“Working together for a skilled tomorrow” National Certificate in Insurance Administration NQF Level 2 Unit Standard 9346: Keep informed about current affairs related to financial services in general and insurance in particular. Credits: 10 Notional Hours of Learning: 100 Learner Material This outcomes-based learning material was developed by IISA with funding from INSETA in March 2003. The material is generic in nature. It’s purpose is to serve as a guide for the further development and customization of company-specific, learner-specific and situation-specific learning interventions. 08/03/16 Page 2 Contents Topic Unit Standard Page ........................................................................................................................ 3 Learner material ........................................................................................................................ 5 Process/Activities ............................................................................................ 5 Examples: Guide for Assessment of Portfolio ................................................ 8 Critical Crossfield Outcomes .................................................................................................... 10 Oral Assessment ...................................................................................................................... 11 Additional Notes/Resources .................................................................................................... 12 08/03/16 Page 3 1. TITLE: 2. UNIT STANDARD NUMBER: 9346 3. LEVEL ON NQF: 3 4. CREDITS: 10 5. FIELD: SUB FIELD: Business, Commerce and Management Studies Finance, Economics and Accounting 6. ISSUE DATE: 7. REVIEW DATE: 8. PURPOSE: The qualifying learner is capable of: 9. Keep informed about current affairs related to financial services in general and insurance in particular. Identify events in the physical environment that could impact on insurance. Identify events in the social environment that could impact on insurance. Identify events in the economic environment that could impact on insurance. Identify people and companies in the news. LEARNING ASSUMED TO BE IN PLACE: There is open access to this unit standard. Learners should be competent in Communication and Mathematical literacy at Level 2. 10. SPECIFIC OUTCOMES AND ASSESSMENT CRITERIA: SO Description Assessment Criteria 1. Identify events in the physical environment that could impact on insurance 1.1 The term physical environment is understood and a list is made of possible events related to the physical environment. 1.2 Information is collected and organised relating to current events in the physical environment. 1.3 A brief indication is given of how each event could impact on the insurance industry. 1.4 The ways in which the insurance industry could be affected by such an event are named for the different sub-sectors of the industry. 2. Identify events in the social environment that could impact on insurance 2.1 The term social environment is understood and a list is made of possible events related to the social environment. 2.2 Information is collected and organised relating to current events in the social environment. 2.3 A brief indication is given of how one such event could impact on one of the sub-sectors of the insurance industry. 3. Identify events in the economic environment that could impact on insurance 3.1 The term economic environment is understood and a list is made of three possible events related to the economic environment. 3.2 Information is collected and organised relating to current events in the economic environment. 3.3 A brief indication is given of how one such event could impact on 08/03/16 Page 4 one of the sub-sectors of the insurance industry. 3.4 The groups of people and kinds of work most likely to be affected are identified for each event. 4. Identify people and companies in the news 4.1 Achievements are identified and explained with examples. 4.2 Problems in the industry and possible causes are identified with examples. 4.3 New developments in the industry are discussed. 4.4 Information is gathered about what ordinary people are saying about the industry. 11. ACCREDITATION AND MODERATION: This unit standard will be internally assessed by the provider and moderated by a moderator registered by INSQA or a relevant accredited ETQA. The mechanisms and requirements for moderation are contained in the document obtainable from INSQA, INSQA framework for assessment and moderation. 13. NOTES: CRITICAL CROSS-FIELD and DEVELOPMENTAL OUTCOMES: This unit standard supports in particular, the following critical cross field outcomes at unit standard level: 1 2 3 4 Identify and solve problems and make a decision. Collect organise and critically evaluate information. Communicate effectively using visual, mathematics and language skills in the modes of oral and written presentations. Demonstrate an understanding of the world as a set of related systems by recognising that problemsolving contexts do not exist in isolation. 08/03/16 Page 5 ACTIVITIES Number Aspect of task Specific Outcome 1: Consult your resources and from your understanding: Identify events in the physical environment that could impact on insurance Action 1 Specific Outcome 1: Action 2 Action 3 Specific Outcome 1: Action 4 Define the term “physical environment”. Make a list is made of possible events related to the physical environment. Compare and discuss your ideas with members of your study/syndicate group Record your findings in a table format, in which you write down the physical environment issue, and next to each one identify the impact of each on either the long term or short term insurance industry. Consult your sources. Specific Outcome 1: Done Collect and organise information relating to current events in the physical environment. Record your information. Consult your sources and suggest how each event could impact on the insurance industry (either short term or long term). Record your suggestions. Consult your sources and from your understanding, name the ways in which the insurance industry could be affected by such an event, for the different sub-sectors of the industry. Record your findings 08/03/16 Page 6 Number Aspect of task Specific Outcome 2: Consult your sources and from your understanding Define the term “social environment” Make a list is made of possible events related to the social environment. Record these Compare and discuss your definition and list with members of your study/syndicate group Record the findings of the group Identify events in the social environment that could impact on insurance Action 5 Specific Outcome 2: Action 6 Specific Outcome 2: Action 7 Consult your sources. Collect and organise information relating to current events in the social environment that you think may affect the insurance business. Use newspapers, magazines, internet searches, and TV and radio news items as sources, and paste any of these into your POE. Compare and discuss your notes with the members of your study/syndicate group Record your collective findings. Consult your sources and from your understanding Specific Outcome 3: Action 8 Action 9 Action 10 Define the term “economic environment” Make a list of three possible events related to the economic environment Discuss and compare your findings with the members of your study/syndicate group Record your agreed ideas. Consult your sources. Specific Outcome 3: Give a brief indication of how one such event from activity 7 could impact on one of the sub-sectors of the insurance industry. Record your ideas Consult your sources. Identify events in the economic environment that could impact on insurance Specific Outcome 3: Done Collect and organise information relating to current events in the economic environment that you think could affect the insurance industry. Place all evidence in the form of articles and notes made from TV/Radio news into your POE Record your information in brief sentences. Give a brief indication, in a tabular form, of how one such event could impact on one of the sub-sectors of the insurance industry. In your table, list each sub-sector, and next to each one, indicate the impact of the event you selected on this subsector. 08/03/16 Page 7 Number Aspect of task Specific Outcome 3: Consult your sources, and identify the groups of people and kinds of work in the industry most likely to be affected, for each event. Record your findings Consult your sources. Action 11 Specific Outcome 4: Identify people and companies in the news Action 12 Specific Outcome 4: Done Identify companies and people form the insurance industry that appear in the news, and record their achievements. Place the articles in your POE. Write brief notes about their achievements, and explain how their achievements enhance the industry, in your opinion. Consult your sources and scan the various newspapers/news broadcasts for input. Action 13 Specific Outcome 4: Action 14 Specific Outcome 4: Action 15 Identify three problems in the industry and provide possible causes, giving two examples for each problem. Record your findings in the form of brief notes about each problem and the possible cause. Provide a possible solution. Consult your sources and discuss new developments in the industry (either short term or long term). Compare and discuss your findings with members of your study/syndicate group and record your findings Consult your sources, and speak to family, friends, and acquaintances. Gather information on what ordinary people are saying about the industry and record these comments. 