many instances where the risk becomes uninsurable. In SHA’s own experience we have seen cases where firms expect their existing staff members to perform functions for which they are not qualified. This is also reflected in the survey, where over 50% of professionals indicated that they have been asked to perform services that fall outside of their professional duties.

Not only does this greatly increase the risk of litigation, but if it is found that the professional gave gratuitous advice or performed services that they were not qualified for, their PI policy would not respond and any possible litigation costs will go to the firm’s balance sheet.

Cybercrime is an emerging trend, with many professionals being targeted, particularly conveyancers, attorneys and real estate firms. Phishing email scams are especially prevalent wherever funds are being transferred, and many professionals have faced the possibility of litigation from clients as a result of funds that have been successfully diverted by scammers. The survey found that 20% of companies have fallen victim to an email scam and 54% have been threatened with litigation afterwards.

Another trend that we have observed is the fact that litigation following a liability incident has increased and it seems that far fewer clients are now willing to settle disputes in an informal manner, rather opting for litigation or arbitration. This is because; in many cases

it is the professional’s reputation and future earning power on the line. The cost of litigation has seen a considerable increase as a result, and insurers have responded by hardening their premiums as well as policy conditions in many instances.

SHA’s own panel of attorneys increase their rates by between 8-10% per annum. Considering that PI claims can take up to five years to resolve, the inflationary effect of legal costs during that time, is significant. Of course, the cost of foreign litigation has also increased exponentially with the weakening of our currency and the adverse exchange rate. The average cost of attorneys in international cases has almost doubled between 2016 and 2018. This has a dramatic impact on the professionals who take on work outside of South Africa when there is a claim.

The above mentioned trend has also led to a steep rise in the frequency of frivolous claims, with parties who feel that they have been wronged, often pursuing litigation at the first sign of possible liability without taking the time to investigate the matter on an informal basis first. In cases such as these, PI policies will respond and cover the defence costs of the professional, as in most other cases.

However, this trend has also placed a significant amount of strain on insurance pools. While there are mechanisms available whereby the insurer can recover the cost of frivolous litigation from the plaintiff, these have so far proved to be largely unsuccessful, with insurers usually only recovering relatively small amounts. Again this has left the insurance industry no choice but to increase premiums for PI policies.

Looking at the international market (specifically the UK) there has been a rise in adverse claims, particularly in the built environment. Some UK insurers have withdrawn from underwriting professional indemnity insurance and others have reduced their capacity in this class of insurance. The PI market in South Africa is now entering the same hard market cycle. If this trend continues, we are likely to find ourselves in a market where insurers will have either withdrawn, reduced their

capacity or imposed unaffordable premiums and excesses on PI cover.

Returning to the survey, the professionals that responded to our questions revealed more troubling statistics. It was found that 20% of professionals do not understand how late renewals affect them, and 22% indicated that they do not rely on a broker to explain policy requirements.

These findings are in line with what SHA has seen in the industry, and the trends are quite problematic for policyholders. To start with, only renewing a PI policy after it has lapsed means that the professional’s retroactive date no longer applies. Effectively, this means that if a new liability claim arises from a mistake that the professional made some years before, it will no longer be covered by the new policy. Long-tailed liability claims are commonplace, especially in the built environment and in incidents involving children, which is why it is vital for professional services firms to have uninterrupted cover throughout the business’ lifespan.

In order to avoid the gap in cover, policyholders must educate themselves on their policy requirements. Not understanding when or how to report liability claims, or

possible future claims to one’s insurer may result in the policy either not responding, or it can significantly impact the success of the insurer in defending the client. This ultimately may result in uninsurable damages suffered. The value of the broker in managing this critical risk for the insured cannot be emphasised enough.

In addition, the respective professional associations that promote the interest of their members, need to invest more time in skills transfer and training. They need to stand together to adopt robust policies to ensure that quality professional services are provided by their members. Training and skills transfer programs are critical in stemming the tide of increasing claims, which if not addressed will ultimately fuel even higher insurance premiums.

The cost of PI cover has become a bone of contention for many, but the fact remains that professionals across all business sectors are more vulnerable than ever to litigation by clients. Even if it is found that the professional had acted responsibly, one is at risk of bankruptcy from the cost of legal defence alone. With this in mind, it is critical that professional service firms indemnify themselves against the ever-increasing minefield of liability risks.

of professionals have been asked to perform services that fall outside of their

professional duties

of professionals perceive a decline in

the quality of graduates entering the market

Cybercrime is an emerging trend, with many professionals being targeted, particularly conveyancers, attorneys and real estate firms. Phishing email scams are especially prevalent

of professionals have fallen victim to an email scam

have been threatened with litigation afterwards

of professionals do not understand how late renewals affect them

20%

22%Renewal of PI

Insurance policy

do not rely on a broker to explain policy

requirements

62%

20%

50%

20 21

SHA’s Annual Risk Review revealed that 29% of corporations surveyed had to deal with the serious injury or death

of an employee as a result of a work related incident in the last three years. Around 36% of the business leaders have dealt with workplace injuries that were covered by the Compensation for Occupational Injuries and Diseases fund (COID).

