A long time ago, I interviewed a Lloyds insurance broker who was selling alien abduction insurance. It’s hard to believe that insurers could be so fascinating, but he was riveting. We sat outside the Lloyd’s building in Lime Street in London’s financial district drinking coffee, discussing how you would prove that someone had been abducted by aliens.
The Lloyd’s building has to be one of the oddest in the world. It’s sometimes known as the “inside out building” because there was a time when it became an architectural fad to put all the piping and the lifts and the electronics on the outside, to keep the inside pristine.
The notion of being inside out could as easily apply to the people who work there.
Selling insurance against alien abduction was, of course, a gimmick. The broker was also hawking other forms of crazy coverage, like MPs-Being-Caught-Drunk-and-Disorderly insurance which, frankly, I think a whole bunch of South Africa politicians could use.
His point was that it’s technically possible to sell any kind of insurance; all you have to do is balance the cost against the risk.
For example, supermodel Heidi Klum at one point decided to insure her famous legs. But she was required to fly to London to be “inspected” by underwriters, which is not creepy at all. They valued her legs at £1.5-million as a pair.
Just to show they had done their jobs properly, the underwriters insured one leg at £130,000 less than the other because, sadly, it had a small scar. But it is nice to know they took their leg-examining job seriously.
The trick to insurance is balancing the premium, the risk and the coverage. If you insure your car for a high premium and it costs you more than you paid for the car, it’s not worth it to the car owner – but if the premium is too low, it’s not worth it for the insurance provider. So, insurance companies hire actuaries to model the risk for a given level of coverage, and calculate a premium.
And that may sound simple, but trust me, it is not. If you are insuring against alien abduction, you have an existing database of the number of people who have been abducted by aliens. That would be zero. Hence, any premium you charge would be money in your pocket. But almost everything else changes over time.
And golly gosh, have we had some extraordinary insurable events over the past three years: the Covid pandemic, the wholesale looting of shops and now the extraordinary downpours around Durban. How have the insurance companies coped with this flood of disasters?
Very well, actually. The losses of SA’s retailers in the looting spree were quickly and almost entirely covered by Sasria, which surprisingly had lots of loot in its coffers. About R17.2-billion was paid out as of February, with R16.6-billion still to be paid out at that point.
The problem is that if looting happens again, we will be up the creek without a paddle. But as far as the industry is concerned, the insurance didn’t come out of their pocket – a huge relief.
As far as short term insurers are concerned, the problem with the Covid crisis was business interruption insurance, and at first, the insurers were afraid the claims would overwhelm them.
Worse, the reinsurers were unwilling to cover the claims, and it looked at one point as if there was going to be a horrible showdown. But as it happened, once the data was in, the insurance companies realised they could manage it – and paid out.
But now we have strike three –the Durban floods. Thousands of claims are still coming in, and for the insurance companies, they look ominous.
Although Covid and the lootings seemed like bigger cataclysms, the floods could end up being the hardest pill the industry will have to swallow.
Santam’s CEO Lize Lambrechts told investors recently that the floods were the largest natural catastrophe in Santam’s history. Their best guess for gross exposure is R3.2-billion. That is quite a lot more than its earnings last year, which were R2.3-billion, but there will, of course, be reinsurance claims.
And there is a strange doubled-edged effect of disasters; they tend to remind people about the utility of insurance. In the same Sens announcement warning about a likely hit to earnings, Lambrechts noted that conventional insurance achieved strong, gross written premium growth of 7%.
Santam’s share price slid during the Covid period, but has rebounded recently, and year to date, it’s up 20%. The other short-term insurers are likely holding up, too.
Disasters hurt insurance companies short term, but tend to support their business longer term – assuming they survive. And assuming aliens don’t arrive en masse. BM/DM
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Article written by Tim Cohen
Featured in Daily Maverick
Link to original article -
https://www.dailymaverick.co.za/article/2022-06-02-after-a-series-of-disasters-is-it-time-to-consider-alien-abduction-insurance/