08/03/16 Page 8 GUIDE FOR ASSESSMENT OF PORTFOLIOS Assessment Criteria Specific Outcome 1 Identify events in the physical environment that could impact on insurance Specific Outcome 2 Learner is competent Learner is not yet competent All or part of each activity not done or incomplete NOT done or all questions not answered. The term physical environment is understood and a list is made of possible events related to the physical environment. Definition and list not recorded Information is collected and organised relating to current events in the physical environment. Information is not recorded A brief indication is given of how each event could impact on the insurance industry. Indication is not recorded The ways in which the insurance industry could be affected by such an event are named for the different subsectors of the industry. Information is not recorded The term social environment is understood and a list is made of possible events related to the social environment. Definition and list not recorded Information is collected and organised relating to current events in the social environment. Information nor recorded A brief indication is given of how one such event could impact on one of the subsectors of the insurance industry Information not recorded The term economic environment is understood and a list is made of three possible events related to the economic environment. Definition and list not recorded Information is collected and organised relating to current events in the economic environment. Information not recorded A brief indication is given of how one such event could impact on one of the subsectors of the insurance Information is not recorded Identify events in the social environment that could impact on insurance SPECIFIC OUTCOME 3 Identify events in the economic environment that could impact on insurance. 08/03/16 Page 9 industry. The groups of people and kinds of work most likely to be affected are identified for each event. Information not recorded Achievements are identified and explained with examples. Information not recorded Problems in the industry and possible causes are identified with examples. Problems causes and examples not recorded New developments in the industry are discussed. Developments not recorded Information is gathered about what ordinary people are saying about the industry. Information not recorded Specific Outcome 4 Identify people and companies in the news. 08/03/16 Page 10 CRITICAL CROSS FIELD OUTCOMES MATRIX FOR ACTIVITES RELATED TO UNIT STANDARD Activity Solve problems / make decisions Teamwork Organisation Information Communicate Technology Related system Personal Development 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 08/03/16 Page 11 ORAL ASSESSMENT The trainer will use this table to monitor your participation during the discussions at your contact sessions. You are expected to contribute during each of the contact sessions. Action Yes No The learner brought summaries and notes made to the session for discussion. The learner makes notes during the discussion, where notes are required to be transcribed. The learner is able to discuss the 1. The nature of the physical, social and economic environment 2. The impact of changes in these environs on the insurance industry and visa-versa 3. The latest developments in the insurance industry both positively and negatively The learner can take part in group discussions by talking about other Learner’s feedback and reports. The learner shows understanding of the current affairs in the in the industry and in business, with reference to the various researched environs LIFELONG LEARNING This short module has introduced you to basic information about the environment in which the insurance industry operates and the latest developments in the industry and business. It is important to do this module, since your ability to function in society and and/or provide a professional service to others depends to a great extent on your knowledge of the issues. 08/03/16 Page 12 ADDITIONAL NOTES The Physical Environment: Since insurance is the method of transferring risk from the insured to the insured, it is important to be aware of occurrences within the Physical Environment that can impact of the insurance industry. While these events, otherwise known as Natural occurrences can have a devastating effect on people, wildlife and the environment, without the benefit of correctly formulised insurance protection the effects of these occurrences would be much worse. Events in the Physical environment will impact not only on those stated above but also on economic recovery and expenditure, social needs, spending and reforms. The following naturally occurring phenomena can impact on societies and insurance: - Fires to buildings, farmlands and other areas of industry and commerce. - Floods arising from heavy rains, tidal waves, and the collapse of dams. - Hurricanes, cyclones, typhoons and other wind storms - Earthquakes and volcanic eruptions - Snow storms and avalanches - Drought and famine - Freezing or extremely hot weather patterns - Hailstorms The effects of these occurrences when they occur in greater than normal magnitudes is that the resultant damage often assumes catastrophic proportions. Currently and in the recent past, natural events arising in the physical environment that have assumed catastrophic proportions include: - The flooding to Limpopo Province, Mpumalanga and Mozambique in early 2000 and on for some months – major rivers such as the Limpopo and Crocodile burst their banks causing devastation of crops and farmlands, losses to industry and commerce from damaged or destroyed structures and buildings; losses to thousands of heads of wildlife and livestock; the loss of the lives of hundreds of people. - The Kobe earthquake of 1995 thousands of people died when an earthquake measuring on the Richter Scale devastated a highly populous city in Japan, damaging buildings and bridges, and causing massive fires. - Frequent earthquakes in central Southern Asia and Europe (Turkey and Greece) - A snowslide and avalanche that destroyed the Prince of Wales’s villa a Klosters in Switzerland and killed his secretary. - The volcanic eruption in the Democratic Republic of Congo in January 2002, resulting in massive damage and loss of life. The lava destroyed whole villages. - A series of hurricanes that have damaged the east coast of the USA, and parts of South East Asia, where they are known as cyclones. To this day, Hurricane Andrew, which struck the south-eastern USA in 1992, remains the most catastrophic of all natural disasters, in terms of total insured damages. The potential impact of these occurrences on the insurance industry is immense, as there are a number of factors which could require the provision of insurance cover to return the area and people to previously held positions. Obviously those who have died cannot be recompensed, other than by means of payments to their families or dependants, but the full effects could impact in the following ways: - Fires, floods, earthquakes, hurricanes or cyclones and hailstorms are insurable perils in South Africa for commercial short-term risks. Losses caused by volcanoes and drought are not. - Loss of life is covered under life and personal accident policies, in respect of all perils arising from the Physical environment, other than the deliberate placing of oneself in danger, or suicide. 08/03/16 Page 13 It is important to always remember to principle of proximate cause under these covers, as death or injury must arise from a physical accident. Death by fire under personal accident covers would result in claims being admitted, whereas smoke inhalations may not be. Example: South Africa’s Natural Risk Areas In South Africa, we are at potentially at risk from events arising to the physical environment, as follows: - Gauteng: Gauteng is relatively free from major potential risks, other than in the following circumstances: - Rain storms in summer time. On most afternoons the province is susceptible to thunder storm activities. Mostly these are short and sharp, but sometimes, heavy rain and lightning risks are attendant. - Hail is a high risk factor in the province, and underwriting care should be taken to be aware of the destructive nature of hailstones to croplands, livestock, buildings and outbuildings and motor vehicles. Especially where there is an accumulation risk factor, such as a fleet of vehicles parked in one location. Also be aware of the construction of buildings as IBR roofing and metal clad structures are at risk from hail. Hail is not considered a major risk to human life, although in extreme cases some loss of life does occur. - In the western reaches of the province, subsidence and landslide as a result of 100 years of mining operations and the resultant changes to the underground make up of the earth results in sinkholes forming. Subsidence is an insurable peril in short term insurance. - Flooding: on major rivers, such as the Vaal, the Klip and the Pienaars, unnaturally heavy rains can cause flooding, as happened in 2000. - North West Province, Northern Cape, Free State and Limpopo: the predominant commercial activities in these regions centre on the farming industry, including crops, livestock and mixed farming activities, as well as mining activities, chiefly diamonds, gold, iron and copper. A major potential physical risk arises in weather patterns, because these areas are arid, and the effects of drought are long standing. Under specific crop insurance, losses arising from drought can be covered, but not under commercial Multimark III. Drought is a major risk to human and animal life, as famine and its associated risks are obvious. Also, because of the vast distances between centres, it is difficult to manage disaster areas effectively, other than by very expensive and logistically difficult assistance programmes, such as military intervention. Flooding risks associated with the major rivers in the regions such as the Orange and the Limpopo are evident. In 2000, massive damage occurred to areas in northern Limpopo as result of flooding. In 1978 the town of Laingsburg, on the Orange River was devastated by a flash flood, and many homes and buildings were destroyed. More than twenty people lost their lives. Hail damage is often evident, and the Eastern Free State, around the Golden Gate region records the highest number of lightning strikes per annum in South Africa. Lightning poses a major threat as the power in a single strike, if harnessed could run the electricity needs of needs of a major city for three weeks. - Western Cape: the Cape Town region lies in a Mediterranean climate, which has dry summers and cold wet winters. The major physical risk to the area is that of windstorm, which is an insurable peril under Multimark III. Often the wind in the region, arising out of