However, claiming from COID for workplace injuries still seems to pose some significant challenges for employers. The survey showed that 49% of businesses that submitted claims to COID in the last three years, complained about long delays. Around 76% of these businesses had to pay upfront for immediate medical treatment of injured employees, and 24% of companies reported that they suffered notable financial losses resulting from an incident.

One finding from the survey that we find particularly alarming and almost unbelievable, is that 52% of brokers indicated that they did not have an awareness of the difficulties their clients are experiencing with COID claims. This is a very important factor in the risk assessment of the client. It is vital that brokers familiarise themselves with the COID Act, the implications of non-compliance on the part of the client, as well as the structure that can be used to assist clients with COID cover and payments.

SHA’s own experience mirrors the survey findings, and we have heard business owners complaining that dealing with COID can take longer than many are prepared to

wait. Submitting the claim is lengthy and complicated, and a response from COID can take anything between six to 12 months. It should also be noted that if submitted paperwork is incorrect or deemed to be incomplete, COID may ignore it entirely and the process will have to start over.

This may well be why it is not uncommon for business owners to become despondent, and attempt to circumvent COID completely if an employee only suffers minor injuries. These employers will often pay for the employee’s medical treatment out of pocket and not report the incident to COID at all, for the sake of avoiding time lost to admin.

However, we cannot stress enough how detrimental a decision such as this can be for a business. Firstly, it should be noted that notifying COID of any workplace injury is a legal requirement. Secondly, and even more importantly, not claiming from COID exposes the business to massive financial liabilities.

ACCIDENT AND HEALTHINSURANCE LANDSCAPEPersonal accident insurance can be classified as a form of short term employee benefit coverage. Employers take out policies to protect their employees from financial losses that follow accidental bodily injury or death. The impact of permanent or even temporary disability can be devastating for the employee (and their families). Cover is generally worldwide and extends beyond workplace injuries to provide 24 hour protection.

Dave Honeyman,Executive Head: Accident and Health

One should not underestimate the potential cost of a single injury, even minor injuries, and the impact that it could have on a business. If the business pays for the medical treatment of an employee out of pocket and does not claim back from COID, it could essentially take responsibility for any and all costs related to that injury in future. If a broken arm or fractured hand develops complications months (or even years) down the line, the employer may be liable for medical costs that could ultimately close the company’s doors. COID removes this risk by covering the employee for any and all future costs related to the reported injury, but claims must be registered within seven days of the incident occurring.

It is also worth noting that many employers’ liability policies exclude any liability for compensation that may be payable under COID – even if the employer failed to submit a claim or neglected to register with COID. This would effectively leave the employer without any insurance for the incident.

of businesses that submitted claims to

COID in the last three years, complained about long delays

of corporations had to deal

with the serious injury or death of an employee

as a result of a work related incident in the

last three years

29%of business

leaders have dealt with workplace

injuries that were covered by the Compensation

for Occupational Injuries and

Diseases fund

36%

of these businesses had to pay upfront for immediate

medical treatment of injured employees

24%76%of companies reported that they suffered

notable financial losses resulting from

an incident

22 23

For larger claims, the time that COID takes to reimburse a business can absolutely have an effect on the bottom line of the company. Having to pay a few thousand rand to a hospital is not uncommon, but neither is having to pay R50 000 emergency medical treatment for severe injuries. This is especially problematic for small and medium enterprises (SME), and cash flow sensitive businesses that are expected to pay a guarantee to a hospital before they treat an injured employee. Being made to wait up to a year or two to get that money back, puts financial strain on the company.

With this in mind, it is crucial that business owners are assisted in correctly and accurately reporting incidents to COID. To start, there are easier ways for businesses to take care of their responsibilities towards employees than to rely solely on COID, and one can put measures in place to assist the business with the process of reporting claims correctly and efficiently.

This is where a Personal Accident policy can in fact play an integral role. While no policy is able to insure a policyholder for reimbursed or reimbursable money, some personal accident policies such as SHA’s product, offer access to Accident Expert services as an add-on. It puts the employer in contact with service providers who deal exclusively with issues like COID and Road Accident Fund claims. These service providers assist the client with submitting accident reports, and ensure that the claims are processed timeously. Having an expert on hand that can follow up on COID claims can effectively reduce the wait time from a year to three months.

