National Certificate in Insurance Administration

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“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.
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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
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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
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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.
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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
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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.
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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.
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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.
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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.


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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
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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.
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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.
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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
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-
-
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.
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- 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
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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
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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
-
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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.
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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.
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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
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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
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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.
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-
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.
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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.
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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
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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.
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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
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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
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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.
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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
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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.
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- 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
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