the south-east reaches gale, and even stronger, force on the Beaufort Scale (a measure of wind speed). This poses a risk to property and human life, as well as to shipping with high seas and destructive winds present. Rivers in the region are not known frequently to flood. - Eastern Cape: As with the Western Cape, high winds are an ever-present risk 08/03/16 Page 14 - - factor. Rain while regular seldom results in extensive flooding of the river areas, of major rivers such as the Kei, Fish and Keiskamma. This is a farming region as well and the distance factor and drought patterns often are problematic. KwaZulu Natal: the effects of flooding and cyclone activity in the province have caused insurers to rethink their underwriting practices over the past several years. Cyclones reaching into the Mozambique Channel have caused severe damage to bridges and structures in the province. In 1983, Cyclone Demoina caused substantial damage, and loss of life and severe property damage was recorded. Hail is not very often seen, nor is lightning damage. Heavy rains often cause washaways, especially to the coastal regions. Mpumalanga: this province has similar weather patterns in its eastern regions to KwaZulu Natal, and the rest of the province is similar to Gauteng and Limpopo. Collection of Information: Information regarding the occurrence of events in the physical environment can be gathered from a variety of sources: - From the print and radio media – news broadcasts and newspaper reports - From the television media in the form of news channels and on regular news bulletins - From newsgathering agencies such as Reuters and Associated Press - From the community itself by way of oral and written reports and eyewitness accounts from survivors or others affected by the occurrence - By general information gathering from colleagues and friends - By use of the internet - From historical, books, news archive publications and encyclopaedia. - From maps, atlases, and other descriptive information media From hydrological, meteorological, geological and geographical statistical information gathering agencies such universities, technikons and government agencies such the Weather Bureau and the Department of Statistics Information must be organised to facilitate easy reference. This is done by means of protection of the information into a statistical format, using reference and cross-reference points, e.g. by class of event, insurance, class, region, date an time, total costs in insurance, cost of human losses, and relief and salvage operations and cost. Impact on the Insurance Industry: Apart from the severity of the losses arising from risk in the physical environment, and the associated costs, the occurrences cause the industry to: - Refocus its underwriting criteria and risk acceptance rules. Where previously risks were not considered as hazardous, underwriters must be aware of the extent of a catastrophic event. Steps must be taken to manage the risk, and to offer solutions to meet the insurance need. - Be aware of the effects of changing weather patterns, environmental threats and issues such as global warming and its effects on tides, rainfall, deforestation and other meteorological factors. - Structure more tightly its statistical information, and seek patterns and impacts on frequency and severity of events. - Inform the insuring public of the effects on the industry and the risks facing them - Work closely with other organisations, such as government and police, relief agencies and organisations in physical event management and control. - Ensure that reinsurance protection (Treaty of Facultative) is obtained at a level necessary to deal with losses. 08/03/16 Page 15 - Arrange appropriate wordings and clauses that clarify covers available and events excluded. - Inform their partners in the risk transfer – brokers, marketers and other financial institutions of its amended focus. - Ensure it systems are capable of dealing quickly with the settlement of claims arising – claims, reporting, statistical and networking with other insurers. - Balance its staff complements with the immediate needs arising from disasters and catastrophes, to ensure speedy and effective assistance to those affected by the occurrences. Example: Dealing with disasters: In 1978, when a flash flood on the Orange River caused sever flooding to the town of Laingsburg in the Cape, the community found it difficult to cope with the tragedy as there had been extensive loss of life, and damage to property. Historically the town had not been under threat as nothing of this nature had happened previously. It therefore took time for the people to come to terms with the tragedy, and to begin cleaning up and trying to get back to normal. In a display of unity, some insurance companies hired caravans and mobile homes for the people, and sent representatives to the area. These representatives were given authority to make immediate and interim payments to insured people who had been affected. They approached known insureds and paid them to allow them to seek temporary shelter and food and clothing, and to attain a measure of indemnity that helped them back on their feet. Activity: Describe three natural or physical events that occur in South Africa to devastating effect. How does the insurance industry adapt its operational procedures after such events? The Effects of Physical Events on the sub-sectors of the industry: In each of the sub-sectors of the industry (see above Impact on the insurance industry), the following would arise: - The financial requirements of insured losses would need to be met, often at great expense and effort by insurers - Reinsurance protection would be reassessed, perhaps reduced. Acceptance criteria are tightened, and there is a closer watch on rating, risk assessment and the risk management requirements on the part of the insured. - More intense statistics collection and investigation is implemented. - Emergency operational requirements are implemented to perform the additional tasks – e.g. temporary staff, mobile claims settling units, customer service lines. - Survey activities are more closely scrutinised and more rigorously followed. - Claims history becomes more important to insurers at the risk offering stage. - Product offerings may be altered, resulting in reduced cover, or even excluded cover. - Greater market networking takes place, as unified and effective procedures for dealing with future events are implemented. - Greater and more intensive research results, to plan and prepare for future events, and to lessen their impact wherever possible. Activity: Describe how a Life Assurer may need to implement different strategies to those of a short-term insurer in dealing with the insurance impact of a catastrophic physical event. The Social Environment: The term social environment applies to the human environment and society, including 08/03/16 Page 16 language, culture, history of peoples, wars, epidemics and disease, the impact of political ideals, colonialism, the rise of slavery, expansionism and Diaspora, revolution and rapid change to the social environment. Added to these are so-called human disasters, arising from accidents, explosions, and other events. Throughout history many events have occurred that can be termed as impacting on the social environment: - The Industrial Revolution The most vital change in work related activities was from the Age of Tools to the age of Machines. The steam engine and the power loom broke the slowly dissolving framework of medieval industrial life. The industrial revolution started around 1750 in Europe, with a series of inventions in the textile industry and by the application of steam to the operation of machines. Until 1871 the focus of the revolution was the consolidation of industrialisation. The main changes wrought by the Industrial Revolution between 1750 and 1871 were in the areas of: - Textile inventions for spinning and weaving - Developments in coal, iron and steel - The steam engine - The factory system, with the new accent upon machines called for in production - Transportation, in new road systems, the development of ports, the invention of the railway, and the development of power driven, rather than wind driven, ships. - Communication by the use of electricity, the telephone, batteries, and the telegraph - Lighting powered by electricity rather than candles and oil. - Agriculture, when activities and output were increased by means of powered machinery rather than animal and human effort. The impact of the industrial revolution on the Social Environment was that now humans were no longer solely required to work for their labour, but needed to become adept at operating machinery. Training and education achieved a higher focus, and the increased number of people no longer able to be employed because machines now did their jobs led to the formation of the first formalised trade union. (See Specific Outcome 3 – the Economic Environment) - Epidemics and pandemics - The Black Death: in the fourteenth century (the 1300’s) most of Europe was affected by an outbreak of bubonic plague, transmitted by air, and arising from fleas living on rats. 15 million people died, most during the worst years of the plague between 1347 and 1350. The poor and unsanitary living conditions prevalent at the time assisted the rapid transmission of the disease. - Influenza: in 1918, during the last year of the first World War, 25 million people died as a result of an influenza outbreak throughout the world. This is 10 million more people than were killed in the First War. At the time, medical advancement had not reached levels sufficient to provide medication for influenza sufferers. The children’s game ‘Ring O’ Rosie’ is based on this event, with the line ‘Atishoo! Atishoo! We all fall down!’ referring to the stricken sneezing and falling where they stood. Today although antibiotics and other medication manage the disease, no cure has been found. - HIV/AIDS: the newest and most far-reaching pandemic, caused by a virus that attacks the immune system of sufferers, and transmitted by sexual contact, contaminated blood and drug use, currently affects 100 million people worldwide, most of them in sub-Saharan Africa. In some areas of Africa the disease has wiped out entire villages and communities. No cure exists, although some 08/03/16 Page 17 drugs have been found to manage the disease. War and Conflict: over the past seventy years, history records that on any given day, somewhere in the world a war was being fought. From the earliest times wars have been constantly fought, arising from geographical conflicts, religious and political, ethnic or racial reasons. In 1970 the Honduras and El Salvador fought a war over the result of a soccer match. - The Hundred Years War: This was fought in Europe for 114 years during the early Middle ages. - World War 1: Between August 1914 and November 1918 most of Europe and some Commonwealth countries, and America were engulfed in the ‘Great War.’ The conflict arose for a number of reasons, chiefly form territorial demands, but the final incitement is deemed to be the assassination of Archduke Ferdinand and his wife by a Serbian partisan, Gavrilio Princip) in Sarjevo in the Balkans. By the end of the conflict 15 million people had died, and Europe’s political map was changed forever. - World War II: after a number of territorial conflicts again in Europe, WW II was fought between the Axis powers, (Germany, Italy and Japan) and the Allies (Britain and the Commonwealth, USA, France, Greece, Poland, Scandinavian Countries and others) between September 1939 and August 1945. This was the first time that civilian populations were targeted, and 6 million Jews were killed, countless Poles and more than a million in bombing raids and attacks on cities. The war ended with the dropping of atom bombs on Nagasaki and Hiroshima in Japan in August 1945. During these tow events alone, more than 200 000 people were killed. - The rise of Terrorism: in the late 1960’s and early 1970’s an old form of political ideology was given a new name – terrorism – when certain political factions added organised violence to their political agendas. Groups of people organised factions to disrupt the ruling classes at the time, and to achieve their political aims. Groups such as the Red Brigade and Baader-Meinhoff in Germany, ETA in Spain, Black September in some Arab countries and the Red Army in Japan attacked civilian targets. This effort focused on displaying to the general populace a disregard for personal safety and life to attain political goals. Attacks, which included kidnapping and ransom demands, bombings and hijacking, began to occur with regularity. - In 1972 8 Israeli athletes were killed during the Munich Olympics - The Italian Prime Minister, Aldo Moro, was kidnapped and murdered in Italy - Lod airport in Tel Aviv was bombed and passengers were killed - An Indian airlines Boeing 747 was blown up off the coast of Ireland, killing all on board - In December 1988 a Pan American airlines 747 was blown up over the town of Lockerbie in Scotland, killing all on board and several people in the town itself - On 11th September 2001 hijacked aircraft were crashed into the World Trade Centre and Pentagon, resulting in the deaths of almost 3 000 people. - Ongoing Conflict: millions of people have died as a result of ongoing conflict in the world, especially in the Balkan states, Rwanda and Burundi, the Middle East and Cambodia, Vietnam and Korea. There are many others. - Human Disasters: - On April 15, 1912, the luxury liner Titanic on her maiden voyage from Southampton to New York struck an iceberg and sank. More than 1 500 people were lost. - In 1975, two jet airliners collided on the runway at Tenerife, Canary Islands. Over 500 people were killed. This remains the single largest air disaster in history. - On 11th September 2001 four airliners were hijacked in the in the USA and were deliberately brought down – two into the towers of the World Trade Centre and - 08/03/16 Page 18 - one into the Pentagon, headquarters of the US Military. The fourth crashed into an open field, but it is believed it may have been heading for the White House, centre for the US government and home of the president. The Trade Centre towers collapsed, resulting in many deaths and massive financial loss. The effects of this event were felt in the Social Environment, but also in the Economic Environment. (See Specific Outcome 3) As a Social event the immediate impact of the attack was war in Afghanistan, where the planners of the event were believed to be in hiding. Political Disharmony: Ethnic cleansing, apartheid, tribalism, racial conflict and ideological discord have resulted in countless deaths, and the breakdown of societies. Religious differences: Ireland is but one place where religious and political differences resulting in antagonistic conflict have yet to be resolved. Crime and related problems: Sociologists recognise that poverty, unemployment, the lack of coherent educational systems and other social events impact very strongly on society. The results are often an increase in crime levels, destruction of the societal unit, and a general change in the norms previously formed in more prosperous societies. Where previously crime was risk to life and property at potentially manageable levels, escalating crime rates in South Africa now affect a vast proportion of the populace. Statistics gathered show we now have a crime rate amongst the highest in the world. Crimes such as hijacking of vehicles, sexual attacks on children, the carrying of weapons to learning facilities and accompanying violence, rampant corruption in government and protection agencies, occur with regularity. This is in addition to murder and rape, the committing of fraud, theft and housebreaking, family murders and more. Example: Insurance protection for crime-related Social Events. Insurance protection against these events is available in certain products, both life and short term. - Hijacking is a motor policy peril, freely available but at increased rates, and with a high deductible. Terms are offered generally subject to the installation of an anti-theft device in vehicles. Cover for goods in transit and marine policies cover the cargo on hijacked carriers (ships and vehicles). - Murder and assault is covered by personal accident and life policies. - The effects of Fraud can be covered by fidelity insurance, specifically designed to protect commercial enterprises. Unfortunately, risks arising to individuals from dishonest brokers, agents, and other advisers are not. There is a modicum of recourse available through the courts, but pursuing recoveries is often very expensive and time consuming. - Healthcare benefits are provided to insured persons in the event of Rape, but most victims are from poorer societies. Here cover is not readily affordable and is thus not purchased. Because of the high levels of unemployment in South Africa, (estimated at 44% of people who are available to work) the support of company provided Healthcare benefits is often not there. - Theft and Housebreaking are insurable perils under theft, all risks and money commercial covers, and household contents, all risks and houseowners policies. - Corruption. The only possible opportunity for recourse for the private individual is through the legal process, or by means of the electoral process, in voting perpetrators out of office. 08/03/16 Page 19 Activity: Other than those stated above, list ten events in history that can be deemed to have impacted on the Social Environment. Collection of Information: Information regarding the occurrence of events in the physical environment can be gathered from a variety of sources: - From the print and radio media – news broadcasts and newspaper reports, and specialist publications. - From the television media in the form of news channels and on regular news bulletins - From newsgathering agencies such as Reuters and Associated Press - From the community itself by way of oral and written reports and eyewitness accounts from survivors or others affected by the occurrence - By general information gathering from colleagues and friends - By use of the internet - From historical, books, news archive publications and encyclopaedia. - From universities and colleges who gather sociological statistics. - From government departments such as the Department of Population Development, Department of Welfare and Pensions and the Ministry of Health Information must be organised to facilitate easy reference. This is done by means of protection of the information into a statistical format, using reference and cross-reference points, e.g. by class of event; type of insurance or class; by region, hemisphere or country; date and time; total costs in damages and insurance value; cost of human losses, and relief and salvage operations and cost. Activity: Describe the need for statistical information relating to the Social Environment, and how this information assists the insurance industry to formulate plans to control the impact of the risks attached to these events The Impact of events in the Social Environment on the sub-sectors of the insurance industry: As events in the Social Environment occur, the insurance industry is faced with a need to act positively to deal with the outcomes of such events. New underwriting criteria are set, reinsurance needs are more closely realised, risk control becomes more important, and product offerings are amended to provide cover that relies on the principles of insurance in terms of potential exposure. Faced with events in the Social environment, the insurance industry will be affected as follows: - The financial requirements of insured losses would need to be met, often at great expense and effort by insurers - Reinsurance protection would be reassessed, perhaps reduced. Acceptance criteria are tightened, and there is a closer watch on rating, risk assessment and the risk management requirements on the part of the insured. - More intense statistics collection and investigation is implemented. - Emergency operational requirements are implemented to perform the additional tasks – e.g. temporary staff, mobile claims settling units, customer service lines. - Survey activities are more closely scrutinised and more rigorously followed. - Claims history becomes more important to insurers at the risk offering stage. - Product offerings may be altered; resulting in reduced cover, or even excluded cover. - Greater market networking takes place, as unified and effective procedures for dealing with future events are implemented. 