One should keep in mind that workman’s compensation pays out 75% of an injured employee’s salary up to an annual earning of R458 520. This means that anything over and above the first R458 520 of an employee’s salary can be paid out by a Personal Accident policy.

In our experience, being there for employees in this manner not only aids greatly in staff morale and employee

retention, but also resonates well with existing and prospective clients. If employers are not familiar with the processes and procedures around managing an injury on duty, they could make poor decisions that not only cost money, but also negatively impact employees.

On the subject of insurance, while the survey has shown that 55% of businesses have income protection insurance in place for their employees, we would argue that this number would look very different when comparing SMEs with large corporates. Most large businesses have some sort of income protection in place for senior staff at least, whereas the overwhelming majority of SMEs do not. At SHA we maintain that a business owner’s responsibility towards employees and their families, stretches beyond work hours, and not having employee benefit insurance in place carries a significant moral and reputational risk.

This is why SHA designed a Personal Accident product to include income protection cover for serious illnesses and bodily injury both during and outside of work hours. Lump sum compensation for permanent disabilities and death benefits for the families of deceased employees are also beneficial. Considering the affordability of the Personal Accident insurance cover, we feel that this type of cover is severely under-utilised.

From our own claims statistics, we have also noted that most disabling injuries and deaths occur outside of work hours. The overwhelming majority of serious injuries and deaths have in fact been attributed to road accidents which occur on the employee’s commute to and from work often in rural areas. This is also reflected in the survey, which showed that 26% of businesses saw one or more of their employees injured in a motor accident in the last three years. The data also reflected that almost exactly the same percentage of employers had experiences where employees were killed or injured in crime-related incidents over the same time span. In the case of road accidents, these are predominantly single

vehicle accidents, which can be attributed to poor road conditions or poor weather conditions – very few of our claims involved alcohol.

Interestingly, key man cover is something that we have been seeing less of in recent years. Given the ongoing skills shortage in just about every market sector, businesses may be well served to have cover in place to help them replace vital members lost to injury or disability, by allowing them to buy out skilled professionals from existing contracts or to provide sign-on bonuses. There is a massive requirement for comprehensive training sessions around COID, RAF and Group Personal Accident cover, specifically to show how these can be linked to add tremendous value to a company, its employees and their loved ones. There is also a very real need for companies to change their attitudes towards COID and other invaluable resources for their employees, and to improve their own administration systems in order to make claiming more efficient. This is a journey on which SHA will be embarking, but it is an industry-wide issue which should be addressed as such.

Workman’s compensation pays out 75% of an injured employee’s salary up to an annual earning of R458 520

of businesses have income protection

insurance in place for their

employees

ONLY

This means that anything over and above the first R458 520 of

an employee’s salary can be paid out by a Personal Accident policy

26% of businesses saw one or more of their employees injured in a motoraccident in the last three years. The data also reflected that almost exactly the same percentage of employers had experiences where employees were killed or injured in crime-related incidents.

24 25

I t is not an exaggeration to say that exposure to cybercrime represents one of the most rapidly evolving perils in

modern society, and it’s not going away any time soon. In fact, just about every recent risk study and survey that has been conducted internationally has highlighted cybercrime as one of the key emerging risks for businesses today.

According to last year’s global Cyber Exposure Index1, South Africa currently has the sixth highest average exposure to cybercrime, with businesses in the industrial and financial sectors being the most common targets of cybercrime attacks. Businesses face the possibility of suffering significant material losses of critcial systems and info if they are not prepared.

Although there is legislation in place to protect the privacy of company and personal information, such as the Consumer Protection Act 68 of 2008 (CPA); the Electronic Communications and Transactions Act; and King IV, the most significant risk to companies is yet to be introduced, with the full implementation of the Protection of Personal Information (PoPI) Act, in the coming years. This Act will regulate how companies process, store and secure personal information, as well as balancing the right to privacy with other rights.

Firstly, this legislation carries harsh penalties for businesses endangering the personal information of clients and employees, imposing up to R10 million in fines, as well

as 10 years’ imprisonment. Such penalties may be regarded as harsh, but one could argue that the financial downside pales in comparison to the liability risks that businesses face if clients decide to sue for damages suffered as a result of a major security breach.

Businesses that have dealings in the European Union (EU) and European Economic Area (EEA), or who handle personal information connected to EU or EEA citizens, now also face similar liability risks under the General Data Protection Regulation (GDPR), which became enforceable in May 2018. The implementation of the PoPI Act will bring the South African framework in line with these international regulations.

As the findings of the SHA Annual Risk Review indicate, a sizeable portion of the market is still perilously unprepared to deal

with the fallout from cyber breaches.

To begin with, the survey revealed that one in five professionals have fallen victim to phishing scams, having been tricked by cybercriminals into revealing important personal information such as bank account details, or having payments diverted to fraudulent bank accounts. For 54% of these professionals, the phishing scam in question led to third parties threatening them with litigation for damages incurred.

The findings relating to small businesses help to complete this picture. Around 30% of the SME businesses surveyed, had fallen victim to a cyber-attack in the preceding 24 months. Of these companies, 82% suffered some degree of business interruption. As many as 87% were offline for up to 48 hours, and 12% for as long as three days – the cost of this downtime alone is significant with the survey revealing

CYBERINSURANCE LANDSCAPEIn a world that appears to turn on a technological axis, the scourge of cybercrime is a dominant concern for most business executives. Even businesses that don’t store confidential information may have exposures through the operating systems that drive their manufacturing and distribution operations. Cyber policies generally respond to first and third party losses following hacking or privacy breaches and extend to cover a range of regulatory exposures.

Kirsten Cronin, Manager: Financial Lines Underwriting

South Africa currently has the

sixth highest average exposure to cybercrime, with businesses in the industrial and financial sectors being the most common targets of cybercrime attacks

This legislation carries harsh penalties for businesses endangering the personal information of clients and employees, imposing up to R10 million in fines, as well as 10 years’ imprisonment. Penalties may be regarded as harsh, but one could argue that the financial downside pales in comparison to the liability risks.

27

that the losses in 30% of cases exceeded R250,000 per incident (7% were above R1m). This is significant in the life of an SME.

Additionally, just over half of the businesses surveyed indicated that they had suffered reputational damage because of the down time – the opportunity cost attached to this is unmeasured.

This already points towards the fact that not enough is being done to mitigate potential damage from cybercrime. In addition, survey results revealed that 50% of businesses do not have a cyber-crisis plan, likely because 45% of companies do not believe that they are exposed, and 58% do not have a broker that discusses cyber insurance with them – these findings are all very concerning.

From our own observations, we believe that one of the reasons why so many businesses mistakenly believe that they are not at risk, and therefore do not have a crisis plan in place, is because they have an in-house IT department or make use of an outside service provider. However, the truth of the matter is that no IT specialist can guarantee an organisation’s safety from cyber threats 100% of the time, especially when the majority of successful cyber-attacks exploit the core vulnerability, which is normally the human element, being the employees in the business.

Looking at the statistics related to ransomware attacks, goes some way towards backing up our conclusion that risk management and cyber-awareness training are not given enough attention. The survey shows that one in five companies have been victims of ransomware attacks. This is in line with global statistics, with demands most commonly ranging from R10 000 to R25 000.

It is especially concerning to note that more than a third of businesses that were attacked opted to pay the ransom demand. In almost predictable fashion, one fifth of the victims who paid the ransom were actually hit a second time thereafter.

It was also alarming to see that 27% of businesses do not conduct regular back-ups and 40% rely on free anti-virus packages to protect them against hackers. There is a direct correlation between businesses that failed to do regular data backups, and those who chose to risk paying ransoms. Without a second copy of the data, the

only option open to the victim is to pay the cybercriminals. The results revealed that 40% of businesses that paid ransom did not have up-to-date backups of company files, and either did not have anti-virus installed, or relied on free anti-virus programs to protect their data.

Furthermore, only a third of companies indicated that they have some form of cyber liability cover in place. If this were true, it would mean that two thirds of businesses are negligently exposing themselves to the risk of closure. Losses of income coupled with potential lawsuits from a significant cyber-breach could run into the millions, financially crippling a business.

However, we have reason to believe that the above statistic is in fact completely inaccurate. It does not link at all with the uptake of cyber insurance cover that we have seen in the market. We suspect that there may be a widespread misunderstanding of what cyber insurance cover is, and which cyber-related risks are covered by existing policies.

A cyber policy indemnifies a business against both first- and third-party losses, which is where the real risk lies, while commercial crime or professional indemnity with computer crime or cyber extensions really

only cover portions of the costs, for example data protection indemnified only or only first party coverage.

The lack of understanding of cyber insurance is still evident in the broker market, where the survey found that only 26% of intermediaries feel confident in selling cyber liability cover.

In light of these facts, we believe that cyber insurance cover is currently being undersold and clients are not being educated on the importance or availability of this cover. This is likely due largely to the fact that PoPI has not yet been fully implemented, and that there are no real penalties in place for not disclosing breaches to clients just yet, has probably also contributed to the low level of uptake for this cover.

With that said, cyber cover remains an underutilised and undersold category of specialist business in South Africa, and while there is not much publicly available in terms of local case studies, it will no doubt not be long before the cover becomes an essential risk transfer tool for businesses of all sizes, across all industries.