08/03/16 Page 20 - More intensive research results, to plan and prepare for future events, and to lessen their impact wherever possible. Epidemics and Pandemics: Medical advances in the treatment of diseases and illness have resulted in the eradication or control of many diseases which previously resulted in the almost certain death of the afflicted. Many developments in health protection, by means of immunisation and inoculation, pasteurisation and the development of antibiotic drugs brought major changes to the Social Environment particularly in the area of epidemics. Many of the following disease were controlled and eradicated by these developments: - Bubonic plague, smallpox, measles, dysentery, scurvy, malaria, influenza, polio, yellow fever, sleeping sickness, and others. Healthcare benefits providers offer cover in respect of disease and illness, as do hospitalisation covers, and income protection policies. The impact on this sector remains potentially massive, with medical costs rising steeply each year. The costs to organisations go up accordingly, but prices need to be monitored, as one of the chief influences on the ability to sustain growth and profitability remains affordability, even at the upper levels. HIV/AIDS: The newest pandemic arising is that of HIV and AIDS. The effects on the Social Environment will be massive, with reduced labour availability, the loss of skills and experience, spiralling costs of treatment, devastation of the social and family unit, loss of community development and spirit, burial costs, employability, the education system, business planning and productivity and the potential loss of national, regional and individual identity. Any insurance covers available in South Africa do not cover the effects of HIV and AIDS. The industry has specifically excluded all cover, owing to affordability and the potential for devastation of the economy by the disease. Government has accepted the financial risk of caring for patients afflicted by the disease. State hospitals provide services to patients, but the costs to the patients are not recoverable under any policies. In certain provinces, local governments provide free anti-retroviral drugs (thought to prohibit the transmission of the virus from pregnant mothers to their children). As at February 2002, only the Western Cape, KwaZulu Natal and Gauteng offer these drugs to patients. War and Political Risks War and political risks are not covered by insurers, but by the government under the terms of the War Damage Insurance and Compensation Act, 1976 (No. 85 of 1976). A limited risk cover under what are known as ‘passive war risks’ is available under personal accident and life policies. These risks would be in respect of people who are not actively engaged in the pursuance of war – e.g. civilians. The impact on the material damage insurers and life assurers would be too great financially to cover full war risks, assuming that any insurers were left in a position to continue to operate after a war in South Africa. Terrorism, kidnap and ransom covers were greatly reduced world-wide after the 11th September 08/03/16 Page 21 attacks on the World Trade Centre. In South Africa cover in respect of terrorism is available under life covers, but for commercial risks the main carrier is the South African Special Risks Insurance Association (SASRIA), a government run special risks fund. Cover must be specifically requested and paid for, under a certificate issued by any of the member companies. (All short-term insurers are members). Human Disasters Human disasters impact on the following sub-sectors of the industry: - Short-term: marine risks for shipping, cargo and liability; aviation for aircraft and liability; material damage for fire, goods in transit, liability, engineering and construction. - Healthcare in respect of disease, accident and hospitalisation. - Life and pensions industry for deaths. The Economic Environment: The Economic Environment is made of events that affect the economies of countries, global, international and regional societies, and the individual. Events that have an effect on the Economic Environment include: - Depression and recession in global or national economies, affecting the population at large, as a result of loss of work opportunities, reduced funding for educational facilities, rising costs, the unavailability of basic products, the fragmenting of the luxury goods industries, the reduced need for banks as a tool for savings and investments, the attendant lack of need for insurance products, and the unaffordability of general services and products. - Inflation and depreciation of currencies affecting government and its agencies, the import (negatively as goods must be paid for in the currency of the seller) and export industry (positively as goods are sold in the currency of the buyer). Also affected are general consumers, as price increases are the order of the day. - Mergers and acquisition of companies, affecting staff and management at the companies involved, in terms of loss of job opportunities, but new opportunities are also created for some. The consumer suffers a reduced choice of carrier, and service levels drop in the immediate aftermath of the merger. - Retrenchment, restructuring and downsizing. This affects all industries in South Africa. Often the first level staff is moved out in the first instance, perhaps on the basis of Last In, First Out, as their number represents the most visible saving area. Key functions will be the least affected. - Changes to the cost and method of doing business. When business increase their reliance on technology, the upshot is often the replacement of people by machines. In the insurance industry, previously essential services such as switchboard operators and typists have been made redundant by voice-mail and direct dialling and software programmes. Effects have also been seen in the post and mail services areas, where e-mail has taken the place of the previously heavy reliance on the postal services. Also. Companies have begun to outsource their non-core functions, such as Human Resources, Training, Salary Services, Auditing, Surveys and Assessment, Fleet Management and Group Benefits functions to specialist organisations. This results in the loss of jobs. - Wars, terrorism and conflict. The impact of these is felt across all groups of people and kinds of work. - Changes to or the maintaining of political systems. These affect people and work in the Social and Economic Environments. - Rampant disease or epidemics 08/03/16 Page 22 - Social revolution, or the occurrence of major social events, such as the Industrial Revolution, or the upsurge of HIV/AIDS Natural evolution or the occurrence of major natural events such as floods or earthquakes Example: Changes to the Economic Environment by mergers or acquisitions in South Africa affecting the insurance industry: Over the last three years, major acquisitions and mergers in the insurance industry have seen some of the following organisations disappear: - CGU has been absorbed into the Mutual and Federal - Allianz has withdrawn from the country - The Guardian has been merged with Santam - Fedsure has been acquired by Capital Alliance The economic effects of these changes include: - A more limited choice of market for the consumer (the buyer or insured) and the broker. - A consolidation of business practices resulting in loss of jobs and retrenchments. - Fewer opportunities for school-leavers wishing to join the industry - The first stages of the formation of an insurance cartel, having a more complete hold over industry practices pricing and product offerings. - Expensive changes to the costs of operations for the companies in transferring data to a unified system, resulting from additional time and training needed to perform this transfer. This results in increased costs to the consumer. - Increased opportunities for specialist underwriters and brokers to enter the market and offer their services to the consumer. - A reduction in service levels owing to the increased bureaucracy within organisations. The negative aspects of these events on the Economic Environment outweigh the positives at the moment, but positives do exist. In the longer term: - Higher levels of service will pertain, as organisations streamline their activities, and staff becomes part of the company culture. - Capacities are increased, and potential failures of companies are averted. Some of the organisations that have disappeared may not have been able to sustain their results. - Ownership of the organisations now lies within powerful groups with demonstrated financial security. Collection of Information: Information regarding the occurrence of events in the physical environment can be gathered from a variety of sources: - From the print and radio media – news broadcasts and newspaper reports and specialist publications such as Financial Times, Business Day, Finansies en Tegniek, Finance Week and Business Times and others. - From the television media in the form of news channels and on regular news bulletins From newsgathering agencies such as Reuters and Associated Press From the community itself by way of oral and written reports and eyewitness accounts from survivors or others affected by the occurrence By general information gathering from colleagues and friends By use of the internet From historical, books, news archive publications and encyclopaedia. 