Reference: 1. https://cyberexposureindex.com/country-statistics/

of SME businesses had fallen victim to

a cyber-attack in the preceding 24 months

Amount of time offline

suffered some degree of business interruption

of businesses that paid ransom did not have up-to-date backups of company files

rely on free anti-virus packages to protect

against hackers

27% of businesses don’t conduct regular back-ups

do not have a broker that discusses cyber insurance with them

30%

48hrs 3days

87%

12%

The cost of downtime:

30% of cases exceeded R250,000 per incident

and 7% were above

of companies don’t believe that they are exposed

45%58%

40%

26

28 29

The perils businesses face in terms of commercial crime are growing exponentially, and organisations will

have to step up their risk management efforts if they are to meaningfully reduce their risk exposure.

Findings from SHA’s risk survey shows that 43% of corporate respondents have suffered a loss due to commercial crime in the last five years, with nearly half of those businesses indicating that they have had multiple incidents of fraud within that time frame.

However, 57% of corporates and 61% of brokers say that they have not seen an increase in frequency of commercial crime over the past five years. Additionally, 52% of corporates expected no change in future fraud exposures for their businesses.

This does not correlate with the trends that SHA has experienced in the market, and it may indeed be one of the most concerning findings of this year’s survey. It indicates that there is a lack of awareness amongst many companies of this escalating risk. Of even more concern is that this, in certain instances, may be indicative of a lack of focus on crime risk identification and management, which needless to say, is the most effective weapon in the arsenal of any fraudster. In some recently settled matters, fraud went undetected for as long as 15 years!

Between 2008 and 2012, SHA received notifications on 66% of commercial crime policies, and while not all of these notifications led to claims, each was a viable fraud incident. This frequency of incidents forced us to impose stricter underwriting criteria on new policies, coupled with the adoption of a more conservative approach to risk selection, and to materially increase our rates.

Even with this change in our approach to risk, we still received notifications on approximately 54% of our active policies between 2013 and 2017. There was also a marked increase in the number of companies disclosing, at renewal stage, that they had suffered significant fraud losses during the past five years.

A disturbing trend that has emerged is that it has become increasingly difficult to predict which business units within a commercial or corporate company would be most likely to experience fraud. Traditionally, crime was most common within procurement and accounts departments, but it is now equally prevalent within other departments throughout the business. As a matter of fact; some material losses have been settled where blue collar workers identified certain loopholes within the system and exploited this shortfall with the help of outside parties.

Not only has the frequency of claims escalated, but the cost of fraud has also skyrocketed. Between 2008 and 2017, commencing around the time the global financial crisis hit, the average claim against our commercial crime policies rose from R1 million to R5 million in value, even though the number of settled claims remained largely static during the period under consideration. This is of particular concern given the reduced number of active policies, and premiums, on the books.

COMMERCIAL CRIMEINSURANCE LANDSCAPEEvery employer faces the uncomfortable reality that their employees could defraud the business. Commercial crime policies generally respond to dishonest, fraudulent or criminal acts of any employee that result in a loss for the business and an improper personal gain for the employee.

Anton Meyer,Executive Head: Financial Lines, Motor and A&H Claims

A lack of focus on crime risk identification and management, which needless to say, is the most effective weapon in the arsenal of any fraudster. In some recently settled matters, fraud went undetected for as long as 15 years!

Between 2008 and 2012, SHA received notifications on 66% of commercial crime policies

2008

2013

2012

2017

Between 2013 and 2017, SHA received notifications on 54% of active policies, even after applying stricter underwriting measures

30 31

A handful of other insurers and underwriters have experienced similar trends, and it has been noted that there has been a general hardening in conditions and premiums among some of our main competitors. We anticipate that the rest of the market will begin to take this same stance within the coming year or two. The fact is, if premiums do not start reflecting the actual losses experienced, there may not be a market for commercial crime cover in the near future.

A little over 31% of brokers surveyed said that there has been a general hardening of terms for commercial crime cover. It has become critical for corporates to adopt better risk management processes, as this remains the most effective mechanism for keeping premiums for commercial crime cover at economically viable levels. Better detection protocols including approval processes which require oversight from people on different teams across divisions, and unannounced audits could serve as detractors.

Alarmingly, the survey findings also show that many companies are still woefully unprepared for fraud within their business

– this will only continue to drive up future premiums. Looking at the companies that reported multiple incidents of fraud, 51% of these businesses had inadequate controls in place, 29% said that their automated systems had in fact hampered fraud detection.

It should also be noted that 29% of notified cases involved senior employees – which is linked to much higher individual losses. Some of the cases that have been reported, involving senior employees, saw actual losses in the R60 million to R100 million range. Regardless of the size of a business, uninsured or underinsured losses of that magnitude have a significant chance of closing the company’s doors for good.

For businesses that have multiple incidents, it becomes more difficult to find affordable cover. Multiple incidents indicate that there are some fundamental management or corporate governance issues, which are allowing fraud to go undetected until it is too late. In such cases, insurers, particularly more experienced underwriters, will either quote

much higher premiums and deductibles, or simply decline to quote outright.

However, on a positive note, companies who can prove that they have implemented effective risk management measures to mitigate their fraud exposure, will be in a much better position to secure commercial crime cover at lower premiums.

The same is true for businesses that already have cover, but who are forced to notify their insurer of a major fraud instance. Being able to show that robust procedures are in place, and that the company is employing every available mechanism to recover stolen funds before resorting to submitting a claim, will indeed help to build a much more solid relationship with the insurer. This ultimately benefits the company when the time comes to renew the policy.

Lastly, it is important to address the role that brokers need to play in ensuring that their clients’ fraud risks are adequately mitigated. Currently, 43% of businesses do not have commercial crime cover and almost 65% of brokers said that the premiums for commercial crime cover were already too high for their clients.

We believe that the most important action that brokers can take is by providing solid advice around the importance of risk management to reduce instances of commercial crime. Only then will businesses begin to see more affordable premiums, ensuring that they are insulated against corporate fraud and theft. This requires a change in attitude, taking a partnership approach rather than seeing the insurer as a balance sheet protector would ensure the sustainability of this product line into the future.

Rise in average claim value on commercial crime policies between 2008 and 2017

R1million

R5 million

of affected businesses had inadequate

controls in place

29% said that their automated systems had in fact hampered fraud detection

29%

Multiple incidents of fraud

Losses of between

R60 million to R100 million

of cases involved senior employees

of businesses don’t have commercial crime cover

43% of businesses do not have commercial crime cover and almost 65% of brokers said that the premiums for commercial crime cover were already too high for their clients.

33

I t seems that collectively; the directors and officers in South African companies are still not being adequately shielded from their

exposure to litigation in their personal capacity. According to SHA’s survey conducted among South African corporations, around 41% of company directors and officers are still not fully aware of their obligations in terms of the New Companies Act of 2008.

While this is indeed an improvement from the 65.5% that we saw in last year’s survey, this is still an unacceptably high number - especially when taking into account that over one in five companies surveyed have had directors or board members who had been accused of wrongful acts or conduct in the past.

At the same time, 61% of companies indicated that high profile cases, such as the Steinhoff scandal, have affected the way in which they view governance, hinting at the possibility that more businesses are becoming aware of the ramifications of mismanagement or lack of proper controls at senior level. In addition, with the prevalence of shareholder activism and better access to the legal system, stakeholders are generally more informed.

The data unfortunately shows that over 62% of companies are not buying directors and officers (D&O) cover, even though nearly half of directors indicated that they worried about being held personally liable for a breach of their duties at some point. This trend is also reflected in the survey responses from the insurance intermediaries, with 63% of brokers noting that they are not currently comfortable selling D&O cover.

We believe the fact that these two statistics are virtually identical, is not a coincidence, since nearly the same number of businesses have stated that their brokers never discuss D&O cover with them at all. As an aside, this in itself is a risk for brokers. Clients who find themselves at the centre of a costly D&O claim without having received counsel from their advisor on their options, could file a suit to recover damages from their broker.

The fact is that D&O cover is becoming more important than ever before. Looking at SHA’s claim statistics, we have not only witnessed a rise in litigation costs following suits being brought against directors and board members in their personal capacity, but there has also

DIRECTORS AND OFFICERSINSURANCE LANDSCAPEEvery time a director steps into the boardroom they are effectively placing their own personal wealth at risk. The Companies Act makes it possible for third parties to seek recourse from the directors of a company in their personal capacity where the members of management or the board may have failed or been negligent in carrying out their fiduciary duties. Directors and Officers coverage is taken out by the company on behalf of the directors and officers of the business to cover the legal defence costs, damages and awards when such an allegation is made by a third party.

Mwenda De Jenga, Executive Head: Financial Lines Underwriting

of company directors and officers are still not fully aware of their obligations in terms of the New Companies Act of 2008

of companies indicated that high profile cases have affected the way in which they view governance

of companies have had directors or board members who had been accused of wrongful acts or conduct in the past

With the prevalence of shareholder activism and better access to the legal system, stakeholders are generally more informed.

41%

20%

61%

34 35

on behalf of their directors and officers, and ensure that they are still adequately covered.

With the frequency as well as the cost of litigation still on the rise, guaranteeing that the insured sum will actually be adequate to cover litigation costs throughout the lifetime of the policy, is extremely important. It has unfortunately become common to see a D&O policy be eroded in a relatively short amount of time, simply because litigation against board members is more frequent. With this in mind, it is important for companies under the advisement of their brokers to ensure that adequate limits and coverage is purchased.

Class-action litigation in the form of shareholder derivative suits have also been on the rise, so one needs to be sure that the D&O cover is also able to pay damages in the event of mismanagement.