08/03/16 Page 23 - From statistics gathering agencies such as universities and colleges. From government bureaux such as the Department of Statistics, the Ministry of Finance and the Bureau for Economic Research. Information must be organised to facilitate easy reference. This is done by means of protection of the information into a statistical format, using reference and cross-reference points, e.g. by class of event; type of insurance or class; by region, hemisphere or country; date and time; total costs in damages and insurance value; cost of human losses, and relief and salvage operations and cost. Economic statistics and indicators are used to determine are generally grouped according to whether they lead, coincide with or lag behind the Economic Cycle: Leaders: Economic indicators for a leading organisation or industry will show positive measures in the following: - The average workweek – number of hours typically worked by employees - Gross hiring or employment costs per 100 employees in an industry - Value of new orders - New housing projects undertaken - Commercial and industrial building contracts undertaken - Net change in number of operating businesses - Business failures and aggregate liabilities of organisations - Corporate profits after tax - Consumer price indices - The value of business inventories The better and more positive these figures are the less the organisation or nation is affected by the Economic cycle – i.e. they remain ahead of the general influence of the cycle. Coincident cycles Organisations that roughly coincide with the economic cycle will be measured by: - Unemployment rate per capita - Gross national product in Rand - Bank debts across the industry - Levels of personal income - The rate of inflation for the industry - Sales by retail stores - The consumer price index Lagging Societies: Measures and statistics used to determine the lagging group, in other words to determine whether a society is in a lower than current economic cycle, include: - Expenditures on new plant and equipment - Salaries costs per unit of output - Manufacturers’ inventories and book value - Consumer instalment debts outstanding The impact of events in the Physical and Social Environments on the Economic Environment: - Social: - The economic cycle has been closely associated with various social phenomena. Marriage and divorce rates and the consumption of luxuries vary more or less closely with the economic cycle at the time. Church activities vary somewhat in reverse order. In other words in a down cycle in the economy, more divorces are reported, but more people attend church. Crime rates also respond to the cycle, but in several different ways, depending on the nature of the crime. 08/03/16 Page 24 - Physical: - There is a measurable relationship between economic cycles and the cycles observable in nature, particularly the more severe ones such as weather and sunspots. Weather cycles with alternations stressing favourable and unfavourable crop years, extending over periods ranging from a decade to a generation, have been noted. The impact of events in the Economic Environment on the sub-sectors of the Insurance Industry: Economic Cycles: Economic cycles are alternations of business activity from peaks of prosperity or booms, to the low points of depressions. Business activity in booms, measured chiefly by productive activity commonly rises as high as 15% above the general average of current business. Depressions sink to 20% and more below. Economic cycles generally last four an average of five years, but generally vary from one to twelve years. An economic cycle is closely related to the expansion and contraction of money, and its substitute, credit. During the nineteenth century under the leadership of Britain, gold became the sole monetary standard of leading nations. In effect, the dollar, pound, franc and mark were merely comparable weights of gold. The Great Depression: The most outstanding characteristic of the boom that had preceded the depression of 1929 to 1939 had been an intensification of business activity marked by rises in production and prices. The initiative had been taken by heavy industries related to investments, the stimulus being the anticipation of profits. With the outlook favourable, banks extended credit to finance expansion. Companies then increased production, and created surplus jobs, thus increasing costs. The excess of bank credit jeopardised reserves, and high prices caused an outflow of gold, as businesses bought cheaper goods elsewhere. Consequently, banks were forced to restrict credit. Businesses contracted and failed, and millions of people became unemployed. The effects of this economic depression were felt throughout the world. It had a major impact on all sectors of the insurance industry, as people were out of work and therefore not earning. They therefore had nothing to spend, and one of the first areas they cut back on was insurance. Inflation: Whenever credit is restricted because it has grown to too large a position, inflation ensues. This manifests itself in rising costs associated with manufacturing and production, transportation, wholesale and retail prices and the general costs of living. While South Africa is rich in mineral reserves, it is a net importer in areas of textiles, manufacture, luxury consumer goods, and industrial machinery. This means that we are influenced by rising costs overseas, and by the devaluation of the Rand against other currencies, as these imports are payable in the currency of the supplier. This affects the financial stability of companies and individuals, and they look to cut costs. The insurance industry is among the first to feel these effects, as there is an ever-increasing trend for consumers to seek cover chiefly based on the price of the product sought. When inflation rates are low, and the Rand is strong against other currencies, the insurance industry benefits as consumers have more ready cash available. Companies seek the fullest cover available to protect their assets, and individuals spend more on investments to maintain their living standards in the event of economic changes occurring in the future. 08/03/16 Page 25 Closures, Mergers and Take-overs: See example above Retrenchment, restructuring an downsizing: Statistics show that companies that exercise the option of retrenchment of staff as a result of rising costs and reductions in profit and turnover never achieve the levels of profit and income that they hoped for. This is because retrenchment is merely one option of dealing with symptoms of a worsening economic cycle. Often service levels have dropped, staff is not adequately trained, prices are set too high, the core business has been diluted by and the company is operating on borrowed money. The effects on the insurance industry are that more people are unemployed, and therefore not financially satisfied, and so less money is available. Fewer purchases are made in the retail, wholesale and manufacturing sectors, so less money is flowing into the economy. Then less is spent, as a knock-on effect, on insurance. In addition, more people out of work are then eligible for unemployment benefits, placing a heavier burden on the State. The cost of services provided by the State is recovered by way of additional taxation, which adds to the cost spiral. One possibly positive feature is that more retrenchment-related products become available for sale, offering support to unemployed people. Such products include lump sum payments to the insured for a limited period following their retrenchment. War, Terrorism and Conflict: These events impact on all sub-sectors of the insurance industry. When soldiers are away fighting and trying to survive, and civilians are in shelters or refugee camps they have no ability to make payments or purchase insurance. War risks to property are excluded other than under Life, and Personal Accident polices, and have been severely restricted under Marine and Aviation covers since the attack on the World Trade Centre in September 2001. War in itself obviously has a negative influence on the insurance industry, but during and after the event, there is always much expansion or rebuilding to be done. This releases money back into the economy, where it is spent on factory works, manufacturing and new and important processes needed for the war or reconstruction effort. In many circumstances, governments fund these projects, but often grants are made or private financing used. These activities lead to an upsurge in the need for insurance risk protection, and consequently more is spent on insurance products. The effects of terrorism are profound on the insurance industry. In the wake of the attack on the World Trade Centre (WTC): - Insurance covers previously available, such as terrorism, kidnap and ransom cover were restricted, and premium was increased for this limited cover. - Previously where ambiguity existed in wordings, these have been refined to be more precise. - Reinsurance capacities have been reduced, and the costs of reinsurance have risen. - A greater focus has been placed on the risk assessment process, with acceptance limits and retentions more clearly defined. - Many companies have been made to pay out vast sums of money as claims, across many lines of business – fire, combined, business interruption and office contents for those companies with offices in WTC; Life, Pensions and Personal Accident for those that lost their lives; motor in respect of vehicles damaged; aviation covers for the aircraft and liability. Some insurance 08/03/16 Page 26 companies will not have enough funds to pay, and will be forced into liquidation. - In addition, the attacks have a marked effect on global travel, with fewer people willing to take risks. This has caused a crisis within the travel and associated industries, with carriers forced to close or cut back on operations, and individuals not needing to have travel insurance cover. The risks available to insure have reduced – BA have cut back their fleet, Swissair and Sabena have closed, and other airlines remain in financial difficulty, faced with mounting costs and reduced customer levels. The Great Depression and World War II stimulated the demands for economic reform. Laws were implemented to stabilise stock markets, and economic leadership openly assumed responsibility the supply of money with a view to stabilising market economies. The laws were also put into effect that govern such industries as insurance and Financial Services. Political Environment: Political events are those that affect the State, or its government, and these events have a wide impact on the insurance industry. Often the insurance industry is nationalised by governments, which means that the government acts as the risk carrier, under