Likewise, extensions that cover the risks associated with outside directorship are becoming crucial. In short, individuals serving on the boards of large corporates, who are instructed by their companies to serve on outside boards such as businesses where they have a financial stake, require extended cover. Many D&O products offer an extension aimed specifically at this type of situation, however, it’s vital that the policy is correctly structured following full disclosure to the insurer.

Lastly, it is paramount that one’s D&O policy includes the services of legal counsel that can help to prepare board members ahead of any formal enquiries. With the risk of adverse judgements having increased, it has also become important to insure that board members do not unintentionally make statements that might skew a verdict.

In closing, it is our opinion that D&O cover is still severely undersold, especially in an environment that is becoming increasingly onerous for businesses and business leaders to navigate. Increasing awareness among prospective clients and making broker training a top priority for insurers and other role players, is going to become crucial if we intend to increase the uptake of D&O insurance in the market.

been an increase in cases that have been settled, with damages paid on behalf of the director or officer – this is in addition to significant litigation costs.

Feeding into this, are two very common misconceptions about D&O cover that need to be addressed. Firstly, we are still confronted with the mistaken belief that professional indemnity (PI) cover and D&O insurance are interchangeable, or that they overlap. Many potential clients therefore erroneously believe that having PI cover negates the need for a D&O policy.

In fact, the cover provided by these policies are mutually exclusive. PI policies only cover litigation costs and damages related to mistakes made by an individual in the provision of their professional services. By contrast, D&O cover is solely responsible for losses arising out of a failure in the performance of an individual’s management and fiduciary duties within a company or board.

Even though D&O cover is intended to protect individual board members and directors in their personal capacity, business leaders should be aware that D&O cover is equally vital for protecting their company’s balance sheet in the event of a loss as a direct result of negligence on the part of their directors or officers while fulfilling their duties. Furthermore,

there is a global trend that suggests that companies who provide D&O cover for their directors are more likely to attract and retain talent at board level. Another trend that we have identified is that various non-executive board members now require directors and officers cover prior to accepting a board appointment.

Claims data reveals that recent years have seen substantially more companies initiating legal action against their own directors for financial losses suffered as a result of their actions. Cases against financial directors stood out in particular, with some businesses suing the individual over fines and penalties incurred by the company for non-compliance on one or more issues as well as losses suffered by the company as a result the directors failure to recover debts and the like.

Losses such as these have the potential to close a company’s doors, and even if they successfully sue the individual in question, there is absolutely no guarantee that the company will be able to recover any damages from a director (especially one who may already have been bankrupted by legal fees).

The above mentioned shift in the risk landscape has also made it important for businesses that already buy D&O cover, to review their existing D&O policies bought

Claims data reveals that recent years have seen substantially more companies initiating legal action against their own directors for financial losses suffered as a result of their actions.

62% of companies are not buying directors and officers (D&O) cover

of directors indicated that they worried about being

held personally liable for a breach of their duties at some point

of brokers are not currently

comfortable selling D&O cover

36 37

The data from this year’s review has painted a clear picture of what the specialist risk market can expect to

see in the coming years. At the core of this changing landscape is what appears to be a general degradation in the quality of the risks across all of the liability categories, and for most classes this trend points to the inevitability of a significant hardening in both terms and premiums for insurance cover.

Our own claims data from the last five years completes this picture, revealing the very definite link between the increasing liability risks across the board and the country’s flailing economy. The quantum and frequency of claims in the professional indemnity (PI), personal injury, Directors and Officers (D&O), have all increased as a result of the growing skills shortages, declining quality of graduates entering the market, lack of proper controls and risk management, and cost-cutting measures. In 2018, SHA paid a record R700 million in claims.

Cybercrime and commercial crime have become more sophisticated and prevalent, and the absence of robust controls and risk management is felt here too, though we believe this stems from a lack of awareness to risk exposure.

Additionally, the litigation landscape is rapidly evolving and lawsuits have become

Simon Colman,Executive Head: Digital Distribution

I N CO N C LU S I O N

more popular than ever before. In much the same fashion as trends witnessed in the developed economies of the US and the United Kingdom, more liability suits that go to court end in judgements for the plaintiffs, and many more businesses and brokers now report litigation and threats of litigation.

At the same time, the cost of legal defence has increased dramatically. Attorney fees have amplified by between 8% and 10% per annum over the last three years, and so far this is not showing any signs of stabilising in the near future. Litigation has become so much more accessible and affordable to plaintiffs, with the rise of no-win/no-fee legal services (especially in class action suits).