the name of a national insurer. Countries in Southern Africa that have nationalised the industry include Lesotho and Swaziland. All countries have legislated regulations that govern the insurance industry; such the Short Term and Long Term Insurance Acts in South Africa. Political disagreements often lead to wars (see above) but in many instances also lead to the imposition of economic sanctions on a nation that is deemed to follow political ideals that conflict with more powerful nations’ ideology. In recent years, these sanctions have affected South Africa and Zimbabwe, Cuba, Iraq, Taiwan, China and others to varying degrees. The impact on the economic environment and particularly insurance, is that trade curtailments reduce the need for insurance cover, particularly for Marine cover and export and import risks. Conversely, insurance needs are enlarged, when carriers are refused overfly rights and had to make longer journeys to reach destinations. Sanctions also affect the economy of the country they are imposed on as a whole. Without international trade opportunities being available, gross revenues are reduced, and these impacts again include the knock-on effect to insurance. Mostly, however the people of the nations are the ones who suffer most. Deprivation, poverty and suffering are increased by these factors, and so political events also affect the Social Environment. HIV and AIDS: See Social Environment Social and Physical Environment: Owing to the high costs of returning society to normal following Social and Physical events, the impact on the Economic Environment, and hence the insurance industry can be severe. Costs incurred in restitution and reconstruction cane be extensive, and are funded by governments and insurers. Example: The Impact of events in the Economic Environment on the Insurance Industry The recently reported troubles at Saambou Bank, when the bank was discovered to have made loans to staff to purchase shares in the bank, to a loan level of one-sixth of its asset base, (R 200 million to assets of R 1,2 billion) may impact on the following sub-sectors of the industry: - The short term industry for potential fraud losses arising from dishonest dealings by management in selling the shares. 08/03/16 Page 27 - Directors and Officers Liability in respect of directors being found to have acted improperly or by use of poor management of the bank resulting in its possible collapse. - The disappearance of the bank’s account from the insurance market, should it be placed into final liquidation. - On the long-term industry by the removal of the bank as an investment vehicle for clients’ money. These are possible effects, in addition to those arising to the Social Environment as further people suffer the rigours of unemployment, others suffer the loss of their investment and savings monies, and possibly increased poverty and crime levels mount. Achievements in the Insurance Industry: Achievements in the industry take many forms. They vary from news about people in the industry such as: - The appointment of new CEO’s or company managing directors, to promotions and appointments. In Johannesburg these are published in the Sunday Times and the daily newspapers, and in specialist insurance publications such Cover and Insurance Times. - The financial results of companies at their half-year or year-end. These figures include the Balance Sheet showing assets and equities and liabilities; Income Statements detailing revenue and profit and taxes paid; Cash Flow statements; and Supplementary Information including comments, accountability and dividends paid. - Mergers and acquisitions: despite the potentially negative impact on the industry, a merger or acquisition represents an achievement. To have the financial capacity to purchase another company demonstrates success and stability. These events are reported to great extent in the media. - Acquiring prestige accounts likewise demonstrates a capacity for expertise, professionalism and financial might to the industry. - New Product Launches: Media coverage of new launches are excellent information sources for the buyers and other organisations, and represent achievement as a company seeks to broaden its offering of risk cover, support and added value to its clients. Problems in the Insurance Industry: There are many positive aspects to the Insurance Industry, and they far outweigh the problems or perceived problems that exist. The industry manages billions of Rand in premiums and investments annually, and this is a measure of the professionalism, integrity and ability of the people and companies involved. However problems do exist, and it would be foolhardy not to recognise them and take steps to eradicate them. The Insurance Industry, because it offers the promise of a product meeting the needs of an insured, by its very nature has a number of problems that affect its operation, reputation and service levels. Some of these problems that arise, to sellers, brokers and buyers alike are: - Insurance needs versus other needs: For the buyer, insurance cover is a need. Some observers describe insurance as a grudge purchase, that is it is something one must have, but the buyer would rather do without it if he could. The industry faces problems in convincing the buyers that their products are valuable, offer a solution to a variety of needs, and have added value in terms of insured satisfaction. In today’s economic climate, with the Rand sliding against other currencies and prices increasing in all sectors, the need for insurance as a comparative requisite against other needs such as food and shelter, education, clothing, business finance and growth, has slid a little down the chain. Insurance is becoming increasingly price driven for this reason and long term relationships between buyers and the sellers and 08/03/16 Page 28 - brokers have become more tenuous in recent years. This is evidenced by the fact that very few Long Term Agreements (an agreement where a buyer agrees to remain with an insurer for a minimum fixed period in return for more favourable rates) are operative. Service Levels: The Insurance industry is beset by problems in providing acceptable service levels. This is an ongoing problem, and has been in evidence for a number of years. The practical operations of the industry are a cause. A broker takes an order after having received a quotation for the insured. The policy closings or proposals are then submitted to the insurer who issues a policy. In the event of a claim, much specialist knowledge, even outside the industry in the form of assessors accountants, lawyers and medical practitioners is required to investigate the circumstances and prepare for settlement. This takes time. The administrative processes are drawn out, by the need for much paperwork. This paper work includes forms and reports, statistical information, authorised signatories and a host of others. The claim stage is when the test of an insurer’s ability to provide service is tested. By taking time to process claims beyond the reasonable expectations of the insured, the industry rightly condemned for its service levels. A cause of poor service levels is the inadequate provision of training undertaken by the industry. Owing to the increased focus on expense levels, staff is often required to produce output rather than efficient service. There is a demonstrable lack of product knowledge among industry people, particularly at clerical level and in the smaller broking houses. Also, the introduction of Call Centres by some companies has impacted on service levels. In these circumstances, buyers can no longer ask for a person by name, there is often a seemingly interminable wait, while being forced to listen to irritating music, and the distinct possibility o not reaching a service operator, but rather their voice mail message. This means that the buyer has to start all over again. In certain areas of the country, tone dial telephone exchanges do not exist yet, and so buyers may be unable to make their choice as offered to dial a certain digit to reach their desired option. - Mergers, Acquisitions and Withdrawals: the impact of the changes to the industry as a result of the multiple mergers and withdrawals of companies over the past decade has left the buyer confused. On the face of it these changes indicate an industry in turmoil. This is not necessarily the case, but the perceptions are difficult to disprove. Some buyers have used the services of three different insurers in five years. This impacts negatively on the building of relationships, and is costly to insurers in that all client information and policies have to be transferred to a new system. Staff must also be trained in the operational requirements of the new company, and much extra work is placed on the broker to conform. - Confusing Wordings: As most wordings are many years old and words and phrases have been tested in court, and so must remain, it is necessary for all stakeholders to understand them These wordings are evidence of the insurance contract in force at any given time. However, most of the wordings, particularly in the short-term market are overlong and confusing, even to some in the industry. The buyer, not being an insurance expert, often suffers greatly in trying to determine what some of the covers, clauses and extensions, exclusions and warranties mean. - Insurance Premium Costs: Over the last twenty years alone, insurance premiums have escalated by 1500% in some cases or fifteen times. This is particularly evident in the classes of Motor, Theft and Healthcare. To many 08/03/16 Page 29 buyers this is an unacceptable ration. Of course, they have influenced this increase substantially, because of the associated increase in losses, costs of repair and the incidence of fraud. The general rise in operating costs has also influenced the premium rise. The results of these increase has seen reductions in limits, increased levels of self-insurance, reductions in cover taken (say Third Party cover only rather than Comprehensive cover under Motor) and a marked move to shopping for the best price rather than the fullest cover. - Minimum covers and premiums: In all sectors of the industry, and