Not only does this increase the risk for uninsured businesses, but even the companies that do take the time to put adequate cover in place, are at risk of having their cover eroded by legal defence fees, leaving little or nothing to pay for damages or future claims. Given the fact that such cases routinely drag out over the course of three to five years, it is evident that the cost of liability cover has to go up if the insurance for this market is to remain sustainable.

Finally, the consumer market has changed and further contributed to the deterioration of liability risks. Social media has made it easier for consumers to come together in

At the core of this changing landscape is what appears to be a general degradation in the quality of the risks across all of the liability categories

clients opted to remain with their existing

market even in the face of increased premiums or restrictions in cover

more than half of clients placed greater

value in a long term relationship with their

specialist insurer

of clients chose to accept the

hardened terms

40%

38 39

class action cases, and the advent of the Consumer Protection Act has made the public much more aware of their rights and the legal mechanisms available to them.

In spite of all the indicators pointing toward a more volatile risk pool, our broker survey revealed that in 40% of the cases where the incumbent insurer had imposed hardened terms, the account was moved to another market. In three quarters of those cases that moved, more competitive terms had been obtained. We agree that competition is healthy and brokers would not be doing their jobs if they didn’t canvas the market for better terms, but the long-tail nature of liability claims does eventually come around.

A business that has moved several times is likely to run out of insurance markets eventually. A trend in this regard is already revealing itself, in 37% of the cases where a broker was unable to move an account, other insurers had refused to quote, or had come in with more punitive terms.

What was encouraging was that in six out of every 10 cases, the client opted to remain with their existing market even in the face of increased premiums or restrictions on cover. We probed the reasons for this and the data revealed that overwhelmingly, in more than half the cases, clients placed greater value in a long term relationship with their specialist insurer. It is also worth noting, that where insurers were able to provide compelling rationale, almost 40% of clients chose to accept the hardened terms. Greater transparency from insurers in their underwriting methodology goes a long way it would appear.

Across the board, our claims data has shown high numbers of late notifications and poor risk management that have, in some cases, needlessly led to claim repudiations. Whilst SHA’s claims rejections only make up 2% of total claims intimated with 131 cases out of 6278, it is still concerning that these could have been avoided with better communication between the broker and the client about critical policy conditions.

The survey reveals that brokers still have low levels of confidence in selling certain lines of liability cover (ultimately to the detriment of the client). It is the combined responsibility of all the players in the industry to ensure that the skill levels of intermediaries and underwriters match the evolving specialist risks in our country. We also noted in the research that there has been a shift in the way in which people prefer to absorb training material. Almost two thirds of brokers stated that they prefer digital learning material rather than face-to-face sessions or industry conferences. This is likely largely due to advances in mobile technology coupled with the busy lives we all lead.

Safety and risk management seminars for clients in certain industries, such as retail, have led directly to increased uptake in A&H and broadform liability cover, and broker training sessions by insurers and

underwriters have definitely improved broker confidence regarding complex liability cover.

However, more education is needed, and in addition to the hardening of conditions and premiums, all the categories of liability require drastic changes in the awareness and behaviour of policyholders if they are to remain viable in the years to come.

We must collectively ensure that the businesses we indemnify are acting responsibly and adapting their approach to risk management – implementing better protocols and measures to improve their risk exposure where possible, must become a priority.

It is worth dwelling on the fact that liability claims are inherently long-tailed in nature. Where the vast majority take up to five years to wrap up, a sizeable portion of claims take significantly longer. It is not uncommon to see cases stretch beyond a decade particularly where minors are involved and prescription only starts running after reaching the age of majority. Therefore, the longevity and experience of the insurers and underwriters who provide this specialist cover, is crucial.

Placing one’s business with insurers who have extensive experience in the local market has a direct impact on the unpredictability that often exists in the specialist claims environment. Taking note of the trends highlighted by established insurers, underwriters and brokers in respect of market conditions and premium cycles also serve as reliable indicators of changes in the risk landscape in the years to come.

In conclusion, liability risks have deteriorated, claims quantum and frequency have increased, and costly litigation has become the norm. The only way for businesses and professionals to remain protected from their specialist risk exposures, and for cover to remain sustainable, is to change the factors that are within our collective control. For businesses, this will mean adjusting spending, prioritising the purchase of adequate risk cover and implementing better risk management protocols. For the insurance sector, it means making a concerted effort to improve awareness through education and keeping an eye on movements in claims trends that may only be minor tremors today, but could evolve into seismic shifts tomorrow.

2018 PI and Liability claims:

All lines:

Open claims =

Claims rejected =

rejection rate

total claims paid in 2018

R700 mil

6278

131

40

risk specialists

Stalker Hutchison Admiral (Pty) Ltd is a wholly owned subsidiary of and provides insurance underwriting services exclusively for and on behalf of Santam Ltd.Stalker Hutchison Admiral (Pty) Ltd is an authorised financial services provider (FSP 2167)

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