particularly in Life and Investment and Personal Lies, buyers are compelled to pay a minimum premium for cover. This may be only R 50 per month, but it causes problems for buyers in some circumstances. Also, certain sections of the policies require a minimum sum insured, such as Household Contents, whether the buyer actually has goods to this value of not. This not only impacts on the buyer in respect of the associated minimum premiums charged, but also at claim time, when he can only be paid out the actual value of goods lost or damaged. - Withdrawal of Cover: After the occurrence of major events, such as the attack on the World Trade Centre or the riots in Bophuthatswana in the early 1990’s, Terrorism cover and Riot Wrap around, previously readily available in certain markets was withdrawn, owing to the large losses incurred by insurers. Buyers see this as an excuse by the industry to cover their inability to provide for their needs. As soon as an event arises which insurers were previously happy to accept premium for, and the costs are deemed too large, insurers withdraw. The rationale behind these withdrawals is broader than that, but again the industry needs to allay the perceptions of its market. - Associated Costs: In addition to paying perceived expensive premiums, buyers are required to expend further monies in order to make their risk insurable. These additional expenses include the installation of fire and theft protections, such as sprinkler systems, burglar bars and alarms, and vehicle tracking devices, among others. In addition, there are medical costs incurred in proving that the buyer is healthy enough to be insured against death. These requirements are vital to insurers, as they help to contain premium costs, but the buyers often deem them untenable. - Industry Fraud: Across all sectors of the industry it is estimated that up to 30% of claims submitted to insurers contain some element of fraud in them. This may be the biggest problem facing the industry at present. Clients claim for items they never owned, they inflate prices, they deliberately destroy items in order to claim, and in extreme instances even commit murder to obtain benefits under the policy. The economic and social environments influence this rise in the commission of fraud, but the industry itself also plays a role. It does this because of the nature of its operation. Because insurance is a risk transfer mechanism, the products sold are only needed in cases of the risk actually occurring. If it does not, buyers receive no financial benefit for the premiums paid. If a buyer is fortunate enough to have a claim free year, the insurer retains his premiums. He may obtain a return by means of claim free entitlement, and by a refund of a portion after a period, but essentially his premiums represent only an outflow of finance. In certain types of buyer this situation in not acceptable and they seek ways to reclaim some of those premiums by committing fraud, as above. 08/03/16 Page 30 - New Legislation: The past four years have seen a plethora of new legislation affecting the insurance industry. These include the new Insurance Acts for the short- and long-term sectors, the FAIS bill, and the implementation of the Policy - Holders Protection Rules. The entire industry has had to inform itself regarding the impact of this legislation at a cost of installing new systems, adding new documentation to policies, and to ensure compliance with the legislation. - Lack of Knowledge: One of the chief complaints from buyers is that often the service and administrative arms of the industry lack knowledge of products and processes. This is a result of the industry previously not having formalised learning programmes across the entire industry. While much high level and very effective training has been done, here have not been compulsory levels that must be attained. Many individuals and company have urged staff to obtain official qualifications, but there was no legislated minimum standard which industry operators had to attain. With the realigned of training and development in terms of the Skills Development Act, and the implementation of an insurance Sector Education and Training Authority (INSETA)) training will be developed and implemented on a more universal scale, to the benefit, ultimately, of the buyer. New Developments in the industry: We have already seen the changes to the industry resulting from a series of mergers and acquisitions of the last several years. In addition to these, there has been a move away from traditional insurance offerings. The following are examples of developments in the industry: - The rise of underwriting managers: Many companies, including reinsurers have given underwriting authority to expert underwriters in the short-term market. Companies such as Highlander, Covenant Underwriters, S A Underwriting Managers, Hospitality Industry Underwriters, Schools for Africa and many other now write niche and general business on behalf of the sellers. The benefits to the companies are reduced expenditure in administration, and the use of expertise of independent people to write new business for them. - INSETA: The training and development functions in the industry are now formalised under the umbrella of INSETA, to the benefit of the sellers, buyers and brokers. - More direct business offerings: In certain product lines, insurers have been able to offer more affordable premium rates by dealing direct with the buyers, rather than by means of the intermediary function. This cuts the commission costs from the price setting, and the benefits are passed on to the buyer. The negative impact may be that intrinsic expertise levels of the broker are bypassed to the ultimate detriment of the buyer. - Reduced Capacity: As a result of the attack on the World Trade Centre, many reinsurers have reduced their capacities to insurers in certain classes of business. Certain covers have been withdrawn, such as Kidnap, Ransom and Terrorism, and premiums have been increased. - World-wide Programmes: As the South African market offers limited capacities, many insured operating here are being forced by their overseas owners to insure under the world wide programme issued in the home 08/03/16 Page 31 country. This results in a loss of premium income to the local market. - The growth of Trade Credit insurance: The decline of the Rand against other currencies has seen a growth in Trade Credit insurance, whereby the payments by importers are guaranteed by insurers in exchange for premium. The Shrinking of the Construction and Engineering market: As a result of the slow down in the economy, and the low levels of investment return in the property market, development in Construction has slowed. This means not many new projects are undertaken, and the insurance sub-sector suffers as a result. - Outsourcing: Many organisations have decided to outsource their non-core functions to specialist organisations. These functions include human resources and training, payroll management, audit functions, underwriting agencies, premium collections, information technology, and others. - The Virtual Office: Several organisations have closed down full branch operations in smaller areas, and have set up a virtual office for one person at their home. These persons, essentially in the marketing functions, service clients and report back via the telephone and e-mail. Policies are issued remotely on line, cutting process and administration costs substantially. Activity: Comment on the developments in the industry, and state whether you think they are of benefit to the buyer. What Ordinary People Think: In the past, surveys undertaken of the industry with regard to service levels, professionalism, integrity, rating levels and general feelings about the industry, have derived their opinions in the main form people and organisations within the industry. This information has been in the form of financial stability and claims paying ability, turnaround times, and claims settling activity and general service levels. Information gained form the public has been scarce and it skewed by recent events in the industry. Recent premium increases, or poor claims service may influence these. In a recent independent survey undertaken of 300 ‘ordinary people’ about the state of the industry in the eyes of non-insurance people, the following outcomes were noted: 34% (102 respondents) had no real thoughts one way or the other. Of the remaining 76%, 13% (10 respondents) felt that they received acceptable service and products for their money, and they were satisfied that they were adequately and cost-effectively covered. The remaining 188 respondents gave negative feedback regarding the industry. This feedback was directed at the following problems: - Poor service levels in general - Confusion caused by technical usage in wordings - High commission levels for perceived little work done, especially in the life industry - Escalating cost of premiums - A perception that short term insurers sought ways not to pay claims, rather than being there to protect client’s interests - The unavailability of mix and match products – I.E. standard covers for everyone. 08/03/16 Page 32 - The hidden ‘small print’ in contracts and wordings, such as item limits, the application of average. - High costs associated with risk protection, such as the fitting or fire and theft protections and vehicle tracking devices and gear locks. - Being made to feel ‘like a criminal’ in proving losses. - The amount of time taken to process routine claims and policy amendments. - The lack of knowledge apparent at administrative and clerical levels. The number of claims submitted to the Insurance Ombudsman tends to bear out this vision of the industry, where thousands of claims have been submitted for investigation, because buyers are not satisfied with the companies’ stance on the matter. Activity: Conduct a survey amongst ten of your friends or family, who are not acquainted with the industry in their work, and obtain their opinion about the industry. Ask the questions: ‘What has been your experience with dealing with the industry, both long-term and short-term, and how do you view the industry as a whole and why? 08/03/16